Should You Sign That Wind Lease?

If you own land, especially farmland, in the “Thumb” region or in Southeastern Michigan, you have likely been approached (or likely will be approached) by developers for a Wind Energy Lease. For most landowners, this is a very new idea, and it may seem very lucrative to lease a portion of your land for wind exploration and the possible erection of wind turbines on a relatively small part of your land.

Like any “deal” being offered by a complete stranger, beware!

Before signing one of these lease agreements, you should do some exploration of your own, about the developer and the terms of the agreement being proposed.

Wind Energy Background

The current national political “regime” has suggested that “renewable energy” is a priority. In light of these priorities, in 2008, The legislature in Michigan created the “Clean, Renewable, And Efficient Energy Act.” Among other things, the Act requires large electric providers to maintain a substantial portion of their total energy portfolio from so-called renewable energy generating sources. For the most part, the companies have identified Wind Energy as the major method of fulfilling this requirement.

The act also provides, that they may only own up to 50% of these producing resources, creating a market opportunity for developers of “Wind Energy Farms” who will sell them the remaining 50% of the energy requirement. This has created a demand for land from the energy companies themselves, private developers of Wind Energy Farms, and owners of “transmission lines.”

The cost of installing and maintaining a wind turbine is substantial (in the hundreds of thousands of dollars for each turbine) and in order to create enough megawatts for viable sale to a company, the Wind Farms must have many turbines. There are “spacing” requirements for the turbines, dictated by both wind statistics and governmental zoning regulations. Because of these considerations, the land mass necessary to ensure a viable operation is significant. There is also an incentive for developers to “tie up” land partly because they do not have enough statistics to know the exact mapping of the turbine placement, and partly simply to keep competitors from acquiring the lands.

Zoning Issues

At this time a number of local townships do not have comprehensive zoning regulations for wind turbines and wind farms and many are scrambling to try to get them in place. As you are perhaps aware, these turbines and farms have also generated some controversy, which of course, affects the process of creating a zoning ordinance, both politically and procedurally. In April of 2008, the Michigan Department of Labor and Economic Growth released some sample language for wind zoning. However, as they emphasize, the jurisdiction for zoning remains with the local villages, townships, cities, etc. Thus, zoning is likely to vary from municipality to municipality. When negotiating a Wind Lease, it would be a good idea to become familiar with your municipality’s zoning ordinance, if one exists.

Wind Farm Developers

Developers are consistently persistent about getting landowners “signed up.”

Land owners often feel pressured to sign, thinking it may be their only opportunity. However, there are numerous developers seeking land, and Lease Agreements vary greatly, in content and quality. A Wind Energy Lease is a very long term proposition (20-40 years), and you will be dealing with the developer for a long time.

You should learn something about the company you will be doing business with. Most reputable developers will have public information available (in all probability on the internet). It is also likely that they will be members of one or more associations devoted to promoting renewable energy and creating quality standards for the creation, operation and maintenance of renewable energy facilities. The American Wind Energy Association is one of the major associations, and I usually check to see if the developer is a member. Being a member or not does not make them “good” or “bad.” But it is an indicator of their sophistication and knowledge. Another membership organization is the American Council On Renewable Energy (ACORE).

Wind Energy Lease

It is also important that you take enough time in your review of the "deal" they are offering you to make sure you are comfortable with the terms of the Agreement and its long term consequence to your own use and enjoyment of the land. You need to consider what rights you are giving up when you sign a lease.

Wind Farm Projects normally have 3 phases: Exploration, Construction, and Operation. The proposed Lease Agreement does indeed describe 3 phases. These leases are essentially "option" agreements and do not guaranty that wind energy turbine(s) will actually be placed on your land. In light of that, the payment for exploration is lower. But the payment should compensate you for the interruption or loss of use.

Payment

There are no "set" prices, but recent Michigan State University study suggests the payment per acre for exploration is generally in the $5 - 10 per acre range. You should consider just how long you want to "tie up" the land for exploration purposes, particularly in light of the relatively low payments being received. Consider a short time period for exploration (1 - 3 years) with options to renew, but leaving the payments negotiable on renewal. This gives you the ability to rotate the land back into some other more productive use, or to seek other developers of wind energy.

Payments for the construction and operations phases vary greatly. Construction often is compensated by a flat amount for each tower/footing placed on your land. Again, it should represent some measure of the loss of the land (which will now be more permanent). Payment for operation can be paid by a flat fee or by a percentage of the actual production of energy. You must take care to be certain that, whichever method, you are being compensation in relationship the production and payment being received by the developer.

It is important to understand how the developer will be paid

As a general rule, these wind farms do not stand on their own, economically. The reason they are being sought is that there is a rather complex series of tax credits and other “green tag” credits which are paid to developers. Often, they are able to enter into a Power Purchase Agreement with Electric Providers which grants them a guaranteed payment rate. Knowledge of how the developer will be paid will assist in negotiating fair terms for the land owner. The Lease should contain "audit" rights for you. You should be provided with access to the power agreement between the power company and the developer, and proof of the payments the developer receives so that you can "audit" the payments made to you based on the lease formula. You should also have access to the power production information on a regular basis (the metering records, etc., showing the actual power produced by each turbine subject to the lease).

Rights Given and Retained

Developers seek exclusive control over large tracts of land. In most cases, the landowner doesn’t really want to give up the degree of control sought by the developer. Careful negotiation means including exactly what uses you want to retain as part of the written lease agreement. This may include the ability to farm the land, hunt or conduct other recreational activity, build or develop structures, whether commercial or residential, and ability to enter into other leases, such as oil, gas and other minerals, telecommunication towers, etc.

Even during the exploration phase, the developer will seek the right to construct roads, erect towers, etc., and even sometimes erect buildings and structures. The scope of that activity and how it interferes with your use and cultivation of the land must be considered during all phases of the Lease. An important consideration for farmers is ensuring that all underground cabling is set below minimum, plow depth.

An Exit Strategy

A Wind Farm will likely be a project in the millions of dollars for the developer. They will probably have to obtain financing and may pledge their interest as security for the financing. It is important to understand your rights in this process. What happens if they default on their obligations to creditors, or on their obligation to complete the process and to pay you? The lease should contain a statement that the developer covenants to keep the land free from mechanics or other liens of any kind and will promptly take all proper steps to remove any such lien that arises from their activities.

A well written lease should also contain provisions which cover what will happen at the end of the lease. There should be provisions for “decommissioning” or removal of all towers and equipment and leaving the land as they found it, in a condition which allows other uses contemplated by you. There should be a fund or a bond posted for ensuring that this gets done.

Summary

As you can see, this is not a simple process involving standard documents and activities. It is not possible to enumerate all the considerations which must be addressed in this process. It is important to remember that we are talking about a 20-40 year “relationship” with the developer. It is well worth the landowner’s while to engage some assistance in negotiating this kind of arrangement.