LeaseGen | Part 2 – Landowners With Turbines Pay Attention

In an October 2016 post, we noted how repowers may affect landowner revenue, positively and negatively. An additional potential aspect of how a repower may affect landowner revenue is worth noting. This other aspect relates to potential power price impacts.

Firstly, and generally, most wind leases (and some solar leases, but solar is not relevant to this analysis) include a compensation mechanism whereby landowner payments are based on the project owner’s gross revenue. Gross revenue comes from power sales, which most often are made under a long-term power purchase agreement. These are long, cumbersome agreements, but usually will limit the amount of generation that will be purchased. This last point (caps on generation) is what could lead to a potential negative impact on landowner revenue in the case of a repower, due to likely negotiation requirements and current tax credit policy.

If a repower is to include additional generation, then that repower would require an amendment of the power purchase agreement. And you would expect that if a power purchaser was to agree to an amendment to add generation, then it would require an additional amendment of the power price (possibly, for the whole of the project) to match current rates, which are lower than were rates three, six, or 10 years ago.

At first blush, it may appear that any power price decrease would have to be directly (and equivalently) offset by increased production for the economics of the repower to work; however, this does not take in to consideration the most-recent production tax credit extension and the ability of the project owner to capture an additional 10 years of tax benefits in connection with the repower.

These additional tax credits could provide the project owner financial benefits more than adequate to overcome the negative effect of any power price decrease. But because landowners (generally) do not share in tax-credit benefits, the net effect to them with respect to their royalty compensation could be negative, overall, even if the same number of MW remained on their property and/or even if overall production increased.

Likely, most projects will not be affected by this scenario, and any effect could be de minimis; however, any landowner looking to purchase property with turbines on it should note this potential and should consult with an expert to determine whether this risk exists. And we at LeaseGen would be happy to answer any questions regarding this or any other issue.