the law of wind-guide to biz & legal issue

8/14/2019 the law of wind-guide to biz & legal issue

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TA B L E O F C O N T E N T S

THE LAW OF WIND is a publication of the Stoel Rives Wind Team for the benefit and information of any interested

parties. This document is not legal advice or a legal opinion on specific facts or circumstances. The contents are intended

for informational purposes only. Copyright 2006 Stoel Rives LLP.

Welcometo the Law ofWind

Wind Energy Lease Agreements

Siting and Permitting Wind Projects

Power Purchase Agreements and Environmental Attributes

Design, Engineering, Construction & Turbine Purchase Agreements

Project Finance for Wind Power Projects

Tax Issues

Choice of Corporate Structure & Entity

Labor Issues

Regulatory & Transmission-Related Issues

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THE LAW OF WindWind


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Dear Member of the Wind Power Community,

As the worlds fastest growing energy source, wind can help power our homes and businesses

and buttress local agricultural economies while leaving cleaner skies for our children. Major

global corporations, new sources of investment capital, and power buyers large and small have

been drawn to wind. States across the U.S. have moved to fill the federal leadership vacuum,

in many cases enacting renewable portfolio standards and state renewable energy tax credits.

The industry is vibrant.

Nonetheless, wind projects like other major projects are subject to a plethora of real property

issues, regulatory and permitting requirements, interconnection, transmission and power

purchase negotiations, financing challenges, tax matters, construction contracting and labor

management issues.

Recognizing these challenges, and as part of our commitment to the growth and success of the

renewable energy industry, in 2003 the Stoel Rives Wind Team developed THE LAW OFWind:A GUIDE TO BUSINESS AND LEGAL ISSUES. This guide contains insights we have gained

during the last 10 years serving the U.S. wind power industry.

You have in your hands the Third Edition ofTHE LAW OF Wind, updated in 2006 to reflect the

current state of play on the legal and policy issues most likely to impact the wind industry

generally and the development of individual wind projects. We hope you find it useful.

Peter Mostow, Chair

Stoel Rives Renewable Energy Practice

[email protected]

503.294.9338 direct

503.220.2480 fax

W E L C O M E T O

T H E L AW O F WindWind


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Chapter One

The Law of Wind Wind Energy Lease Agreements

Samuel J. Panarella

The security, flexibility, financeability, and cost-effectiveness of a wind energy projects land rights are a key part

of the projects overall value. The tool for capturing this value is the wind energy lease agreement or wind energy

easement agreement (the Wind Energy Land Agreement).

Like agreements for the use of retail or industrial space, a Wind Energy Land Agreement has provisions that set

out the term, the purposes for which the developer may use the property, the amount and method of payment for

the leasehold or easement interest, the manner in which the costs of insuring the property will be allocated

between the parties, the conditions constituting a default, and the manner by which such default may be cured

by the defaulting party.

However, in a Wind Energy Land Agreement, several of these standard provisions must be tailored to theunique requirements and realities of wind energy development. Moreover, a Wind Energy Land Agreement ought

to have certain provisions that typically are not present in most other kinds of leases or easements. These unique

and tailored provisions are the focus of this chapter.

I. The Scope of the Property Subject to the Wind Energy Land Agreement. The portion of the

landowners real property that will be subject to the Wind Energy Land Agreement is frequently the first and most

contentious issue during negotiations. There is a natural tension between a developers wish to include as much

of the real property in the Wind Energy Land Agreement as possible and a landowners desire to limit the propertysubject to the agreement to only those portions necessary for the construction, maintenance, and operation of the

wind power facilities on the property.

A. Basic Issues. There are several reasons that a developer may want to maximize the amount of

property that will be subject to the Wind Energy Land Agreement:

In todays competitive environment, developers often begin acquiring rights in real

property before they have enough wind data and information about the propertystopography, access to suitable transmission lines, and environmental attributes to

accurately determine the most productive and cost-effective layout for the wind power

facilities on the property. By leasing most or all of the landowners property, the

developer gains flexibility to respond to changes in the project layout and design that

may become necessary as a result of, for example, gathering more complete wind data

for the property, landowner concerns about the impact on the landowners continued

use of the property, the requirements of governmental permitting authorities, and the

desire to minimize the time and expense required to construct the wind energy project.

Economies of scale play a role. By maximizing the amount of property subject to the

agreement, the developer can maximize the size and efficiency of the wind energy

project on the property and benefit from economies of scale in reducing development

costs and increasing productivity.


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The effective generation of wind energy from wind turbines is largely dependent on the

annual average wind speed over the property. Any obstruction (e.g., a tall building or

silo) that interferes with the flow and speed of the wind over the property can have a

dramatic, negative impact on the ability of the wind turbines on the property to generate

energy. A developer will want control over the size and kind of structures that can be

constructed on the property by the landowner and/or third parties during the term of the

Wind Energy Land Agreement. An effective way to gain this control is to encumber asmuch of the property as possible and have noninterference covenants in the Wind

Energy Land Agreement that limits the landowners right to interfere with the wind flow

over the property.

The landowners primary motivations for limiting the amount of its property that is subject to the Wind Energy

Land Agreement are to limit the impact of the wind energy project on the landowners other activities on the

property (especially when the landowner is a farmer or rancher and plans to continue using the property in this

manner while the wind energy project is operating on the property), to preserve the opportunity to lease theexcluded land for other purposes (e.g., cell towers), and a basic reticence to give up a measure of control over too

much of the property.

B. Potential Resolutions. There are several devices that may be helpful in resolving a conflict

between landowner and developer over the amount of property to be included in the Wind Energy Land

Agreement:

Tie a portion of the payments required under the Wind Energy Land Agreement to thetotal number of acres to be encumbered.

During the planning stage, consult with the landowner regarding the location of the

proposed wind power facilities on the property. This may reassure the landowner and

can provide the developer with useful information about the property.

Offer a phased approach under which the landowner will agree to lease or grant

easements over all or most of the property to the developer during the construction

phase of the wind energy project. After construction has been completed, the developerwill quitclaim to the landowner its interest in the portions of the property that are not

part of the wind energy project, minus a reasonably large buffer around the wind power

facilities to allow ample room for operation and maintenance activities and possible

future repowering of the wind turbines. In such an arrangement, a developer will want

to include terms in the Wind Energy Land Agreement that clarify that the landowners

commitment not to interfere with the wind speed and flow over the property also

applies to the released property for the term of the agreement. Further, a developer

may demand a right of first refusal for the released property, so that the landowner maynot re-lease it for a purpose that will interfere with the wind project. Before taking this

approach, however, the parties should make sure that this arrangement will not violate

local land use laws.


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Finally, the developer may agree to encumber only those portions of the property that it believes will be necessary

for the wind energy project (e.g., strips of land for wind turbines, transmission lines, roads, and related facilities).

This can be risky if the developer does not have enough information to accurately determine the most

advantageous locations for its wind power facilities.

II. Purpose of Agreement/Use of Property. Another contentious issue involves the purpose of the Wind

Energy Land Agreement and the uses the developer may make of the property to accomplish this purpose. Ofcourse, the obvious purpose of a Wind Energy Land Agreement is the construction and operation of a wind energy

project. However, the developer and landowner may disagree about the scope and extent of the rights in the

property that the developer needs in order to accomplish this goal.

A developer will want the right to take any action on, and make any use of, the property that the developer

believes is necessary to accomplish the goal of constructing and operating a wind energy project on the property.

For its part, the landowner may wish to see these rights limited to only those clearly delineated activities and

facilities necessary to construct and operate the wind energy project on the landowners property.

