A PRIMER ON WIND LEASES
Robert P. Wright
In order to understand the dynamics of a wind lease, it is useful to have some
appreciation of the current state of the U.S. wind power industry, the elements of a wind power
project, and how a wind farm works. This paper will provide a brief background in these areas
and then describe the key issues typically addressed in wind leases that are unique to wind
1. Introductory Terminology and Concepts.
a. Production capacity (“nameplate capacity”) is measured in kW (kilowatts) or MW
(megawatts); one MW of electricity will power 270-300 homes.
b. Production is measured in kW-hours (kWh) or MW-hours (MWh). One kWh = 1,000
watts of electricity produced for one hour. So a 50 W bulb running for 20 hours
consumes 1 kWh of electricity (50 watts x 20 hours = 1,000 watt-hours = 1 kWh).
c. “Capacity factor” is a measure of energy production of a power plant or wind turbine.
It is expressed as a percentage and compares actual power produced over time with the
amount of power that would be produced in the same time operating at full nameplate
d. “Availability factor” gauges reliability of the equipment. It is expressed as a percentage
of a year during which the production facility is actually available to produce electricity.
2. Wind Has Become Big Business in the U.S.
a. From its modest beginnings in California in the early 1980’s, the industry has taken off
at exponential rates in the last several years. 8,358 MW of capacity was installed in
2008 alone, increasing total U.S. installed capacity by 50% in one year. The capacity
installed in the last two years constitutes almost twice the total capacity installed in the
U.S. previously since the inception of the industry here more than 25 years ago.
b. At the end of 2008, total U.S. installed capacity was 25,170 MW, making this country
for the first time the world leader in wind power capacity (Germany, previously the
world leader, has about 23,000 MW of installed capacity).
c. In 2007, new wind power capacity represented 35% of the total new capacity in power
generation of all kinds installed in the U.S. during that year, and in 2008 that share
increased to 42% according to initial estimates from the American Wind Energy
Association (AWEA), the industry’s trade organization.
3. Industry Challenges.
a. There is no question that 2009 will be difficult for the wind power industry, just as it is
for others. Two shorter term problems present challenges.
2 A Practitioner's Guide to Wind Farms and Leases
i. First, the low prices of oil and gas as competing sources of power production will
make some existing projects less profitable and lessen the attractiveness of new
projects. As recently as this summer, according to Emerging Energy Research, a
Cambridge, Massachusetts-based market research firm, the cost of power from a
new wind farm (before tax credits) was 8.4 cents per kilowatt hour, cheaper than
power from a new gas-fired power plant (9 cents) or a new nuclear plant (9.8
cents). Only coal, at about 6 cents for kilowatt hour, was cheaper.
ii. Second, the industry suffers from lack of available financing. Lehman Brothers,
Wachovia and AIG were principal lenders in the industry, and are now gone,
sidelined or sold. Credit Suisse, a very large player in the industry, has indicated it
is out of the market entirely for this year. And the ability to finance projects
through “tax equity” partnerships (channeling the production tax credits enjoyed by
the industry to investors with an appetite for those credits) has shriveled since there
are fewer investors now looking to shield profits through application of the tax
b. Longer term, there are two significant challenges creating constraints that will need to
i. Transmission capacity is the most limiting factor. Generally (and not surprisingly),
high-voltage transmission lines do NOT run to the areas where the wind is in this
country. But a transmission line is essential to transport the electricity to market,
since there is no way to store or transport it otherwise. So wind farm development
in some states such as North Dakota (which has the most potential for wind power
of any state, according to a 1991 study by the Pacific Northwest Laboratory) has
been severely hampered as a result. Typically the construction of transmission
infrastructure is very costly and time-consuming; a typical project can take 10 years
to site and build, and will cost two to three million dollars per mile. Some states,
such as Texas, New York and California, have aggressively addressed this issue
and have new, accelerated transmission projects planned. But there is a strong
move afoot to develop a program of this kind of transmission expansion on a
national basis and this is likely to be an area addressed early on by the new
ii. Another challenge is the ability to produce turbines fast enough. Growth in the
manufacturing sector in the US is behind that of Europe, partly because of the on-
again, off-again approach to the industry in this country (see PTC discussion
below). During the last three years, turbine availability has been a major
constraint, with large developers having significant advantage over smaller ones in
having the ability to make and pay for large orders in advance so that supply would
not be an issue for them. Development of the industry in this country will be
important to our ability to continue to develop wind farms at a pace that might be
achievable absent this constraint.
Robert P. Wright 3
4. Industry Advantages.
a. Notwithstanding these immediate issues, the industry is in a favorable long-term
position and is likely to receive a considerable boost from political policy in the near
term. Without fuel cost or any significant carbon footprint, it is going to be a clear
favorite and part of the solution for reducing dependence on foreign oil and gas-
producing countries and reducing the nation’s carbon footprint.
b. Two politically-created incentives have provided a great boost to the industry in past
years and are likely to continue to do so into the future as they are enhanced and
i. The industry currently enjoys a federal production income tax credit (PTC) of 21
cents per kWh for the first ten years of production of electricity from any projects.
