Wind Turbines: Killing the market or just a few deals?

Wind Turbines: Killing the market or just a few deals?

Overview

 

•Market overview: what does wind production look like in the U.S. and Texas?
•Future of wind production: should we expect wind turbine graveyards?
•Contract structures: what to look for?
•Land values: killing the market or just killing a couple deals?
•Separating wind rights from surface rights: does it make sense?

What is wind energy and what is expected from landowners?

 

•Wind energy developers want to access landowner’s wind, convert it to electricity and send the electricity offsite.
•Wind companies want to minimize their already massive footprints hence their preference for leasing.
•Power (watts) = ½ xDensity of Air xSwept Area x Speed of Air3
•Turbines are usually 1.5 to 2 MW wind towers
•1.5 MW model
•Blades: 116 feet
•Tower: 212 feet
•Total Height: 328 feet

Comparable to the Statue of Liberty

Bigger turbines, more power, same land footprint

Wind energy struggles

Power (watts) = ½ xDensity of Air xSwept Area xSpeed of Air3
Wind availability & variability
1.Need wind to blow
2.Need it to blow at the right speed

 

Wind energy struggles

•Inputs to wind energy production are geographically fixed.
•Wind energy and transmission lines are inherently related to deliver electricity to demand sites
•Two costs: transmission line development + energy lost during transmission

Wind production in the U.S.

•80/20 mix: hydrocarbons/ renewable + nuclear
•Renewable energy provided 18% of the electricity generation in the U.S. in 2018
•90% from wind and solar
•6.3% of the nation’s electricity generation comes from wind

Installed wind power capacity

> 50% of the U.S.’ wind production comes from:
1.Texas, 25%
2.Iowa
3.Oklahoma
4.California
5.Kansas
8 of the world’s 10 largest wind turbines reside in the U.S. 5 of those are in Texas.
Greater wind capacity than Texas:
1.China
2.United States
3.Germany
4.India
5.Spain

Wind production of top 5 states

•Texas became number 1 in wind energy production in 2006 and has since produced about a quarter of the wind production in the U.S.

How the energy production portfolio is changing

•In 2017, wind and solar represented almost half of the new electricity generation capacity and wind surpassed coal in installed generating capacity in Texas.

Wind production capacity–plenty of room to grow

•Installed:
•Texas: 25K MW (2%)
•U.S.: 96.5K MW (<1%)
•25% of the total land area of the U.S. has winds powerful enough to generate electricity as cheaply as natural gas or coal at today’s prices.

2017 wind portfolio

•23K MW of energy produced from wind (90% of capacity).
•Accounts for 15% of all in-state electricity production
•Equivalent to powering

Texas’ wind portfolio

Texas’ Wind Portfolio:
•Installed wind capacity:24,899 MW
•No. of wind turbines:12,793
•Wind capacity under construction:6,148 MW
•No. of jobs supported (direct and indirect):24,000
•No. of active manufacturing facilities:46
•Total capital investment through 2017:$42billion

Declining capital costs

•Declining costs due to improvements in technology and manufacturing capabilities.
•Concentrating construction in regions with the lowest installation costs.
•Increase 2005 –2010:
•Increases in labor costs.
•Increases in the cost of key manufacturing and construction commodities.
•International currency exchange fluctuations affected key

Average construction cost per kilowatt

Subsidies

•In 2016, the U.S. spent $18.4 billion on energy subsidies
•Renewable energy: $11 billion
•Energy efficiency: $3 billion
•2019 U.S. energy subsidies (per megawatt hour):
•Coal: $0.5
•Oil and Natural Gas: $1-$2
•Wind: $15-$57
•Solar: $43-$320
•Production Tax Credit (PTC)
•2.3 cents per kilowatt hour
•PTC is currently set to phase out by 2024

Contract Structures

3 stages of wind project development

Easements

Access

•Roads
•The developer needs to travel across the property to reach the turbine area.
•Blanket easement-the landowners need to specify where roads can be built to minimize disruption on the property or in certain areas.

Easements

Construction

•Tied to the access easement
•Areas used for construction and delivery of equipment(“lay-down yards”).
•Construction takes up the most space compared to any other step.