A. What Facilities Go on Whose Land? For most large wind energy projects, a developer must

control the properties of several neighboring landowners in order to aggregate the large number of acres it takes

to site the project. Few landowners own enough windy land (with access to transmission lines) to have a stand-

alone wind energy project on their property. Inevitably, once the developer has conducted its wind,

transmission, environmental, and construction studies on each of the properties, some of the properties will stand

out above the others as better candidates for wind turbines, while the others may be more suitable for

transmission lines and roads that serve the wind turbines. No landowner wants to be the one who has few or no

wind turbines on its property but plenty of transmission lines and roads that serve wind turbines on a neighbors

property. A landowner may try to avoid this scenario by making the developers right to extend the term of the

agreement beyond the initial evaluation and development phases conditional on the developers installation and

operation of a fixed number of wind turbines on the landowners property. Alternatively, the landowner may

negotiate to receive special minimum payments under the agreement if its property is used primarily for

transmission lines and roads. Generally, the landowner will want such minimum payments to be large enough to

compensate for the fact that the landowner will not be receiving royalty payments on the sale of electricity fromwind turbines on the property.

A landowner may also require that the developer pay additional compensation for the right to place certain

special facilities on the subject property. For example, when the developer wants to place a substation that will

serve the entire wind energy project on one landowners property, the landowner may feel that it is entitled to

additional compensation for the added burden and loss of usable property caused by construction of a substation

on the property. In most cases, a developer will agree to pay such compensation.

B. Landowners Continued Use of the Property. A unique and attractive feature of wind energy

projects is that, in most cases, even after the project is built and operating, the landowner may continue to use a

great majority of the subject property in the same manner as the landowner had been using it before entering into

the Wind Energy Land Agreement. This is because only a small portion (usually between 2 and 4 percent) of the


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subject property is used for wind turbines, roads, transmission lines, and related facilities. The remaining

property suffers little or no impact from the wind energy project. For this reason, most Wind Energy Land

Agreements will provide that the landowner may continue to conduct its farming or ranching activities on the

property throughout the life of the project on the property, provided that such activities do not and will not

interfere with the construction and operation of the wind energy project.

III. Term. A Wind Energy Land Agreement usually provides for an initial term lasting anywhere from 3 to 10years. The purpose of this initial term is to give the developer time to study the feasibility of wind energy

conversion on the property by collecting wind data from anemometer towers installed on the property and by

performing geotechnical, environmental, and other studies on the property and (assuming that the wind data and

studies demonstrate that the property is suitable for development) time to obtain a permit and construct the wind

energy project on the property.

The Wind Energy Land Agreement generally provides that the developer will have the automatic right to extend

the agreement for an extended term lasting approximately 30 to 50 years if the developer (i) agrees to pay the

landowner an annual minimum payment during the extended term, (ii) pays the landowner a one-time lump-sum

payment upon commencement of the extended term, or (iii) installs a certain number of wind turbines on the

property that generate electricity during the initial term of the agreement (the parties may disagree on the number

of wind turbines that the developer should be required to install on the property to trigger the automatic right to

an extended term, with the landowner pushing for a high number and the developer arguing for a low number).

Many Wind Energy Land Agreements also give the developer the right to extend the extended term for a period

ranging from 20 to 30 years if the developer repowers at some point during the extended term by replacing all

or a significant portion of the wind turbines on the property and/or by installing additional wind turbines on the

property. The net result of these successive terms is an agreement that has the potential to run for more than 70

years. The unusual length of the agreement is often troubling to a landowner, especially when the property is a

family farm or ranch that the landowner envisions being passed down to successors or heirs. A landowner may

be reluctant to sign an agreement that has the potential to continue encumbering the property long after the

landowner has handed control of the property to successors. Further, the length of the agreement may give rise

to concerns about the landowners ability to sell the property at some later date and questions about the long-term viability of the developer.

IV. Payments. In general, Wind Energy Land Agreements provide that the developer will pay the landowner

either a lump-sum payment or annual payments for the rights granted in the agreement.

A. Lump Sum Payment. Occasionally a developer will offer the landowner a one-time lump-sum

payment as consideration for the rights granted in the Wind Energy Land Agreement. This lump-sum payment

will be paid upon mutual execution of the agreement and, with a few minor exceptions, is the only payment thelandowner will receive under the agreement. A lump-sum payment may be attractive to a landowner because it

provides the landowner with a large amount of money right away, without concerns about the developers

ongoing financial health and ability to make annual payments. However, attempting to calculate the time value


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of the lump-sum payment against future annual payments can be difficult and time-consuming. Further, such

payments can have undesirable tax consequences for a landowner.

B. Annual Payments. Annual payments from the developer to the landowner are the most

common payment structure for Wind Energy Land Agreements. Typically, the payments are structured as

follows:

1. Initial Payment/Signing Bonus. The developer will pay the landowner an up-front

payment for signing the agreement. The amount of this signing bonus varies widely, depending on factors such

as the perceived potential of the property for wind power generation, the degree of competition between

developers for the property, and the negotiating skills of the landowner and/or its attorney.

2. Annual Preoperation Rental Payments. These are annual (or monthly) rental payments

from the developer to the landowner for the period of time during which the developer is measuring the wind flow

over the property, performing studies, obtaining a permit to construct the wind energy project, and constructingthe project. Again, the amount of these payments is dependent on several factors. It is not uncommon for the

parties to agree that the payments will be calculated by multiplying the number of acres of property subject to the

agreement by an agreed dollar figure. A landowner may prefer to be paid on a monthly basis, but developers

typically prefer to pay annually to decrease the chance of missing a payment and risking defaulting under the

agreement. In most cases, these annual or monthly rental payments will cease once the wind energy project is

operating and the landowner begins receiving royalty payments from the sale of electricity generated by the wind

turbines on the property.

3. Installation Fees. Many Wind Energy Land Agreements provide that the developer will

pay the landowner a one-time installation fee for each wind turbine installed on the property by the developer.

Landowners often insist that the installation fee is calculated using the total megawatts of installed capacity of

wind turbines or other power-generation facilities constructed on the property, rather than on a per-turbine basis.

This is particularly true when the wind turbines installed on the property have a manufacturers nameplate rating

of more than one megawatt.

4. Operating Fees. The operating fees paid to the landowner by the developer are usually

the most lucrative aspect of the Wind Energy Land Agreement for the landowner, and, for that reason, the

operating-fees provision is often the most heavily negotiated provision in the agreement. If and when wind

turbines are installed on the property and begin delivering electricity on a commercial basis to a purchasing utility

or other purchaser pursuant to a power purchase agreement or similar document, the developer will begin paying

the landowner operating fees based in some form on the output of those wind turbines. These operating fees

may be (a) a percentage of the gross revenues received by the developer from the sale of the electricity generated

by wind turbines on the property; (b) a millage rate per kilowatt-hour of electricity generated by wind turbines onthe property, with the millage rate being determined by the capacity factor of the wind turbines on the property;

or (c) a per-turbine annual lump-sum payment that has no strict relationship to the amount of electricity

generated by wind turbines on the property.


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S a m u e l J . P a n a r e l l a

Law Practice

Sam Panarella practices in the areas of land use, natural resources, real estate

development and environmental law. Sam advises clients on the development,

acquisition, sale, finance, construction and operation of projects and the

structuring and negotiation of contracts, with particular expertise in acquiring

land and obtaining permits for utility and energy facilities including wind energy

projects throughout the western United States and natural gas storage facilities.

Sam has extensive experience in the acquisition and sale of power plants, power

plant project development and financing, and the acquisition, sale, financing,

development, permitting and leasing of commercial real estate.

Prior Legal Experience

Law clerk to Judge Otto R. Skopil, Jr., U.S. Court of Appeals for the Ninth Circuit

(1998-99).

Professional Activities

Volunteer attorney, Sponsors Organized to Assist Refugees; attorney partner,

Northwestern School of Law of Lewis & Clark College First Year PartnershipProgram.

Publications

Just Starting Out: Leasing, Siting, and Permitting Geothermal Projects, in Lava

Law: Legal Issues in Geothermal Energy Development (Stoel Rives 2004).

Wind Energy Lease Agreements, in The Law of Wind:A Guide to Business and

Legal Issues (Stoel Rives 2004).

