六月 08, 2004
by Carolyn S. Kaplan, Esq., and Richard M. Cogen, Esq.
by Carolyn S. Kaplan, Esq., and Richard M. Cogen, Esq.
Wind power is often referred to as the world’s fastest-growing energy source. In recent years, the United States has experienced unprecedented growth in the number of wind power projects, primarily due to government incentives for renewable energy resources and advances in technology that increase efficiency and decrease costs. In 2003, wind projects were completed in seventeen U.S. states and total installed capacity reached 6,337 MW, elevating the U.S. in world ranking to second place behind Germany, which leads the world with over 14,000 MW. In spite of wind power’s increasing popularity, developers face a number of challenges to bringing wind energy projects to market. While the specific challenges may vary from community to community, developers must have a grasp of the range of issues they are likely to face.
Identifying the Site and Connecting to the Grid
The two most important attributes for any potential wind energy project are the quality of the wind resource and access to the electric transmission grid. There are a number of sources for screening-level wind resource information, including published wind resource studies and wind resource maps. Developers are often required to collect data at the property for at least one full year to allow for detailed evaluation and documentation of the wind resource on the actual proposed site. A site visit provides invaluable supplemental data and may help to narrow the options by providing site-specific information, such as the accessibility of the terrain for construction and maintenance and the presence or absence of sensitive environmental features.
No matter how good the wind resource at a site, it will be useless if there is no access to the electric grid. Access to transmission lines is crucial, as is the ability to obtain a generation interconnection agreement. Thus, in evaluating a potential project site, a developer must evaluate the means by which it will interconnect the project to the transmission grid. Where is the interconnection point? How will the interconnection be made? Can the land rights necessary to construct the interconnection reasonably be obtained? What are the likely costs for the interconnection corridor?
With respect to the interconnection agreement itself, for generators of more than 20 MW, FERC has promulgated standardized interconnection rules, which are in the process of being implemented by transmission service providers. These standardized rules should provide developers of projects over 20 MW with greater consistency and certainty than currently exist. However, many wind power generators are smaller than 20 MW. FERC has proposed to establish a standard interconnection agreement for such smaller generators, but has not yet finalized its rules in that regard.
Whatever size the generator, before an agreement can be executed, the transmission provider will conduct studies, at the expense of the developer, to determine the cost of the interconnection and any necessary transmission system upgrades, the costs of which will also be paid by the developer. Some of those costs may be offset by transmission credits after operations begin.
In addition to an interconnection agreement, the generator will need a transmission service agreement with providers controlling other areas of the grid that the project will need to access to supply power to customers. These agreements may be with owners of transmission facilities or, in some areas, an independent system operator or regional transmission organization.
Securing the Site
Securing the prospective site for a wind power plant presents a number of interesting issues. Agreements between developers and property owners usually involve two phases. Typically, a developer will want to secure an option to acquire the land rights needed to construct the project and then convert the option into a definitive agreement after making sure that the necessary approvals and financing can be obtained.
Negotiating the option, including payment terms and the potential for extensions, is extremely important. During the period that the option is in effect, the developer must conduct whatever studies are necessary to determine the feasibility of the site and the best locations to build on, work with the community and government officials to gain whatever approvals are required, and, once approved, obtain financing. The developer wants to be secure in the knowledge that the site will remain available, under agreed-upon terms, even if the early stages of the process take unexpected twists and turns.
The option will usually include agreement on at least the basic terms for the definitive land agreement that will confer the rights to use and occupy the land on which the project will be constructed. The land rights could be secured through an outright purchase and sale, a lease, or an easement. Whatever form is used to convey these rights, the developer must assure that it will have the right to use and occupy the land for a sufficient period of time to meet its project objectives (and in no event shorter than the contemplated term of any project debt).
