WIND DEVELOPMENT 101

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WIND DEVELOPMENT 101

• Tom Potter
• Sustainability Field Advocate for the Rural West
• All American Energy LLC
• [phone] tpotter_at_allamericanenergy.com

2
Objectives

• Overview the process
• Recommend further action
• Reference support resources

3
Overview of Wind Development

• Resource and siting
• Business forms and deals
• Land issues
• Wind power economics
• Utility partners
• Project installation and operations

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Assessing the Wind Resource - I

• Screen via the Wyoming wind map

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Assessing the Wind Resource - II
Goal 18 mph speed (annual average) at 250
hub height Assumes no landform barriers

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Layout and Site Suitability

• Terrain contour high spots beneficial
• Orient rows perpendicular to wind
• Spacing 1/8 mile rows 1/2 mile
• Avoid homes and farm buildings
• Use corners of crop circles
• Road access rail too, if possible
• Transmission access substation 1/4 acre
• This example Colorado Green, near Lamar

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Business Forms and Issues

• Prepared by
• Bradley J. Haight, J.D.
• Hackstaff Gessler LLC
• 1601 Blake Street, Suite 310, Denver CO 80202
• P [phone] F [phone]
• bhaight_at_hackstaffgessler.com

8
Business Forms

• PARTNERSHIP (general or limited)
• CORPORATION
• LIMITED LIABILITY COMPANY
• NEW GENERATION COOPERATIVE

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Purpose of the LLC

• LIABILITY PROTECTION
• CAN PROVIDE FAVORABLE TAX TREATMENT
• FLEXIBLE FRAMEWORK
• MEMBER CLASSES
• SIMPLE REVERSION FEATURES
• DIVISION OF RIGHTS AND RESPONSIBLITIES

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Form the Entity (e.g., the LLC)

• TALK TO CO-OP DEVMT CENTER
• FILE ARTICLES OF ORGANIZATION WITH THE SECRETARY
  OF STATE
• MEMBER-MANAGED OR MANAGER-MANAGED ENTITY?
• LOCAL OWNER, OUTSIDE INVESTOR?
• PREPARE OPERATING AGREEMENT

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Structure (Contd)

• OWNERSHIP AND REVENUE SHARING EXAMPLE
• 95 INVESTOR AND 5 LOCAL OWNER
• CONVERSION TO 5 INVESTOR AND 95 LOCAL OWNER
  AFTER GOALS MET
• LEASE AND MANAGEMENT FEES PAID THE LOCAL OWNER BY
  THE ENTITY

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Elements of the Deal

• PURCHASER, INTERCONNECTION, WHEELING
• LAND AGREEMENT
• MONEY INVESTOR, DEBT, LINE OF CREDIT
• OM, EPC, BOP CONTRACTS

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Elements of the Deal (contd)

• TURBINE AND TOWER PURCHASE AGREEMENT
• PERMITS AND APPROVALS
• GREEN CREDIT PURCHASER
• INSURANCES

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• Consultants
• MAY BE ABLE TO ASSIST WITH THE FOREGOING, BUT CAN
  BE EXPENSIVE
• CONSIDER EXPERIENCED COUNSEL, LIKE JEFF PAULSON
  [phone] OF MINNESOTA, WITH LOCAL COUNSEL
  TO ADDRESS LOCAL ISSUES

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• Investor Issues
• FAVOR MINNESOTA MODEL
• REQUIRE CLASS 4 WIND CONFIRMED BY ANEMOMETER,
  ALSO MAY REQUIRE WINDLOGICS VERIFICATION
• REQUIRE MINIMUM RETURN, POSSIBLY 15-20 IRR,
  GREATER RETURN REQUIRED WITH SMALLER PROJECTS

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Investor Issues (contd)

• IRR AND TAX CREDIT REQUIREMENTS DICTATE
  SIGNIFICANT INITIAL OWNERSHIP PERCENTAGE (UP TO
  95) IN FAVOR OF INVESTOR
• WANT LOCAL OWNERS TO SHARE RISK AND INVEST
  THEIR OWN CAPITAL IN THE PROJECT
• REQUIRE PARTICIPATION OF EXPERIENCED CONSULTANTS
  AND COUNSEL

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Investor Issues (contd)

• PREFER MULTI-UNIT PROJECTS
• LIKE TO AGGREGATE PROJECTS
• REQUIRE STRONG WARRANTIES AND EQUIPMENT TRACK
  RECORD

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• Land Issues Nature of the Agreement
• LEASE, EASEMENT, OPTION, OR COOPERATION (or
  analysis) AGREEMENT
• WHAT DOES THE AGREEMENT AUTHORIZE
• BEWARE OF AGREEMENT THAT GRANTS RIGHTS NOT
  RELATED TO WIND-ENERGY DEVELOPMENT
• CONFIDENTIALITY AGREEMENT