Creating Landowner Value with Lease Agreements: The Finer Points Explained

for a Document that could be Valid for Years, North American Windpower,

(September 2004)

Comment, Not in My Backyard: The Clash Between Native Hawaiian Gathering

Rights and Western Concepts of Property in Hawaii, Environmental Law

(Winter 1998).

503-294-9223 Direct503-220-2480 [email protected]

EducationJ.D. cum laude, Northwestern School of Lawof Lewis & Clark College, 1998

Associate editor, Environmental Law

Review, Business & Tax Law Scholar1997-98

B.A., honors, liberal studies, University ofMontana, 1994

AdmissionState bars of Oregon, Washington; State barof California (pending)


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Chapter Two

The Law of Wind Siting and Permitting Wind Projects

Timothy L. McMahan, Peter D. Mostow

While wind energy projects are commonly praised for producing green power, they rarely receive preferential

permitting treatment. Wind energy projects raise local land use, environmental, and community concerns similar

to those raised by other commercial and industrial projects. Several of the countrys largest proposed windprojects face such concerted local opposition that not only are their schedules and pro formas being impacted,

but their very futures are in doubt. This has sensitized potential project purchasers and financiers, who usually

scrutinize permitting and environmental issues very closely.

In this climate, project developers can achieve a significant competitive advantage by doing permitting right:

imposing a disciplined focus on site assessment and fatal flaw analysis, permitability oriented project design,

and strategic consultation with interested agencies, communities, and interest groups.

I. The Permit Process. Wind energy facility siting processes are highly local. There is enormous variation

from state to state and even from location to location. Factors such as the need for transmission lines or access

roads, facility size, facility and equipment location, land ownership, and federal involvement may determine the

number of agencies and the level of government involvement for a particular project.

A. Federal Siting. Proposed wind projects on federally managed land must secure land rights

(typically called rights of way) and undergo the associated environmental review under the National

Environmental Policy Act (NEPA) and related statutes. This is particularly relevant in those western states suchas Utah and Nevada where much of the land, including much of the prime wind area, is located on federal lands.

B. State Siting. A few states, including Oregon and Minnesota, have state siting councils or boards

that have one-stop mandatory siting jurisdiction over permits for wind energy facilities exceeding certain sizes.

Washington has a siting council that may take jurisdiction over issuing permits for wind energy facilities of any

size but only if requested by the applicant. California has a state siting body that has no jurisdiction over wind

energy facilities.

C. Local Siting. In states where projects do not trigger state siting jurisdiction, and in states with

no state siting process, wind energy projects are permitted by the local jurisdiction, which, for typical rural wind

energy projects, is almost always a county (as opposed to a city governing body). Windy states with no state

siting process include Colorado, Idaho, Iowa, Nevada, Texas, and Utah.

D. Comparative Advantages. On average, siting wind energy facilities through a state siting

process takes longer than doing so through a local process, as more documentation typically is required at the

state level. In Oregon, for instance, the issuance of a site certificate for a wind project may take from 12 to 18months. However, Oregon now allows for an expedited (nine to 12 months) review process for wind energy

projects that will have up to 300 MW of nameplate capacity. In comparison, siting at the local level can occur in

three to six months if there are no significant environmental reviews required.


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Despite the longer period of time required for state siting, it offers several advantages over local siting. Generally,

these advantages are important for difficult or highly contentious projects, and are less important for

straightforward, locally-supported projects. First, review and approval tend to be based on more objective criteria

and to be less subject to potential political bias. Second, the process for appealing site approvals can be

expedited under state permitting.

There is a commonly held view that it is easier to permit wind energy projects at the local level, but this may notbe true for all projects. When the option exists, a decision to pursue a particular permitting route should be

made carefully and on a case-by-case basis.

State siting typically requires a higher level of involvement from other state departments such as fish and wildlife,

environmental quality, water resources, parks, and cultural resources agencies. State siting is typically far more

costly to the applicant due to significantly more complex regulatory barriers, required studies, agency review costs

passed on to the applicant, and added processing and review time. In local permitting, such agencies may not

even be notified and, if they are, their recommendations often do not carry the force of law.

II. Local Permitting. For local siting applications, an applicant may be required to work with local planning

commissions, zoning boards, and county boards. The county governing body, typically a board of commissioners,

generally must approve and issue a permit, usually a conditional use permit. In most counties throughout United

States, a wind power project is conditionally allowed in rural land use zonesit is not expressly allowed or

prohibited, but rather subject to a discretionary review by the appropriate local authority.

To secure a conditional use permit, an applicant typically must show that the project will be compatible with

adjacent land uses (typically farming or ranching). Some counties have developed, or are developing, utility or

wind overlay zones that further dictate where and how wind energy projects can be sited. Some counties,

including several in Utah, have adopted ridgeline overlay zones that impose certain restrictions on ridgeline

construction. Additionally, conditional use ordinances often required review by and consultation with state or

federal agencies in the permitting process. For instance, if the project could negatively impact wildlife species

listed by state or federal agencies as threatened or endangered, the appropriate state and/or federal agencies will

have to be consulted. State and federal wildlife agency review may also occur as a matter of course through theenvironmental review process. Locally permitted wind energy projects typically require three to six months to be

completed, depending on the complexity and level of environmental review required and the presence or absence

of project opponents.

In addition to the applicants securing a conditional use permit, some states require that the local permitting body

conduct environmental review based on state environmental review statutes modeled after NEPA. Washington

and California require this review, Washington under its State Environmental Policy Act (SEPA), and California

under its California Environmental Quality Act (CEQA). Oregon, Nevada, Wyoming, Utah, New Mexico, andIdaho do not have comprehensive environmental review statutes. The net effect of state statutes like SEPA and

CEQA is to increase process time and cost and, likely, to result in the imposition of additional mitigation

requirements.


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III. Federal Environmental Review. Wind energy projects that require a federal agency to take action or

make a decision enabling the project trigger NEPA review. NEPA is a procedural statute that requires federal

agencies to consider the environmental impacts of a proposed decision before making the decision. In the

context of wind energy projects, NEPA can be triggered by the need to acquire a right of way or special use

permit from the Bureau of Land Management (BLM), the U.S. Forest Service, or another land-managing federal

agency; the need to interconnect with a Bonneville Power Administration (BPA) or Western Area Power

Administration (WAPA) main transmission line or substation; entering into a power purchase agreement with

BPA or WAPA; and the need to secure a Clean Water Act section 404 removal/fill permit from the U.S. Army

Corps of Engineers. Depending on the level of review required, the review can take a month (for decisions that

have been Categorically Excluded from individual NEPA review), two to six months (for an Environmental

Assessment (EA) to be prepared that concludes that the federal action will not significantly impact the

environment), or more than a year (for an EIS that analyzes in much more detail the impacts of projects in areas

that are considered to be environmentally sensitive). When a state level environmental review is already under

way for a wind energy project, the federal agency may piggyback on the state process and incorporate theenvironmental documentation from the state process into the federal NEPA review. In appropriate situations, the

federal agency may also tier a decision to a prior NEPA review and thereby reduce the amount of time and

material that must be prepared for the new decision. An example of this would be BPA relying on a prior

programmatic EIS that evaluated future energy development in the Northwest in order to support a decision as

to whether to allow an interconnection to a BPA transmission line as part of a specific wind project.

In late 2003, the BLM announced the intention to develop a programmatic EIS for siting wind energy projects on

federally-managed lands. Initial scoping meetings have been held, but there still is a significant chance for input.Developers with projects on federal lands should involve themselves in the BLMs process.

IV. Key Substantive Issues. Substantive issues are important to developers for two reasons: cost and risk.

Accordingly, fatal-flaw analysis of the following big-ticket items should be part of any project planning.

A. Avian Impacts. Avian mortality has traditionally been the single biggest issue in the siting of

wind energy projects. This is due in large part to the number of birds killed, particularly at Altamont Pass in

California, when turbine technology consisted of fast-moving blades and perching opportunities, too little wasknown about flyways, and migration patterns were not adequately considered in siting decisions. At other sites

around the country, avian mortality rates are dramatically lower due to advances in turbine technology and better

siting decisions. Nonetheless, avian impact concerns remain an important issue for wind project permitting.