Easements

Transmission

 

•Building underground and overheadtransmission lines between turbines and substations.
•Underground lines should be below plow depth.
•Erosion can cause the lines to move above plow depth. Include a provision that insures continual maintenance of that depth.

Easements

Non-obstruction

•The landowner agrees not to build structures–trees, grain or feed towers, etc.—that interferewith the speed and directionof the wind.
•Maximum heights and minimum distances from turbines are specified.
•This may include an approval process for the landowner to build on the land.

Easements

Overhang

•Agreementwith neighboring properties–all parties must sign.
•Turbine blades are allowed to overhang on to adjoining properties.

Easements

Noise

•Noise,up to a certain level and within a certain radius, is allowed
•At 10 mph, 1K feet away a turbine registers at about 45 to 55 decibels.

Standard lease features–rate structure

Standard lease features–rates structures for each stage

Standard lease features–rates: two markets pricing wind energy

Standard lease features–timing

Standard lease features–footprint

Standard lease features–“return the land to its previous use and quality”

The construction stage has the largest footprint and puts the soil under considerable stress due to size and weight of the equipment.
Restore soil to conditions prior to construction:
De-compact and restore topsoil, reconstruct terraces or conservation structures, restore native vegetation

Standard lease features–damages

Standard lease features–other obligations

Standard lease features–project completion

2 MAJOR CAVEATS

“If I can see a turbine, I don’t even want to look at the land”

What do the academics say?

•Academic literature has shown no statistical evidence of adverse property value effects due to views of or proximity to wind turbines.
•Various statistical methodologies, datasets and regions have been considered.
•“Neither the view of wind energy facilities nor the distance of the home to those facilities was found to have any consistent, measurable, and significant effect on the selling prices of nearby homes.”
•Fear of the unknown
•“Anticipation stigma” effect-lower community support for proposed wind facilities before construction but support increases once facilities are operational.
•Similarly another article found those who live closer to turbines support turbines more than respondents who live further away.
•Showed homes’ property values increased due to the facilities driving economic investment and tax revenue which benefited all surrounding property owners.

What about appraisers?

•Consider the income capitalization and highest and best use.
Income Capitalization
•Land receiving income from wind energy production will receive a higher price, ceteris paribus, than similar land not receiving income from wind turbines.
Highest & Best Use
•High ag production areas
•Pan Handle, South Texas, etc.
•Will not see declines in prices as the use of the land has largely been unchanged but instead the land now has an added income source.
•Residential land
•Hill country, proximity to metro areas
•Land selling at a premium for residential and view shed use are more likely to be affected by the addition of wind turbines.
•Market data has not shown to support any diminution in value from wind turbines.

Texas’ largest wind farms

Nolan County Price per Acre

Pecos County Price per Acre

Nolan County Total Dollar Volume

Pecos County Total Dollar Volume

Separating wind rights, the future?

 

•“Seller reserves the oil and gas and minerals lying in, on or under the property wind rights lying on or above the property.“
•Properties with wind turbines:
•Some portion of the income from the turbines, and for the most part all, will be transferred with the sale of the land.
•If the seller wants to maintain some of the rights, they create a royalty for the life of contract.
•Properties without wind turbines:
•Wind is not the dominant estate so you may have rights to the wind but no ability to access it.
•Overhead for developer is too high.
•Margins are already low. If there is a lot of additional management costs to find and organize who to pay, the land becomes less desirable.
•Several states have made it illegal to sever wind rights from surface rights.
•Valuing wind rights
•Wind production is currently too speculative to place a value on.

Wind wrap up

 

•Market overview and future of wind production: what does wind production look like in the U.S. and Texasand should we expect wind turbine graveyards? Wind production in U.S. and Texas is growing, construction costs and technology are improving and there remains significant capacity for continued growth.
•Contract structures: what to look for? Contracts for wind lease have become much more standardized and protect land owners.
•Land values: killing the market or just killing a couple deals? Currently, it looks like wind turbines are only killing a couple deals and haven’t adversely affected land markets. Research also shows that as people are exposed to wind turbines, they are more supportive of them. A positive outlook for future.
•Separating wind rights from surface rights: does it make sense? Has been done but doesn’t prove efficient yet.