Alternative Energy

 

Overview

Alternative, renewable energy sources like wind, solar, and biofuels are some of the hottest emerging issues in technology.  As such, little law has developed in this area so far.  Some of the biggest issues that farmers might face in this area are the possibility of converting a farming operation into a biofuel production operation, installing windmills or solar panels to generate electricity, and what to look for if presented with an offer to rent out farmland to a renewable energy operation.

 

Legal Issues

Biofuels and biodiesel

Wind energy

Solar energy

 

Applicable Law

Emergency Economic Stabilization Act of 2008 - P.L. 110-343 Div. B, § 104

NC Green Business Fund - N.C.G.S. § 143B-437.4

Tax Credits for Biofuel Production Facilities - N.C.G.S. § 105-129.16D

Tax Credits for Biofuel Equipment - N.C.G.S. § 105-129.16A

Wind Energy Tax Credits - 26 USC § 48;

Solar Energy Tax Credits - 26 USC § 48; 26 USC § 25D

 

FAQs

Biofuels and Biodiesel

I want to start or expand a small business producing biofuels.   Can I apply for grants to help me?

Yes.  Grants are not guaranteed, but the North Carolina Green Business Fund was started to provide grants to businesses with less than 100 employees, with an emphasis on business involved in the production of biofuels.  N.C.G.S. § 143B-437.4.

The solicitation period for grant requests has closed for 2010, but check the North Carolina Green Business Fund website for information on the 2011 solicitation period (likely to begin in December 2010).

 

Can I receive tax credits for starting a biofuel business or buying biofuel property?

Technically yes, but the deadline is almost up.  A tax credit is available to facilities producing biodiesel, bioethanol, or ethanol/gasoline blends consisting of at least 70% ethanol.  The credit is 25% of the cost of constructing and equipping the facility, but the facility must be operational by January 1, 2011.  N.C.G.S. § 105-129.16D.

If you purchase, lease, or construct a renewable energy property, such as equipment that uses biomass for biofuel production, you are eligible for a tax credit of 35% of the property.  Renewable energy property here means process equipment such as oil presses, agitators, storage tanks, etc., and not real estate.  N.C.G.S. § 105-129.15(7).  The credit must be taken in five equal installments beginning in the taxable year in which the property is placed in service.  However, note that the property must be placed in service by January 1, 2011 to receive the tax credit.  N.C.G.S. § 105-129.16A.  This can be a major undertaking, so consult an accountant, tax attorney, or other professional if you plan to pursue such an acquisition.

 

Wind & Solar Leases 

A developer has approached me with a lease agreement.  What should I look for in the lease and what other issues do I need to consider?

Leases, even alternative energy production leases, can vary greatly in form.  A lease can be anywhere from a few pages to a hundred pages or more.  In general, longer lease documents will contain more provisions that can clear up ambiguities if problems arise in the future.  Also note that nearly all alternative energy leases are option agreements and do not guarantee that energy will be developed on the property.

That said, here are some important considerations when deciding whether to lease your property for alternative energy development (based on a model wind lease worksheet available here):