Many permitting agencies still require at least one years worth of avian data before issuing a site permit. In

addition, conditions of permit issuance may require follow-up monitoring of avian impacts.

Avian baseline data is gathered to provide information about bird and bat use of a potential wind project site.

The baseline data may allow a developer to avoid placing a project in a key flyway or other area of heavy avian

use, thus reducing the possibility of high avian mortality. Post-construction avian fatality monitoring is performed

to determine the bird and bat impacts of an operating wind project. In accordance with fairly well-developed

statistical concepts, the monitoring is often done on only part of the operating project. Fatality data provide a

means of confirming the siting decisions that were made on the basis of baseline avian use data. In addition,


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fatality data can identify specific turbines or groups of turbines with higher than expected impacts and can be

used as the basis for adaptive management decisions. Tubular turbine design, technology advances in turbine

design, including slower turbine tip rotation speeds, increased use of underground power transmission cables,

and reduced use of guyed wires and other facilities where birds can roost lessen the risk of avian collisions.

B. Other Wildlife. Wind energy projects can also disturb other wildlife and plant species. It is

important to assess whether any of the species present in the project area are listed as federal or state threatenedor endangered species or state species of concern. This is generally determined through a database inventory of

species likely to occur in the project vicinity, combined with site visits that typically require a spring survey for

plants and some animal species.

C. Habitat (Including Soil Erosion). Wind energy projects typically involve substantial grading for

road and turbine base construction, with impacts upon a wide variety of plant and animal species. In active

agricultural areas, this issue may be of minimal importance. However, most productive wind energy sites will

likely include some areas of native habitat or native species occupying previously undisturbed areas. In many

western states, wildlife habitat is classified one of several categories based on its importance to various species,

and mitigation ratios are set accordingly; in some cases, no disturbance at all is allowed to the most valuable

habitat types.

Soil erosion due to road and facility construction can also be a problem. Project planning should include an

attempt to avoid sensitive habitats, consider mitigation for habitat impacts that cannot be avoided, and provide

for soil conservation and any necessary erosion-control measures.

D. Visual Impacts. Modern onshore wind turbines can be 60 to 80 meters tall at the hub, with

blades extending the total to over 100 meters. They are sited in open areas and on ridge lines, with little

available in the way of visual buffers. Lights on the turbines, which are typically required by the Federal Aviation

Administration, can have nighttime visual impacts as well. In addition, associated substations and transmission

lines can add to the visual impact of a wind project.

There appears to be a split in sensibilities between those who consider wind turbines an eyesore and those who

like the visual effect of the turbines. From either perspective, for areas with broad vistas, wind energy projects

can result in a fairly dramatic change to rural landscapes, with turbines typically standing in a sentinel-like

manner along ridge lines or in rows through pastures and fields. According to studies by the U.S. Forest Service,

visual impacts are typically greatest within three miles of the facilities and decrease significantly at greater

distances. However, under certain atmospheric conditions, wind turbines can be discerned from many miles

away. When wind energy projects are sited in relative close proximity to populated areas or areas of scenic

importance, visual impacts may be particularly important. Visual modeling is usually required to assess the

potential impacts of wind energy projects. Mitigation for visual impacts typically includes painting turbines aneutral color that blends into the landscape. However, aside from avoidance, options for full mitigation of visual

impacts are limited.

E. Cultural Resources. It is not uncommon to discover fossil and cultural resources, including

those of significance to Native American tribes, at potential wind project sites. A thorough site evaluation is


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generally necessary before and during construction. When appropriate, the early and constant involvement of

local Native American tribes is advisable. Mitigation may also be necessary. Such mitigation typically requires

avoiding protected sites and moving the sites if they cannot be avoided. In addition, it may be necessary to have

an expert in native culture or paleontology on-site during construction to protect identified sites and alert the work

crew to additional sites that may be unearthed during construction.

F. Storm Water and Federal Water Crossing Permits. Factors such as road construction, steepterrain, and the proximity of streams and rivers require storm water management, including compliance with

local, state, and federal storm water regulations. The presence of wetlands and streams will raise numerous

other concerns relating to habitat and water resource management and may involve Endangered Species Act

(ESA) issues through Clean Water Act section 404 consultation and/or state removal or fill laws. In addition,

some wind energy projects will need to cross water bodies subject to federal Army Corps of Engineers jurisdiction.

This includes streams flowing into navigable waters and river power line crossings. A myriad of issues may arise,

including salmon habitat impacts and potential impacts upon bird species listed under the ESA (e.g., potential

bald eagle injuries due to new power lines crossing rivers). Federal Rivers and Harbors Act section 10 permits

can often lead to the need to consult with federal wildlife agencies as well.

G. Land Use Compatibility. Compliance with applicable land use criteria will be required. Each

county has its own land use criteria, which may be dictated by statewide land use requirements. County land

use codes often have vague standards and criteria, requiring (or allowing) highly discretionary determinations of

public need, public safety, and compatibility with other land uses. In Oregon, statewide planning goals must

be met. The statewide goal for agricultural lands (Goal 3) limits the amount of land that can be taken out ofproduction by a wind energy facility to 12 acres for high-value farmland and 20 acres for non-high-value

farmland. When more than the allowed amount would be taken out of production, an exception to the goal must

be secured. Fortunately, Oregon recently determined that access roads for wind energy facilities should not be

included in assessing these acreage impacts, and thus an exception is rarely needed.

H. Noise. Some states, particularly Oregon and California, have statutes that limit the amount of

noise that can be emitted by a wind energy project. Wind turbine noise decreases rapidly over distance and

tends to be masked by the background noise of the wind itself. However, wind energy projects are typically sitedin locations with very low ambient noise levels, which can make limits on the allowed increased in ambient noise

generated by the project difficult to meet. Noise-related concerns tend to be expressed by those with homes

located closest to the wind turbines. In Oregon, the noise statutes do not expressly allow an applicant to simply

get permission from a nearby resident to have noise exceed the statutory limits (such as through a noise

easement). As a result, applicants may be required to purchase the residence or refrain from siting turbines near

the residence. Noise modeling and ambient baseline noise monitoring may be required as part of the permitting

process.

I. Federal Leases and Easements. Because the United States owns and manages many acres of

rural land in the western states (usually through the Bureau of Land Management (BLM)), developers are

increasingly interested in securing leases for preliminary wind monitoring and for long-term wind energy projects

on these sites. In addition, wind turbines sited on private land may require an electrical transmission line to


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cross federal land in order to gain access to the main grid. In those cases, an easement over the federal land

may be required.

The BLM has revised its policy on temporary and long-term wind energy monitoring and development in an effort

to encourage and streamline the permitting process. The policy notes that long-term development applications

should be processed under an EA for purposes of NEPA review, unless there is significant public controversy over

the project or significant and unique environmental concerns have been identified.

V. Timing.

In order to develop a project-specific assessment of issues that may cause permitting delay, consider whether any

of the following apply:

Whether avian baseline data will be required and, if so, whether a full year (four

seasons) or more of baseline data will be required as part of the permit application.

Whether any surveys in spring or other seasons will be required for certain plant or

wildlife species as part of the permit application.

Whether a state environmental process (e.g., SEPA/CEQA) or federal NEPA process will

be required and, if so, whether an EIS (which in the case of NEPA typically takes at

least a year to prepare) or a less comprehensive environmental document will be

required.

Whether a cultural and archaeological site survey will be required and how long it will

take to complete such a survey (if the survey will completed by a Native American tribe,

it may take much longer than expected).

Whether the locality will require a conditional use permit for installation of

meteorological towers to assess the wind feasibility of the site. If so, this may add

weeks or months to the site evaluation process.

Whether an easement or lease from the BLM or other federal agency will be required for

the project (and, if so, what level of NEPA review will be required).

