Introduction to Wind Power and Electricity Generation - ABA YLD 101 Practice Series

By Katy Pier Moore

Introduction. Prior to the advent of industrial wind energy production facilities, the world had been using wind power for thousands of years. In fact, farmers and ranchers in much of this country have used windmills to access water for centuries. Large-scale commercial wind farms are a development of the last three decades and have their roots in oil shortages of the 1970's. This paper provides a short summary of considerations involved in the location and mechanics of a large-scale commercial wind farm, in financing such wind farms and in lease agreements used in the development of large-scale wind farms.

Location and Mechanics of a Wind Farm. An individual wind turbine converts the kinetic energy in the wind -- that is, the energy of the wind's motion -- into electrical energy. An industrial-sized wind farm contains a group or groups of wind turbines, each producing electricity individually, that combine to produce commercial amounts of electricity. The amount of electricity an individual wind turbine can generate is a function of several variables, including the turbine's nameplate capacity, or the amount of electricity the particular turbine is engineered to produce. Because the wind does not blow constantly, the amount of electricity an individual wind turbine and wind farm can produce also depends on the farm's capacity factor, or the percentage of time a wind farm is actually producing electricity. Thus, in basic terms, a wind turbine will produce power equal to the nameplate capacity times the capacity factor.

Although siting wind farms depends on many variables, two particularly important factors influence the location of wind farms: (i) wind availability and speed and (ii) the availability of transmission lines. In general, wind speeds of at least 13 miles per hour are necessary to economically produce wind electricity. Additionally, economic development demands that the wind be blowing at least 25% of the time in order to produce electricity.

Currently, this country's electrical distribution system requires production of electricity simultaneously with the use of that electricity. That is, electricity is not stored prior to use. Instead, electricity is produced, transmitted to the end user and used in short order. For this reason, an essential component in constructing any plant for the generation of electricity is the availability of electrical transmission lines to carry electricity to end users. This is especially true of wind energy production facilities, because those areas of the nation with high wind-energy potential are often isolated from demand centers, making the presence of high-powered transmission lines that can carry electricity across these distances even more important.

Today, the nation's transmission lines are primarily regionally integrated, meaning that energy produced in one region is generally used in that region. There is currently a push toward the development of a nation-wide transmission grid that will be capable of moving electricity across vast areas of the nation. Even if this project were approved and completely funded this year, such a transmission grid is years, maybe decades, away. Additionally, even within regional areas, access to regional transmission lines, which cost millions of dollars and several years to site, permit and construct, is currently one of the most limiting factors in the development of wind farms.

Financing a Wind Farm. An important factor in the economic feasibility of wind power production is the federal production tax credit. Originally created in the Energy Policy Act of 1992, the production tax credit has been inconsistently re-authorized by Congress over the past two decades. Most recently, Congress re-authorized a production tax credit in February, 2009 for three additional years. Currently, the credit is 2.1 cents per kilowatt hour for the first ten years of production of electricity from a wind power project. The credit will expire in 2012 absent further action by Congress.

The production tax credit has lapsed three times since its initial creation. Each such lapse has resulted in a significant decline in wind energy development during the lapse. Because the production tax credit is typically authorized for short periods of time only and is dependent on its continual extension or re-authorization, continual uncertainty regarding the production tax credit has been a major source of instability in the wind power industry.

Another significant issue currently affecting the economics of wind power development is the national recession affecting the nation's economy as a whole. As with many other types of development, the recession has affected debt financing available for the construction of wind power projects. The wind power industry has traditionally also relied on passive investors who generate income against which tax credits can be monetized; the recession has significantly reduced the number of investors desiring to offset extra income against such tax credits.

Wind Leases. Surface leases are the most common form of legal arrangement under which wind energy developers obtain the right to use a tract of land to harvest wind energy. Wind easements, sometimes alone and often in connection with a wind lease, are also used to obtain the right to develop wind energy farms or production plants or to construct transmission lines to carry wind electricity to the grid. Because of the very capital-intensive nature of wind energy development and because wind energy development often does not preclude other uses of such land, wind energy developers do not usually purchase land for the siting of a wind energy production facility.

Wind energy leases have characteristics of both traditional natural resource extraction leases as well as leases contemplating traditional commercial development. Like leases for commercial development, a wind leases term is often for a set number of years rather than an indefinite term based on the production of electricity. However, like traditional resource extraction leases, wind leases usually provide for the payment of royalty based on some percentage of the gross revenue from sales of electricity produced from the wind farm project.

Regardless of the form, the lease or easement agreement will establish the parameters for a long relationship. Wind leases typically run 20-40 years in duration. The wind lease is often divided into an option period consisting of 1 to 5 years during which the wind developer will evaluate the feasibility of locating a wind power production facility at that site and a secondary fixed term of 25 to 35 years or more. The lease may also provide for an extension option at the end of the original fixed lease term. Because of the long duration of the lease or agreement, both parties should address both future uses and development of the property subject to the lease and any existing specialized use of the land, such as farming, livestock grazing or hunting, that wind operations may affect.  

More Information. Two excellent resources for those wishing to learn more about the wind energy and power industry are the American Wind Energy Association's website, www.awea.org, and the United States' Department of Energy's 20% Wind Energy by 2030 Technical Report, found at www.eere.energy.gov/windandhydro/wind_2030.html.

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About the Author

Katy Pier Moore is an attorney with the firm Cox Smith Matthews in San Antonio, Texas. Her principal areas of practice are Energy and Natural Resources.

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