  • Your long-term plans for the land – Alternative energy leases are normally long-term instruments, ranging anywhere from 20 years to 99 years.  Consider whether you or your heirs have other plans for the land during the term of the lease.
  • Confidentiality clause – Many attorneys advise against signing a lease containing a confidentiality clause, which may prevent discussion of the lease with other landowners and inhibit family communications.
  • Phases of the lease – Most alternative energy leases have two phases – an evaluation phase and a production phase (and sometimes an option to extend the production phase).  It is important to know how long each of these phases could last.
    • Evaluation phase – In the evaluation phase, the developer gathers information to assess the viability of the project.  It is usually in your interest as a landowner to keep the evaluation phase as short as possible, because with a long evaluation phase the developer can control the property for a long time while waiting for the project to become more viable (e.g., higher electricity prices, better access to the electric grid, locating financial resources, etc.).  As long as the developer has a lease, you would generally not be allowed to contract with another firm that has more immediate plans to begin development.
    • Production phase­ – In the production phase, the project is underway and producing energy.  A long production phase is necessary for the developer because alternative energy projects may have a long payback period, but a shorter production phase is more desirable for you as a landowner because you will have an earlier opportunity to renegotiate the lease terms or use the land for other purposes.
    • Extension clause – Developers may say that they need an extension clause in order to secure financing for the project.  Consider what use you would like to make for the land at the end of the initial lease term before deciding whether to allow an automatic extension clause.  If the developer brings up the possibility of an automatic extension clause, you should negotiate for additional compensation since you will no longer have the option to terminate the lease at the end of the initial term.
  • Payment – There are a number of different payment options, so this is a difficult and complicated issue.  Here are some guidelines, but be sure to consult with your attorney:
    • Payment during the evaluation phase – A higher payment during this phase does not necessarily mean the developer is more committed to developing the property for alternative energy production.  Therefore, pay less attention to the payment in this phase than the payment in the production phase, which is much more critical for your long-term returns.
    • Payment during the production phase – There are several different ways in which you could receive payment for the electricity produced during the production phase:
      • Lump-sum payment at the beginning of the lease – There may be situations where an initial lump sum payment is beneficial, but be sure to consider the tax implications and calculate how this option compares to a lease with payments over time.
      • Annual fixed payment per turbine or solar panel – This option is less risky in some ways but much more risky in others.  The landowner is guaranteed a fixed payment for every year of production, but payment will be received only if the project is actually developed.  In this arrangement it is important to know the size of the turbines or solar panels; a higher price should be negotiated for larger turbines or panels with greater electricity output.
      • Payment based on a percentage of electricity sales – In this arrangement, you share some of the risk with the developer.  Returns may vary based on wind speed or sunlight.  To obtain an estimate of the payment you will receive under this arrangement, obtain the following information about the Power Purchase Agreement that the developer has negotiated with the electricity buyer:
        • Electricity sale rate ($/kWh);
        • Estimate of the annual kWh generated per turbine or panel at the point where power is measured;
        • Your percentage share of the electricity sales specified by the lease.

Multiplying these together will give your estimated annual returns per turbine or panel.

      • Payment based on a percentage of electricity sales and an annual fixed payment – This option is less risky than simply arranging a payment based on a percentage of electricity sales, but obviously the percentage you receive will be smaller to compensate for the annual fixed payment.  Compare using the previous calculation to see which will be more profitable for your lease on average.
    • Pooling – If pooling is used, your share will be based on the percentage of your acreage in the project.  That is, if you owned 10%  of the land used in the project, then your share would be 10% from all the turbines or panels in the project, even if you had more or less than 10% of the turbines or panels on your acreage in the project.
    • Inflation-adjustment clause – Because alternative energy leases last for such a long term, you should request an inflation adjustment clause that will protect the value of your payments over the potentially decades-long life of the lease.
  • Assignment – If the lease contains an assignment clause which would allow the developer to sell or transfer the rights to another company, there are at least two things you might want to consider.  First, you could negotiate a higher payment rate to compensate for the risk of dealing with a third party in the future.  Second, you could negotiate a clause which holds the developer liable for any failure on the part of the third party to satisfy all the terms of the lease.
  • Property Tax – Turbines and solar panels are generally considered improvements and are therefore subject to property tax.  The lease should specify whether you or the developer is responsible for the property tax.  If you are responsible for it, then your payment from the developer should be higher to reflect that expense.  Conversion of agricultural land to a solar field, wind farm, or other alternative energy site may complicate your property’s tax classification.  Consult a tax attorney to see how you might be affected by such an agreement.
  • Liability Issues – There are several liability issues that should be considered in any alternative energy lease:
    • Landowner’s liability for damage to turbines or solar panels
    • Developer’s liability to landowner for damage to the property throughout each phase of the lease
    • Developer’s liability for damages that occur to a third party
    • Does the lease require the developer to have insurance on the turbine or solar panel and any associated facilities?
    • Liability for cost of litigation with any third party (e.g., neighbor suing over noise from a turbine)
    • Liability for cost of violations of land use/zoning regulations
  • Other Land Use Restrictions – There will often be provisions in the lease preventing certain uses of the land, like hunting, building, or planting trees.  Some of these provisions are necessary to make sure that turbines receive enough wind and solar panels receive enough light to work effectively, but make sure these provisions are narrowly written to prevent interference with other desirable uses of the land.
  • Choice of Law/Venue Clause – A choice of law clause might specify that any litigation would employ the laws of the developer’s home state.  A choice of venue clause would specify that any litigation would actually take place in the developer’s home state.  It is normally in your best interest to have all litigation take place in North Carolina if possible.
  • Termination – There are several issues regarding termination of the lease oh which you should be aware:
    • When can developer terminate the contract?  Are there specified events which would allow the developer to terminate the lease?  Is the developer permitted to terminate the lease “at any time without cause”?  If so, what are the landowner’s rights to any remaining payments?
    • Landowner’s rights of termination – How must the landowner exercise the right of termination?  Is binding arbitration required?
    • Removal of turbines or solar panels – Is the process defined for the removal of the turbines or solar panels and any associated facilities such as roads and structures?  Who will pay for the removal of the turbines or solar panels?  Does the developer have to retain funds in escrow that will be sufficient to remove the turbines or solar panels at the termination of the lease?
  • Miscellaneous Issues – This list is not comprehensive and it should be reiterated that you should consult with an attorney to address the full list of issues you should consider.
    • Developer’s access – Does the lease grant broad access and use to the developer?  Does the developer have a perpetual easement?  It is normally unfavorable for the developer to have a grant of access that is any larger than necessary.
    • Default – What are the landowner’s rights if the developer defaults in the middle of the project, leaving it unfinished?
    • Trespassers – Will the developer or the landowner be responsible for enforcing trespassing laws?  Who bears the responsibility for trespassers’ actions?