An early assessment of potential public opposition and appropriate strategies to respond to controversies and

opposing environmental opinions.


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T i m o t h y L . M c M a h a n

Law Practice

Tim McMahan practices in the areas of land use, real estate development,

environmental, and municipal law. He has offices in Portland, Oregon and

Vancouver, Washington.

Tim has extensive experience in representing energy facility developers,

property owners and municipal clients in Washington and Oregon. Tims practice

focuses on permitting shoreline developments, utility and energy facilities

including pipelines, natural gas generation and wind energy facilities, and

commercial and industrial facilities. Tims experience on behalf of public sector

clients includes planning and permitting municipal water and wastewater

facilities. He has represented developers and public sector clients both throughthe permit process and in administrative and judicial litigation, including

Washingtons State Environmental Policy Act (SEPA), NEPA, Shoreline

Management Act and Growth Management Act compliance. Tim represents

energy facility developers in Washington and Oregon, including the Oregon

Energy Facility Siting Council (EFSC) and the Washington Energy Facility Site

Evaluation Council (EFSEC).

Tim regularly speaks at conferences regarding permitting major facility projectsin highly contested settings, particularly rural area energy facilities.

Prior Work Experience

Prior to joining Stoel Rives, Tim served as the Port Townsend City Attorney for

over five years, during which he guided Port Townsend through Growth

Management Act implementation, successfully defended the citys

Comprehensive Plan and Shoreline Master Program in agency and judicial

litigation and developed innovative strategies to protect Port Townsends

municipal water supply from spiraling demands.

Professional Organizations and Community Activities

Member, Washington State Association of Municipal Attorneys; Washington State

Bar Land Use and Environmental Law Section; Oregon State Bar Real Estate and

Land Use Section; University of Washington Department of Urban Design &

Planning Professionals Council; Member of Board of Directors, Columbia-

Willamette United Way and Chair of United Ways. Community Impact Cabinet;

Pro bono attorney for the Columbia Land Trust, Vancouver Washington.

503-294-9517 Direct Portland360-699-5900 Vancouver503-220-2480 [email protected]

EducationM.A., University of Washington, 1991

Urban planning, Tau Sigma Delta

architecture and allied arts honorsociety

J.D., Willamette University College of Law1986

Case note editor, Willamette LawReview

B.A., European History, University of PugetSound, 1983

AdmissionsState bars of Oregon, Washington


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P e t e r D . M o s t o w

Law Practice

Peter Mostow is a partner in the firm, where he concentrates his practice in

the areas of natural resources and land use law. He guides clients through the

siting and environmental permitting process for gas-fired, wind, geothermal

and hydroelectric power plants as well as underground natural gas storage

facilities and gas pipelines. He assists a variety of public and private clients

with Endangered Species Act (ESA), National Environmental Policy Act (NEPA),

water rights, and water quality issues associated with their development

projects. Peter has extensive experience providing counsel on project site

evaluation, advising client/consultant teams in application preparation and

record building, and representing clients in all phases of local, state, and federal

permitting. He has successfully defended clients rights on appeal before the

Land Use Board of Appeals, Oregon Court of Appeals, Oregon Supreme Court, and

U.S. Ninth Circuit Court of Appeals.

Professional Activities

Vice-Chair, ABA Energy Facilities and Siting Committee; Member, Governors

Carbon Allocation Task Force, Northwest Hydroelectric Association, OregonWater Resources Congress, Oregon Genetic Privacy Advisory Committee; board

member, National MS Society of Oregon, Oregon Health Decisions, Legacy Health

Systems Institutional Review Board; volunteer attorney, Sponsors Organized To

Assist Refugees.

Publications and Presentations

An Assessment of Wind Project Siting Regimes," Proceedings of the AmericanWind Association (2002); Water Supply Easement Protection Workbook (Oregon

Water Resources Congress (1997); An Evaluation of State Energy Facility Siting

Acts, 3 Rocky Mountain Mineral Law Series (1996); Senate Bill 674: Increasing

the Flow Rate of Oregons Water Rights Permitting Process, 32 Willamette Law

Review 187 (1996); Reassessing the Scope of Federal Biotechnology

Regulation, 10 Pace Environmental Law Review 227 (1993); conference

presentation, National Conference of State Legislatures, Salt Lake City, UtahSiting Wind Projects, (2004).

Background

Law clerk to The Honorable Betty B. Fletcher, U.S. Ninth Circuit Court of

Appeals, Seattle, Washington (1993-94).


EducationJ.D., Yale Law School, 1993

Editor, Yale Law Journal; managing editor,Yale Journal on Regulation

J.W. Goethe Universitt, Frankfurt,Germany

Fulbright Scholar, 1989-90

B.A., Reed College, 1987

AdmissionsState bar of Oregon; State bar of California

(pending)


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Chapter Three

The Law of Wind Power Purchase Agreements and Environmental Attributes

William H. Holmes

I. The Basics.

A. The Parties.

1. The Seller. The seller is often the developer and owner of a wind plant that will

generate energy and environmental attributes (output). But the seller may also be a power marketer that is

buying the output of a plant and selling it to one or more purchasers. If a company is reselling output, the resale

power purchase agreement (PPA) will usually track the relevant terms of the underlying PPA because the

marketer will not want to promise more than it has the right to deliver. As a result, the marketer will often use a

back-to-back PPA for the resale. The resulting terms will be almost the same as those in the underlying project

PPA, except for price or other unique items that the marketer does not wish to pass through to the ultimate

buyer.

2. The Buyer. The buyer is often a utility that purchases the wind projects output to serve

its load. The utility may also be motivated by a renewable-portfolio standard or other regulatory policy that

encourages the development of wind power and other forms of renewable energy. In a state that permits direct

access, the buyer may be a retail purchaser, such as a manufacturing facility that wishes to hold itself out as a

green company. Power marketers may also buy output for resale to one or more third parties. Power marketers

sometimes can purchase all of a projects output (something that no other single market player may be able todo), enabling the owner to finance the plant.

3. Credit Support Provider. The PPA will require the buyer to buy the output that the

seller delivers. It may also require the seller to pay the buyer if the project is not built on schedule or fails to

achieve certain performance standards. Each party will be concerned about the others ability to satisfy these

payment obligations. If one party is not creditworthy, the other may require it to provide a guaranty or post a

letter of credit or other security to ensure that amounts due under the PPA will be paid.

B. Regulatory Concerns.

1. Exempt Wholesale Generator and Market-Based Rates. Unless the wind plant is a

qualifying facility or QF, or is owned directly by a utility to serve its customers, the project owner will need to

apply to the Federal Energy Regulatory Commission (FERC) for a determination that the owner qualifies as an

exempt wholesale generator (EWG) under section 32 of the Public Utility Holding Company Act of 1935

(PUHCA). If the owner were to sell the plants output without obtaining EWG status, the owner would be an

electric utility. As a result, the seller and its affiliates would be subject to extensive regulation under PUHCA,something that most companies prefer to avoid. It usually takes about 60 days from the date the EWG

application is filed to get a determination from FERC. The seller will also need to obtain authorization from FERC

under section 205 of the Federal Power Act to enable the seller to charge market-based rates, even if all sales

are made under a single contract.


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2. Qualifying Facility. If the wind plant is a qualifying facility under the Public Utility

Regulatory Policies Act of 1978 (PURPA), the wind energy that it generates can be sold at wholesale rates.

Under PURPA, the local utility must buy the output of a QF at a price not less than the utilitys avoided cost. QF

status may also give a project certain advantages in securing transmission rights and thus may be valuable even

if the strong-arm provisions of PURPA are not used to force a utility to buy the output.

To be a qualifying facility, a wind plant must be either:

an eligible wind facility, in which case its application for QF status or self-certification

of QF status must have been filed with FERC not later than December 31, 1994 and

construction must have commenced not later than December 31, 1999 (or reasonable

diligence was exercised to complete the project); or

a wind facility that has a power production capacity that, together with the production

capacity of any other facilities located at the same site, is not greater than 80 MW.