The Approval Process
The approval process varies significantly from location to location and impacts are always site-specific. Nevertheless, certain issues arise in project after project. Projects that exceed federal, state, and/or local thresholds will undergo more scrutiny than projects that are carefully located and designed to minimize the permitting process. As with any large development project, the impacts of a wind project are primarily local. Understanding the host community’s hot-buttons and making a concerted effort to address the community’s concerns up front can save valuable resources and avoid lengthy litigation that can tie up or defeat a project.
The first stop in the permitting process is often a local zoning or planning board. The developer must ensure its project will comply with applicable zoning requirements, such as land use restrictions, height and setback restrictions, and overlay districts. If the project will not satisfy all of the zoning requirements, the developer may need to apply for a variance or appeal to a superseding authority.
The developer should always be prepared to address potential environmental impacts. Although new construction techniques and technologies have significantly reduced avian mortality since early wind energy projects, avian impacts continue to be an issue of concern in many locations. Other environmental concerns may include loss of vegetation, wildlife impacts to rare and endangered species, and disruption of natural habitat. As a result, studies of avian impacts as well as studies of potential impacts on other wildlife and habitat are commonly required.
Visual impacts and noise are also common issues. Given the height of these facilities, the requirement for navigational lights, and their location in open areas, wind facilities are likely to have some visual impact on their surroundings. While incorporating design elements that help a project blend into the landscape is always an option, developers should not underestimate the potential negative response to siting a wind project in the viewshed of cultural, historic, or recreational resources. Yet in the right location and with the right approach, many people feel that these facilities actually have a positive visual impact—certainly more so than with traditional power plants.
There are some states and localities that explicitly limit the amount of noise that a wind project can create. Technology has enabled new wind projects to operate with very little noise, particularly when it is masked by the ambient noise of the wind itself. Also, given the amount of space required for a wind farm, the likelihood of the noise being heard by residents located a fair distance away is fairly remote. Nevertheless, if the project is located near residences and in an area with normally low noise levels, this can be a problem and can require developers to acquire neighboring properties to avoid the issue.
Financing and Power Purchase Agreements
Unless the developer is one of the few entities large enough to obtain balance sheet financing, the project will need to be financed largely on the basis of anticipated revenue from power purchase agreements.
Capital costs for wind projects are relatively high compared to their nameplate output because wind resource limitations invariably limit a wind energy project’s output to only a percentage of its theoretical total output. Although the developer incurs the cost of, for example, a 100 MW facility, the plant’s revenue projections typically must be based on less than that full instantaneous output, for much less than a full calendar year.
Developers desire power purchase agreements (PPA) of a minimum duration. Typically, the PPA should be sufficient to finance development costs and operations over the period during which the debt financing of the project will remain outstanding.
The PPA will usually place a number of requirements on the seller (the developer), such as assurances that the project will be built on schedule, that the seller will arrange for connections to transmission lines, and that there will be a certain amount of guaranteed output.
The PPA will also include agreements on many other issues, such as:
Other important agreements that typically are needed to support project financing include equipment supply and construction agreements (or a turnkey equipment procurement and construction agreement), a service agreement in which the manufacturer of the turbines guarantees the performance of the equipment, and operation and maintenance agreements.
Opportunities for Growth
While Congress’s failure to extend the production tax credit has inserted a new wave of uncertainty into the U.S. wind industry, it is widely expected that wind power will maintain its rapid rate of growth. Developers hoping to capitalize on this anticipated expansion of the industry must be prepared to grapple with a number of key issues. Understanding the landscape and gaining a reputation for getting projects off the ground smoothly and successfully now will give developers a strong track record as the industry expands into the future.
Carolyn S. Kaplan is counsel in the Boston, Massachusetts, office of the law firm of Nixon Peabody LLP. Ms. Kaplan is co-chair of the firm’s Renewable Energy Team.
Richard M. Cogen is a partner in the Albany, New York, office of Nixon Peabody LLP. Mr. Cogen is co-chair of the firm’s Facility Siting and Operations Team.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.
