The Wind Energy Project Development Process
Dale Osborn, Distributed Generation Systems, Inc.
To finance and construct a wind energy project, five areas must be addressed: (1) detailed wind data for the site being developed, (2) the right to access and use the land on which the project will be constructed, (3) permission to construct and operate the project from local permitting authorities, (4) rights to interconnect to the transmission or distribution system and to transport (wheel) that energy to its purchaser, and (5) a power purchase agreement between the owner of the project (seller) and the power purchaser (buyer). If any of these issues are not contractually supported with the proper documentation, the project is unlikely to obtain financing. An exception may be made for entities that will balance-sheet finance the project. That entity assumes the risk for potential project failure resulting from any inadequate information in items (1)-(5).
Wind Resource The quantification of the wind resource and the robustness of that resource is the single most important economic variable in evaluating competing wind sites; the stronger and more consistent the wind resource, the greater the value of the site. Topographical features such as ridges and plateaus, which are higher in elevation, usually have a better wind resource than the surrounding area. However, very high elevations have lower air density, which reduces the expected output of a project. Wind measurements are taken using a meteorological (MET) tower. MET towers can be purchased with varying heights, although generally, the taller the tower, the better the information. In order for the wind resource assessment to be sufficient, data must be collected hourly at varying levels on the tower for one year. This time period may be shorter if other wind information has been collected within reasonable proximity. This data may be correlated with the MET tower information, and predictable output projections may be derived.
Lease or Easement Agreement The project developer must obtain a lease or easement agreement that grants the developer (a) a right of access to and across the property for the purposes of construction, operations, and maintenance of the project; (b) a right to transmit the electricity off the property; and (c) a term sufficient for the financing of the project, usually at least 25 years. The lease or easement agreement between the landowner and the developer may include certain limitations on the construction project and reclamation provisions to restore the land at the termination of the lease. The landowner may be compensated for land use in several ways. The most important is the royalty to be paid during the operational phase of the project. This amount is usually defined in the lease agreement as a fixed fee per kilowatt-hour produced or as a percentage of the gross revenue of the project. The fixed fee guarantees annual revenue to the landowner, and the percentage of gross revenue provides an opportunity for the landowner to share in any economic upside if the price of energy goes up or the project produces more than expected. The land lease or easement agreement is a complicated document, and a landowner should consult experts before signing any agreement.
Permitting Obtaining land use permits to construct a wind facility may be complex, time consuming, and expensive, or simple, quick, and inexpensive. Within this spectrum of permitting possibilities, federal- and state-controlled lands are much more difficult than privately owned land because of the permitting and public hearing processes usually required for public lands. Wind resources being equal, privately owned land is preferred. Local zoning regulations may impose permitting requirements similar to those required on public lands. The local planning department will define the zoning district in which a project area is located and will provide the documentation for the land use permitting process. The process usually includes a definitive time period to administer the permit application. If the project site is located in an area zoned for agriculture or a nonzoned area, the process can be as short as a few days or as long as several months, depending on local planning and zoning ordinances.
Interconnection and Wheeling The owner of the three-phase transmission system must allow for the interconnection of the wind facility if there is capacity on the wires to accept the energy. The cost of such an interconnection varies widely among utilities. The utility will require system protection devices between the wind facility and the transmission lines. This is justifiable and can be implemented in several ways for different costs. An experienced engineering firm can analyze these variables and recommend the best technical and economic solution. Moving the energy from the project location to the buyer through the transmission system is called wheeling. There is a fee paid to the transmission system owner for providing this service. The fee may be negotiated, but it is usually a tariff filed by regulators at the state or federal level. All of these arrangements between the utility and the developer are documented in an interconnection and wheeling agreement.
Power Purchase Agreement (PPA) The PPA is the asset of the project that can be financed. It guarantees that a buyer will purchase the energy from the seller at a negotiated price for a specific period of time, thereby creating a predictable long-term cash flow. The buyer must be a good (investment grade) credit risk for the developer to obtain project financing. Many developers spend large sums obtaining items (1) through (4) and may not be able to obtain a PPA. Under those circumstances, the investment in the project is lost. The PPA is by far the most difficult project stage to complete and without it, there is no project. The availability of PPAs depends on regulatory and legislative requirements and on the purchaser’s economic motivations. In summary, the following items are necessary to complete a wind facility, but they may not be sufficient for financing:
1. A high-quality wind resource assessment for at least one year
2. A long-term lease or easement agreement with the landowner
3. A land use permit, if required, from local, state, or federal agencies
4. An interconnection and wheeling agreement with the local transmission or distribution provider
5. A power purchase agreement with a creditworthy buyer. In some regions, additional items may be required to complete a wind project. Many wind industry experts are available to provide development expertise, and they should be consulted as necessary.
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