In addition, a facility is not a qualifying facility if the project owner is primarily engaged in the production or saleof electricity other than through cogeneration facilities or small power production facilities. For example, unless

otherwise exempted, no utility or holding company or affiliate or subsidiary thereof may own more than a fifty

percent equity interest in a qualifying facility.

3. Retail Sales. With certain exceptions, power sold to an end user (e.g., to a residential

customer or an industrial user) is a retail sale that may make the seller subject to regulation as a public utility

under state law. Because such regulation is costly, plant owners usually avoid retail sales of wind energy. In

states that have implemented deregulation, it may be possible to sell power at retail rates to certain end users.

The law of the state in which the end user is located must be checked to see if any retail sales are permitted and,

if so, under what circumstances.

II. The Term.

A. Project Financing. If the wind plant is financed with limited recourse financing, the term of the

PPA should be sufficient to amortize the project debt. Capital costs per megawatt hour (MWh) of energy

produced are relatively high for wind plants because they produce only when the wind is blowing. Thus a wind

farm with an installed capacity of 100 MW and a 33 percent capacity factor will, on average, produce only 33

aMW of electricity. To produce the revenues needed to amortize the project debt, the term of the PPA must

usually be at least 20 years.

If the term of the PPA is 20 years, lenders will generally be willing to amortize the debt over a 15- to 17-year

period. In project financings, the debt amortization period generally needs to be shorter than the PPA term, to

allow work-out time in case the project encounters financial difficulties in later years. Generally, only the base

term of the PPA is taken into account, because the lender has no assurance that the purchaser will elect to

continue the PPA into a renewal term.

B. Useful Life. Wind plants generally have an economic life of at least 25 to 30 years. Since the

purchaser under a PPA effectively pays for the entire capital cost of the project (plus a profit to the owner), the

purchaser normally will want the PPA to capture the entire value of the project by covering the entire economic


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III. Purchase and Sale.

A. Delivery Point. The PPA will require the sale of energy to occur at a specified delivery point. If

the energy is to be delivered at the plant in a busbar sale, the delivery point will usually be the high side of the

transformer at the projects substation. In a busbar transaction, the buyer provides the transmission required to

transmit the energy from the plant to the point where the buyer intends to use it (or to deliver it to another party

in a resale transaction). The PPA may also require the seller to deliver energy to a specific point some distance

from the plant, in which case the seller will be responsible for securing the required transmission to the delivery

point, and the buyer will be responsible for obtaining the transmission required to take the energy at the delivery

point. Transmission ancillary services can be fairly costly and should be specifically allocated in the agreement.

Title and risk of loss pass from seller to buyer at the delivery point.

B. Pricing.

1. Contract Rate. Price is usually the most important part of the PPA. The price may be

flat, escalate over time, or contain other features. An escalating price is often tied to a contract year that begins

at a specified point after the commercial operation date is achieved, thus encouraging the seller to lock in the

initial price and the escalation rate by achieving commercial operation as soon as possible.

2. Test Energy Rate. Because a wind turbine can generally function independently of

other wind turbines, the PPA may require the purchaser to buy power from the turbines as they are installed,

connected to the transmission grid, and made operational, even though the project as a whole has not achieved

its commercial operation date. To encourage the seller to achieve commercial operation as soon as possible,

such energy is often sold at a test energy rate, which is often lower than the contract rate that will be paid once

the commercial operation date is reached.

3. Excess Rate. A PPA often requires the seller to specify how many MWhs the plant is

expected to produce each year. This output estimate may form the basis of an output guarantee or a

mechanical-availability guarantee. To encourage the seller to make an accurate estimate of expected output, the

seller may be paid less than the contract rate for each MWh of energy in excess of, for example, 110 percent of

the estimated annual output.

C. Environmental Attributes. Environmental attributes are the credits, benefits, emissions

reductions, environmental air-quality credits and emissions-reduction credits, offsets, and allowances resulting

from the avoidance of the emission of a gas, chemical, or other substance attributable to the wind project during

the term of the PPA, together with the right to report those credits. Environmental attributes are sometimes

called green tags, green tag reporting rights, or renewable-energy credits. The PPA usually makes clear that

production tax credits and wind energy incentives (such as those provided by the California Energy Commission)

are not part of the environmental attributes and thus are not being conveyed to the purchaser.

The PPA should clearly state whether energy is being sold with or without the environmental attributes. If

environmental attributes are being sold, the seller will usually warrant title to the attributes but will not warrant

the current or future use or value of the attributes or whether and to what extent they will be recognized at law.


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D. Allocation of Taxes and Other Charges. The PPA should specify who pays any sales, excise, or

other taxes arising from the transaction. Although most states do not tax wholesale energy sales, the parties may

wish to consider allocating the tax liability resulting from future legislation.

IV. Permitting and Development.

A. Commitment to Develop. The PPA will make the project owner responsible for developing and

constructing the project. The seller usually prefers a PPA that requires it to sell the projects output only if the

project is actually built. A buyer tends to view such a PPA as a put and will usually insist that the seller make

some commitment to develop the project. Many tense negotiations revolve around what the seller will or will not

be required to do to develop the project, as well as the off-ramps that each party has if the project does not

achieve certain stated milestones.

B. Status Reports. The buyer is typically interested in the development of the project, since it

needs to know when the energy will be deliver onto its system or when it will need to take a hedge position. As a

result, the PPA usually requires the seller to deliver regular reports to the buyer about the status of permitting and

construction.

C. Milestones and Delay Damages. The PPA often includes a schedule of certain project

milestones (e.g., the date by which the seller must secure project financing, the date by which turbines must be

ordered, the date by which all permits and the interconnection agreement must be in place, and the commercial

operation date). If the seller fails to achieve a milestone, the buyer may have a right to terminate the PPA,

collect delay damages, or require the seller to post additional credit support. The seller will therefore want to

limit the number of milestones and bargain for some flexibility, especially in cases where a delay in achieving an

interim milestone is not likely to delay a projects completion date. Sellers sometimes prefer PPAs that provide

that the buyers only remedy if the seller fails to meet a project milestone is to terminate the PPA without

recovering damages. Buyers are concerned that this gives the seller a right that resembles a put and strongly

prefer to require the seller to suffer some consequences if project milestones are missed. Many interesting

negotiations revolve around the off-ramps that the seller will have, versus the damages it will pay to the buyer if it

fails to build the project in accordance with the PPA.

V. Interconnection and Transmission.

A. In General. The PPA usually requires the seller to bear the cost of interconnection (including

any network upgrades required by the new project) and all costs of transmitting the energy to the delivery point.

If the seller is the project owner (as opposed to a marketer), it will also be responsible for negotiating the

interconnection agreement with the transmission provider. The buyer will be responsible for arranging and

paying for transmission from the delivery point.

B. Shaping. Transmission is often very expensive for wind projects because the intermittent nature

of the resource can produce generation imbalance penalties and the transmission owner has to pay for the

maximum transmission capacity that the project can produce, even though the project will deliver that much

energy only part of the time. To reduce these costs, a project owner may enter into an integration and exchange

agreement (often called a shaping agreement) with a utility that has a load that can be served by the project.


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In general, a shaping agreement allows a project to deliver energy into the utilitys system as the energy is

generated. The intermittent energy serves the utilitys load. In the following week or month, the utility redelivers

the energy that it has received as a flat product at an agreed-upon point of delivery. Not surprisingly, the utility

will charge a fee for this service.

VI. Performance Incentives. A seller will usually prefer to enter into an as-delivered PPA, which means

that the seller is obligated to deliver only what the project actually produces. A buyer will often require the seller

to warrant or guarantee that the project will meet certain performance standards. Such guarantees usually

enable the buyer to recover all or part of its incremental cost of purchasing replacement power in the market to

the extent that the project fails to perform as expected. Performance guarantees enable the buyer to plan around

the plants expected output and strongly encourage the seller to maintain a reliable and productive project.