This credit was originally created in the Energy Policy Act of 1992 (it was
originally 15 cents per kWh but has been increased over time to account for
inflation). Congress has been inconsistent in extending the credit, and the industry
has seen a 73% to 93% drop in wind energy installations in the year following each
of the three years in which the PTC was allowed to expire without renewal (see
graph). Most recently, the PTC was extended at the end of 2008 for one year. The
inconsistent, short-term extensions that keep the industry and its supply chain in
on-again, off-again mode represent one of the big issues that the new
administration has indicated it intends to address to encourage longer term stability
in growth. (In addition to seeking relief in this area, the industry is also seeking
refundability of the PTC or other similar measures to mitigate the effects of the
current downturn and the consequent lack of appetite for tax credits that are useful
only to those with profits to write them off against.)
Source: American Wind Energy Association
ii. The second major driver for the industry is the implementation of renewable energy
portfolio standards (RPS or RES). These standards use market mechanisms to
create demand and ensure that a growing portion of electricity is produced from
4 A Practitioner's Guide to Wind Farms and Leases
(a) An RPS requires that electric utility providers acquire a certain amount or
percentage of their electricity from renewable energy sources. Generally, a
market is created in each jurisdiction through the issuance of transferable RPS
certificates for the production of renewal energy. Their value is set by the
(b) There is currently a drive to implement a federal RPS. (A federal standard has
been considered and passed by either the Senate or the House, but not both at
the same time, three times since 1997.) So far these standards have been
created on a state-by-state basis; 28 states have adopted an RPS, and many
have increased their requirements since first passage because the rate of
renewable energy development is exceeding their expectations. Examples of
current requirements are as follows:
(1) New York: 25% by 2018
(2) New Jersey: 22.5% by 2021
(3) Texas: 5,580 MW by 2018 (which has already been exceeded).
c. Wind resources are abundant in the U.S. The U.S. Department of Energy’s “20% Wind
Energy by 2030 Technical Report,” issued in July 2008, laid out a plan under which, by
the year 2030, wind power could supply 20% of U.S. electricity and reduce carbon
emissions by 25%. (This 228-page report is a very good resource and springboard to
other resources for learning about the wind power industry in the U.S.; it can be
downloaded at www.eere.energy.gov/windandhydro/wind_2030.html.)
d. Advances in technology will undoubtedly continue and will improve prospects for the
industry by increasing reliability and reducing costs. In 1981, turbines installed had a
rotor diameter of 10 or 15 meters, a nameplate capacity of 25-50 kW and a capacity
factor of around 20%. Today rotor diameters are more typically 80 or 90 meters,
generate 2 to 3.5 MW, and have a capacity factor of around 35%.
5. Where are the wind farms?
a. Wind farms are located in places where the wind speed averages at least 13 mph AND
there are nearby transmission lines. Generally this means the northwest and midwest
sections of the U.S., as well as along mountain ridges and coastlines. The following
map shows the prime wind development areas in the U.S.
Source: United States National Renewable Energy Laboratory
b. 35 states have installed utility-scale wind power facilities.
c. According to AWEA, in order of nameplate capacity installation, the top five states as
of the end of 2008 were Texas (7,116 MW); Iowa (2,790 MW); California (2,517 MW);
Robert P. Wright 5
Minnesota (1,752 MW); and Washington (1,375 MW). (North Dakota, the state with
the most wind resource, had only 714 MW installed, an indication of the significance of
existing transmission constraints.)
6. Critical Elements in the Development of a Wind power Project.
a. Understanding and evaluating the wind resource is obviously fundamental. Wind of at
least 13 mph, as previously indicated, with an anticipated capacity factor of at least 25%
is necessary for the development to be economic, assuming appropriate pricing. The
power that can be generated from wind varies as the cube of an increase in wind speed,
rendering locations with seemingly only minimally larger wind speed averages
considerably more productive. Generally more than one year of wind data is needed to
evaluate the wind resource and its characteristics sufficiently to site turbines on the
b. Ensuring proximity to transmission lines, and available capacity in those lines, is also
critical. Where no lines exist, there must be an accurate assessment of (i) the likelihood
that the transmission lines will become available within the period the developer can
retain site control and (ii) the cost of accessing such lines. Even if lines exist, a
developer must often get in a “queue” to determine the priority of its project for
capacity availability. Transmission studies (both by developers and by the utilities to
which they apply for transmission capacity) can be lengthy.
c. Siting and project feasibility will need to be addressed. This includes evaluation of
local community sentiment, avian, archaeological or other environmental issues,
geology, local air traffic, and zoning and permitting requirements. It is by no means a
given that any particular community will welcome a wind power project, particularly in
scenic areas where the prospect of the economic benefits to local landowners and the
community of a wind power project doesn’t have the impact that it does in other places.
Working with a community and convincing it to support a project can take many
months and in some cases, years. Avian studies require at least a full year so as to
include a complete migratory cycle, and sometimes can require two.
d. Securing access to the land for the project--the “wind farm”--will be necessary, through
the acquisition of leases and easements from all necessary landowners. A leasing
program must be carried out in tandem with establishing siting and project feasibility,
and itself can take years to complete.
e. Establishing access to capital (equity and/or debt) is obviously essential. A wind
project is very capital-intensive, with initial outlays for utility-scale projects often
measured in the hundreds of millions of dollars (recently cost of installation has
approximated $2,200 - $2,300 per kW).
f. Identifying and contracting with a reliable, long-term power purchaser is usually
required to make the project financeable. Typically this will be an electric utility under
a long-term (10-30 year) power purchase agreement. However, some “merchant” plants