 

Wind

 How can wind energy be used effectively on a farming operation?

There are a number of ways you can put wind energy to work on any type of farm.  For some ideas, see this fact sheet.

 

Are any tax credits available for the installation of wind turbines on my farm?

Yes.  The Emergency Economic Stabilization Act of 2008, P.L. 110-343 Div. B, § 104, extended a federal tax credit authorized by 26 USC § 48 on commercial wind turbine installations until 2016.  The credit is equal to 30% of expenditures on small wind turbines (up to 100 kW in capacity).  There is no maximum credit.

 If you are installing a wind energy system for your home rather than your farming operation, there is also a 30% residential tax credit authorized by 26 USC § 25D.

 

How do I claim the tax credit?

The commercial tax credit is claimed on IRS form 3468.  The residential credit is claimed on IRS form 5695.  Consult an accountant, tax attorney, or other professional if you plan to pursue such an acquisition.

 

Should I be aware of any local ordinances that might interfere with me installing a wind turbine?

Yes.  Some local ordinances restrict the height of structures in certain areas, so you should make sure your zoning is adequate to install a wind turbine.  Also be aware of any local noise ordinances which might interfere with the installation of a wind turbine. 

If you plan to connect the turbine to the local power grid, contact the power company to determine its requirements for interconnectors and buying electricity from small independent power producers.

 

Solar

 How can solar energy be used effectively on a farming operation?

There are a number of ways you can put solar energy to work on any type of farm.  For some ideas, see this fact sheet.

 

Are any tax credits available for the installation of solar panels on my farm?

Yes.  The Emergency Economic Stabilization Act of 2008, P.L. 110-343, Div. B, § 103, extended a federal tax credit authorized by 26 USC § 48 on commercial solar energy installations until 2016.  The credit is equal to 30% of expenditures on solar energy property, including equipment that uses solar energy to generate electricity, to heat or cool a structure, or to provide solar process heat.  There is no maximum credit.  Passive solar systems are not eligible for the tax credits.

If you are installing a solar energy system for your home rather than your farming operation, there is also a 30% residential tax credit authorized by 26 USC § 25D.

 

How do I claim the tax credit?

The commercial tax credit is claimed on IRS form 3468.  The residential credit is claimed on IRS form 5695.  Consult an accountant, tax attorney, or other professional if you plan to pursue such an acquisition.

 

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