A. Output Guarantees. The PPA may include an output guarantee to the buyer. An output

guarantee requires the seller to pay the buyer if the projects output over a specified period fails to meet a

specified level. The period may be biannual, annual, or seasonal. The PPA usually allows the owner to operatethe project for one or two years before the output test is applied, enabling the owner to fix any problems at the

project. The owner should offer such a guarantee only if very confident about the projects wind regime, wind

variability and capacity factor.

Wind turbine manufacturers generally do not provide output warranties to project developers. Rather, the project

owner assumes the risk that the wind at the project will produce enough energy to meet the projects revenue

requirements.

B. Availability Guarantees. The owner of the wind project is usually more willing to offer the

purchaser a mechanical-availability guarantee than to offer an output guarantee. Such an availability guarantee

requires the wind turbines in the project to be available a certain percentage of the time, after excluding hours

lost to force majeure and a certain amount of scheduled maintenance. Mechanical-availability percentages

usually range from 90 percent to 95 percent, but they may decline over the life of the project in order to reflect

wear and tear on the turbines.

Wind turbine manufacturers typically provide availability warranties that support the project owners mechanical-availability guarantees for the first few years of the project. However, such warranties generally last only five

years, and the seller is usually on its own if it chooses to give a mechanical-availability guarantee that covers the

period after the manufacturers warranty expires.

C. Power-Curve Warranties. Wind turbine manufacturers also may warrant the ability of the

turbines to produce a specified output at specified wind speeds. The power curve represents a calculation of the

amount of energy that the turbines are rated to produce at different wind speeds. Power-curve warranties are

intended to compensate the project owner for lost revenues resulting from inefficient turbine operation, i.e., thefailure of turbines to operate within a certain percentage (typically 95 percent) of the power curve. Power-curve

warranties are not typically passed through to buyers under PPAs.

D. Liquidated Damages. If a guarantee is not met, the PPA usually provides a mechanism for

determining the damages suffered by the buyer. First, the parties determine the output shortfall (stated in


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MWhs) relative to the amount of output that the buyer would have received had the project lived up to its

guarantees. Second, the shortfall is multiplied by a price per MWh determined by reference to an agreed-upon

index. Because market indexes cover only power prices and do not include the value of environmental attributes,

the PPA may include an adjustment to account for the assumed value of the environmental attributes or may use

a firm price index as a proxy for the value of the energy plus the environmental attributes. The amount of

liquidated damages is usually determined once per year. The seller pays the liquidated damages to the buyer or

credits the damages against amounts owed by the buyer under the PPA.

E. Termination Rights. To protect against chronic problems at an unreliable wind plant, the PPA

usually allows the buyer to terminate the PPA if the output or mechanical availability of the project is below a

stated minimum for a certain number of years.

VII. Curtailment and Force Majeure.

A. Curtailment. The PPA often describes circumstances in which either party has a right to curtail

output. For example, the seller may have a right to curtail deliveries if the plant is affected by an emergency

condition. The PPA may permit the buyer to curtail for convenience, in which case the PPA usually requires the

buyer to pay the purchase price for the curtailed generation and the after-tax value of the PTCs that the seller

would have earned had the buyer not curtailed the plants output.

B. Force Majeure. If energy is curtailed at a partys discretion or because the party is at fault, the

PPA usually requires the curtailing party to pay damages to the other. If curtailment is caused by an event

beyond a partys control, the partys duty to perform under the PPA will be excused. For example, if a disaster

disables the transformer at the delivery point, the seller would be excused from delivering energy, and the buyer

would be excused from taking and paying for energy, until the transformer is repaired. The party responsible for

maintaining the transformer would, of course, be required to use diligent efforts to make repairs.

Parties often heavily negotiate force majeure provisions. Good provisions should carefully distinguish between

events that constitute excuses (which relieve the affected party from its duty to perform) and those that are

risks (which are simply allocated to a party). The ability to buy energy and environmental attributes at a lower

price or sell them at a higher price is generally not a force majeure event. Moreover, a partys inability to payshould not constitute a force majeure event under the PPA.

VIII. Operation and Metering.

A. Operation and Maintenance. The PPA generally outlines the sellers responsibility to operate

and maintain the project in accordance with prudent utility practices. Such duties typically include regular

inspection and repair, as well as completion of scheduled maintenance.

B. Metering. The metering provision is one of the most important in the PPA because it is used to

determine the quantity of output for which the seller will be paid. The PPA usually requires one party (typically

the seller) to install and maintain a meter. The other party typically has the right to install a check meter. If the

sellers meter is out of service or generating inaccurate readings, the PPA should specify how the parties will

determine the projects output. Tests should be conducted regularly to verify the accuracy of the sellers meters.

The PPA usually states how often such tests will occur, at whose expense, and what form of notice will be given


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to each party. The PPA should specify how much variance in the meters accuracy will be permitted and how

repair or replacement of defective meters will be handled.

C. Real-Time Data; Maintenance, Records, and Project Data. The PPA may require the seller to

provide the buyer with real-time data (including meteorological data, wind speed data, wind direction data, and

output data).

IX. Billing and Payment.

A. Billing and Payment. The PPA typically determines how invoices are prepared, when they are

issued, and how quickly they are paid. The billing provision often states that an invoice is final if not challenged

within a period of time. The PPA usually sets forth procedures for raising and resolving billing disputes and the

interest rate and penalties that apply to late payments.

B. Right to Audit. The buyer will typically have the right, upon reasonable notice, to access those

records of the seller necessary to audit the reports and data that the seller is required to provide to the buyerunder the PPA.

X. Defaults and Remedies. The PPA will usually list events that constitute defaults. These may include:

failure by any party to pay an amount when due;

other types of material defaults, such as the sellers failure to use commerciallyreasonable efforts to achieve a material project milestone;

the bankruptcy, reorganization, liquidation or other similar proceeding of any party;and/or

a material default by a partys guarantor.

The default clause should specify how long the defaulting party has to cure a default. If the default is not cured

within the agreed-upon period, the nondefaulting party usually has the right to terminate the agreement and

pursue its remedies at law or in equity, to suspend performance of its obligations, or to seek specific performance

and injunctive relief. The remedies clause may also limit remediesfor example, in some PPAs the buyers only

remedy for the sellers failure to achieve a given milestone is to terminate the PPA without seeking damages.

XI. Boilerplate and Examples. The PPA will also address the following boilerplate matters, such as

confidentiality, representations and warranties, the right to pledge the PPA to project lenders, governing law, the

limitation of consequential damages, dispute resolution, consent to jurisdiction and waiver of jury trials. Because

the transaction between the parties may involved complex calculations, the PPA should also include a number of

carefully considered examples that illustrate how those calculations will work in certain scenarios.


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W i l l i a m H . H o l m e s

Law Practice

Bill Holmes concentrates his practice in the area of energy law, with a special

emphasis on wind and renewable energy. He also has extensive experience with

water law, mining and oil and gas law, real estate law, and general corporate

transactions.

Prior Legal Experience

Mr. Holmes joined Stoel Rives as an associate in 1985 and has been a member of

the firm since 1992. Before joining the firm, he served as Law Clerk to Judge

Louis F. Oberdorfer, United States District Court for the District of Columbia

(1984-85).

Representative Transactions and Energy Clients

Mr. Holmes has represented clients in the negotiation of numerous major power

purchase agreements on both the "buy" and the "sell" sides. This experience

includes work on many major wind power purchase agreements, including the

agreement under which PPM Energy, Inc. purchases the output of the 300-MW

Stateline Wind Project in Oregon and Washington. Mr. Holmes has also advisedclients in the negotiation of fuel supply agreements, coal supply agreements,

O&M agreements, management agreements, LLC agreements, energy project

development agreements and related documentation. Representative clients

include PPM Energy, Inc., PacifiCorp, and NRG. Mr. Holmes manages the PPM

Energy, Inc. Client Services Team at Stoel Rives.