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Land Issues (contd)

• EXPLORE ALTERNATIVES TO LEASES OR OPTIONS (such
  as cooperation or analysis agreement) IF ONLY
  ANALYSIS OF THE LAND AND WIND REGIME IS NECESSARY
• NOTE ANY EXCLUSIVE RIGHTS OR FIRST REFUSAL RIGHTS
  SUCH AGREEMENTS MAY GRANT
• AVOID PERPETUITY CLAUSES

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• Landowner Due Diligence
• RESEARCH THE DEVELOPER
• ASSESS THE DEVELOPERS INTENT AND ABILITY
• DETERMINE WHETHER A GUARANTY IS NECESSARY

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The Subject Land

• IDENTIFY THE LAND IMPACTED
• IDENTIFY WHAT MAY BE CONSTRUCTED
• CONSIDER HOW THE DEVELOPMENT WILL AFFECT THE
  HISTORIC, CURRENT, AND FUTURE USE OF THE LAND

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• Lease Term
• TERM
• NOTE WHEN THE LEASE STARTS AND FINISHES
• NOTE ANY CONDITIONS PRECEDENT TO LEASE
  COMMENCEMENT

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Lease Term (contd)

• EXTENSION AND RENEWAL
• WHEN AND HOW MAY THE LEASE BE RENEWED OR EXTENDED
• HOW MANY TIMES MAY THE LEASE BE RENEWED OR
  EXTENDED
• FOR HOW LONG MAY THE LEASE, ULTIMATELY, BE
  EXTENDED OR RENEWED

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• Compensation
• PER INSTALLED MEGAWATT?
• PER ACRE?
• NO LONGER COMMON, EXCEPT MAYBE WITH OPTION
  AGREEMENTS
• ROYALTIES (percentage of the electricity sold)

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Compensation (contd)

• OTHER PAYMENT OPTIONS
• EXECUTION PAYMENTS
• CROP LOSS PAYMENTS
• ASSIGNMENT PAYMENTS
• CAREFUL ANALYSIS IS NECESSARY SPEAK WITH AN
  EXPERT
• CONSIDER A MOST-FAVORED NATIONS CLAUSE

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• Liability Protection
• DEFENSE, INDEMNITY, AND HOLD HARMLESS PROTECTION
  HIGHLY RECOMMENDED
• SIGNIFICANT INSURANCE COVERAGE FOR THE DEVELOPER,
  NAMING THE LANDOWNER, IS ESSENTIAL
• INCREASED TAX LIABILITY ISSUES MUST BE ADDRESSED
• ADDRESS MECHANIC LIEN ISSUES

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• Financing Provisions
• NEARLY ALL IF NOT ALL DEVELOPMENTS ARE FINANCED
• DEVELOPMENT FINANCING IS SIGNIFICANT (projects
  cost on average 1 million per installed
  megawatt)
• DEVELOPERS, AND THEIR LENDERS, REQUIRE BROAD (and
  complicated) FINANCING PROVISIONS

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• Assignment Provisions
• ASSIGNMENT IS POSSIBLE WITH ALL DEVELOPMENTS
• DEVELOPERS ABSOLUTELY REQUIRE ASSIGNMENT
  PROVISIONS, WITH SOME REQUIRING AN ABSOLUTE RIGHT
  TO ASSIGN REGARDLESS OF LANDOWNER CONSENT

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Assignment Provisions (contd)

• BEWARE OF ASSIGNMENT RIGHTS THAT EXCUSE DEVELOPER
  LIABILITY
• EXPLORE REASONABLE LIMITS TO DEVELOPER
  ASSIGNMENT RIGHTS
• BEWARE OF RIGHTS GRANTED THE DEVELOPER THAT
  AUTHORIZE SUB-LEASES (sub-easements, or
  sub-licenses)

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• Termination
• WIND-ENERGY LEASES ARE NOT EASILY TERMINATED BY
  THE LANDOWNER
• TERMINATION RIGHTS IN FAVOR OF THE DEVELOPER ARE
  OFTEN BROAD, PARTICULARLY PRE-DEVELOPMENT
• CAREFULLY NOTE THE LIMITED BASES UPON WHICH
  TERMINATION IS ALLOWED

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Termination (contd)

• NOTE THE SPECIFIC PROCEDURE TO FOLLOW IN ORDER TO
  TERMINATE
• BEWARE OF ANY PROVISIONS THAT PURPORT TO SURVIVE
  TERMINATION
• SEEK TERMINATION RIGHTS TO PROTECT AGAINST THE
  POSSIBILITY THAT THE LEASE WILL SIMPLY TIE UP THE
  LAND

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• Decommissioning
• NOTE WHEN AND HOW THE PROJECT WILL BE
  DECOMMISSIONED
• TAKE STEPS TO ENSURE THE DEVELOPER WILL BE
  RESPONSIBLE FOR DECOMMISSIONING COSTS
• NOTE WHETHER THE LEASE INCLUDES SELF-HELP
  REMEDIES IN THE EVENT THE DEVELOPER FAILS TO
  DECOMMISSION THE PROJECT

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Economics

• Prepared by
• Tim Olsen, P.E.
• Advanced Energy Systems LLC
• 1428 S. Humboldt St., Denver CO 80210
• P [phone]
• tolsen_at_windtechnology.com

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Project Economics - I

• Project Description
• Total Rating 10.5 MW
• Turbine Rating 1.5 MW
• Number of Units 7
• Hub Height 80 m (263 ft)
• Project Life 20 years
• Losses 9.0

• Project Finances
• Initial Cost 16.5 million
• Equity 9.0 million (51)
• Debt 7.5 million (49)
• Interest Rate 9.0
• Debt Term 15 years
• CPI Growth 3.0

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Project Economics - II

• Wind Resource and Energy
• Average Wind Speed 8.56 m/s at hub height
  (19.1 mph)
• Air Density 1.05 kg/m3 at 1600 m (5250
  ft)
• Annual Energy Production 36.0 million kWh/year
• Capacity Factor 39.2

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Project Economics - III
Revenue
Year 1 Year 16 Energy Sales
at 0.039 /kWh 1,406,000
1,632,000 Green Credit at 0.005 /kWh
180,000 180,000 Gross Revenue
1,586,000
1,812,000 Expenses Property Taxes
64,000
64,000 Land Royalty at 2
32,000 36,000 Operating Costs
259,000
403,000 Debt Service
675,000 0 Total
Expenses 1,030,000
503,000 Net Operating Income
556,000 1,309,000 Principal
Repayment 255,000
0 Net Cashflow
301,000
1,309,000 Tax Benefits PTC
685,000 (holds
for 10 years) Depreciation, 5 yr DDB
2,110,000 (tapers out in 5 years) Net Tax
Benefit 2,795,000
(tapers down to 685k in 5 years)
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Project Economics - Summary

• Financial Results
• Assume 20 year life and contracts
• Internal Rate of Return 12.5
• Debt Coverage Ratio 1.40

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Utility Partners
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Utility concerns

• Safety
• Interconnection standards
• Power quality
• Interconnection standards
• Reliability of resource
• Buy-back rate
• Rate equity
• Buy-back rate

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Utility opportunities

• Local economic development
• Support entrepreneurs
• Better use of facilities lower rates
• Ease interconnections
• Partial alternative to new central plants
• Encourage local vs. out-of-state investments
• Higher reliability, shorter outages
• Help wind become part of the solution

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Project
Installation

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Prep for Installation Overview

• Land lease or purchase access
• Wind data collection 1-2 years, monthly visits
• 1-5 meteorological towers w/ guy wires, 1/4 acre
  each
• 50-60 m tall (164-197 ft)
• Energy buyer local utility, urban market,
  private
• Utility interconnection protective switchgear
• lt 5 MW feeder voltage gt 5 MW substation
• Engineering, soil testing
• Permits and taxes local, state, federal
• Financing debt _at_ 5-7, equity _at_ 12-20, PTC
• Legal Framework

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Installing Project HardwareSite Preparation

• Roadways, crane pads
• Electrical trenching
• Excavation for foundations
• Substation
• Operations and maintenance building in area

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Installing Project HardwareConstruction Process

• 4-8 months, depending on project size
• JOBS 100 MW, 1.5 mm, 200 jobs
• Foundations, installation, commissioning
• Dust, noise, hard work, commerce
• Permanent roads, foundations, crane pads (4 of
  land)
• Minimal impact to farm operations courtesy
  (polite to the livestock), speed limits, gate
  etiquette (close them)
• Reclamation of damaged land

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Installing Project HardwareOM, Upgrades,
Decommissioning

• OM Jobs (long-term) 0.16 FTE / MW direct
• Example 100 MW Project, 16 direct jobs, many
  indirect jobs
• Project life 20 years, with likely upgrades and
  extensions up to 40 repowering for much longer
• Upgrades from subtle software changes to new
  blades and drivetrain
• Decommissioning reserve fund to remove all
  equipment and concrete to 3 depth restore land

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Summary

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What did you hear?

• Wind development is not a trivial exercise
• Check out the lay of the land first, yourself
• If it still looks good, get professional help
• Excellent benefits await successful developers,
  and their communities
• With help, you can do it!

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Questions
Wind Advocate Tom Potter 303.503.2230
tpotter_at_allamericanenergy.com Legal/Business
Brad Haight 303.534.4317bhaight_at_hackstaffgessler
.com Minnesota Model Jeff Paulsen
952.835.0055 Project Devmt Tim Olsen
303.777.3341 tolsen_at_windtechnology.com