Professional and Firm ActivitiesAmerican Wind Energy Association; Member, Oregon State Bar Public Utility Law

Section; Member, American Bar Association Energy and Natural Resources

Section; Practice Group Leader, Stoel Rives LLP, Energy and Telecommunications

Practice Group; Chair, Stoel Rives LLP Technology Committee.

Civic and Charitable Activities

United Way Leadership Giver; President of the Board of Directors, Portland

Habitat for Humanity (1995-1997); member of the Board of Directors of Portland

Habitat for Humanity (1992-1997); pro bono counsel, Portland Habitat for

Humanity (1987-1995, 1997-2000).


EducationJ.D., magna cum laude, University ofMichigan Law School, 1984

Certificate in water law; certificate in

environmental law

Associate editor, Michigan Law Review,1982-83

Editor in chief, Michigan Law Review,1983-84

Henry M. Bates Memorial Scholarship

Abram W. Sempliner Memorial Award

B.A. with highest honors, Plan II honors

program, Order of the Coif; Phi Beta KappaUniversity of Texas, 1981

Admissions

State bar of Oregon


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W i l l i a m H . H o l m e s

Publications

"Power Purchase Agreements and Environmental Attributes," in Chapter 3 of The Law of Wind (Stoel Rives); Co-author,

"Water Rights and Transactions," Fundamentals of Real Estate Transactions (2001 Cumulative Supplement); Author, "Dams for

Sale: The Ins and Outs of Federal Facility Transfers," 43 Rocky Mt Min L Inst 24-1 (1997); coauthor, "Bureau of Reclamation

Contract Renewal and Administration: When is a Contract Not a Contract?" 41 Rocky Mt Min L Inst 23-1 (1995); coauthor,

"Employee Benefits and ERISA Considerations in Natural Resources Transactions," 34 Rocky Mt Min L Inst 5-1 (1989); coauthor,

"Natural Resources, Energy and Environmental Law," 1987 Oregon Legislation 21 (Oregon CLE 1987); coauthor, "Reporting

Violations of Hazardous Substances Law: Mandatory Self-Incrimination," Or Envtl & Nat Resources L News, at 4 (fall 1986).


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Chapter Four

The Law ofWind

Design, Engineering, Construction,

and Turbine Purchase Agreements

Alan R. Merkle, John F. Pierce

This chapter provides an overview of the contractual structures that often apply to the construction of wind

energy projects, including design and engineering, procurement of wind turbine generators and related

equipment, the erection of wind turbine generators and the construction of ancillary facilities. This discussion is

written from the perspective of a wind energy project developer; however, the information set forth below should

interest design and engineering, construction, and operations and maintenance contractors as well. As with any

complex negotiated transaction there is a large amount of value to be won or lost by all parties, and often the

potential for using creative legal strategies to increase value on both sides of the table.

I. Construction-Related Agreements. Critical to the actual development of any wind energy project are the

various agreements a project developer must enter into in relation to:

design and engineering;

procurement of necessary equipment (wind turbine generators and related componentssuch as nacelles, blades, towers, control systems and transmission equipment) andmaterials to construct balance-of-plant facilities such as foundations, roads, cranepads, lay-down areas, transformers and maintenance facilities;

obtaining construction, erection, installation and balance-of-plant services necessary toconstruct the wind turbine generators and the ancillary facilities; and

warranty and insurance arrangements set forth in the agreements.

Engineering, procurement, and construction agreements are often collectively referred to as EPC agreements.

These agreements may also provide for, or anticipate, other services such as warranty services or operations and

maintenance services for the wind turbine generators and related facilities.

There are occasions when the design and engineering, procurement, and construction/erection services areaddressed in a single agreement (a full-wrap agreement), usually when there is a single general contractor for

the project. However, it is also common to have separate agreements such as design and engineering

agreements, construction/erection agreements (balance-of-plant agreements) and procurement/sale agreements

using one or more contractors for each of the various services. Depending on contractual structure, warranties,

insurance and other matters may be addressed in a single master agreement or in each individual agreement.

II. Design and Engineering Services. Wind power projects require certain design and engineering expertise

that is unique to this sector of the power generation industry. For instance, a relative few firms (Bonus, GE WindEnergy, Nordex, Suzlon and Vestas design, engineer and manufacture wind turbine generators. There is also

a certain degree of standardization in the design of wind turbine generators, and the existing producers


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manufacture a limited range of wind turbine generators to suit market requirements;1 those requirements are in

part dictated by the operating parameters of a project, which are, in turn, dictated by the projects location and

meteorological conditions. A turbine supplier may offer a project developer several variations of a wind turbine so

that the developer may select different tower/hub heights, blade lengths, control systems and related equipment.

Each of these variations is designed and engineered by or for the turbine supplier. When a developer acquires

wind turbine generators, it also acquires the producers design and engineering services. These services may

include the turbine producers design legacy arising from its previously sold and in-use product, turbine control

and monitoring system experience, components and materials experience, and weather mitigation packages.

III. Balance of Plant Design, Engineering and Construction Services. As described above, the developers of

wind energy projects generally acquire certain design and engineering services along with the wind turbine

generators supplied by the turbine manufacturer. This still leaves substantial design and engineering work to be

performed at the project site, including geotechnical studies, micro-siting, the design and engineering of turbine

and crane pads and foundations, road design and other earthworks, environmental mitigation and related

activities. These design and engineering services, and related procurement and construction work (often

described as balance-of-plant work), may be performed by the supplier of the wind turbine generators under

one or more agreements or by a third party on behalf of the project developer.

IV. Typical EPC Contractual Structure for a Wind Project. Given the multiple factors influencing the

development of a wind energy project, no single contractual structure would apply to all such projects. However,

the following example of a contractual structure used for a particular wind project development illustrates, in a

limited way, how a project developer and a turbine supplier addressed certain concerns.

In this example, a U.S. project developer wanted to acquire a turbine suppliers wind turbine generators, (the

design and engineering of which were proprietary) and to use the turbine suppliers services in the erection and

installation of such wind turbine generators, as well as related services for the commissioning, start-up, and

testing of such wind turbine generators. The project developer also wanted to acquire either the turbine

suppliers control and monitoring system or the system of a third-party supplier. Additionally, the turbine supplier

possessed certain interests in land (such as access and/or wind easements) and related meteorological data that

the project developer wished to acquire. The project developer also sought to acquire certain (a) operations andmaintenance and (b) warranty-related services from the turbine supplier.

The project developer and the turbine supplier entered into a turbine supply agreement whereby the project

developer agreed to purchase a specific number of wind turbine generators from the turbine supplier, along with

the turbine suppliers services to erect, install, commission, start-up and test the wind turbine generators at the

project developers site (the site was acquired by the project developer from the turbine supplier, as a condition to

entering into the agreement). Pursuant to their agreement, the turbine supplier agreed to deliver the wind turbine

generators to the project developers site and to provide the personnel and materials (excluding the balance-of-plant work) necessary to erect, install, commission, start-up, and test the wind turbines.

1 For instance, a popular utility wind turbine for onshore use is 1.3 to 1.5 MW with a 65- to 80-meter hub height, whereas3.2- to 5.0-MW wind turbines with an 80- to 140-meter hub height have been designed for offshore use. Small (e.g. 25 kW)wind turbines are available for nonutility use.


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The project developer then entered into a balance-of-plant agreement with a general contractor wherein the

contractor agreed to design and construct the other necessary facilities for the project, such as foundations,

roads, crane pads, lay-down areas, transformers and maintenance facilities. Care was taken in both sets of

agreements to avoid interference, duplication or omission between the scopes of work of the turbine supplier and

the balance-of-plant contractor, and to ensure that, collectively, the agreements would result in a fully-

constructed, integrated and operational project.

The issues that the parties addressed in the turbine supply and balance-of-plant agreements included the scope

of work, measures of completion, warranty obligations of the turbine supplier and balance-of-plant contracto

Documents

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