Chapter 4 SOLAR LEASE NEGOTIATIONS FROM THE LANDOWNER'S PERSPECTIVE

• Jurisdiction: United States

58 Rocky Mt. Min. L. Fdn. J. 109 (58-1, 2021)
Chapter 4

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SOLAR LEASE NEGOTIATIONS FROM THE LANDOWNER'S PERSPECTIVE
F. Parks Brown Uhl, Fitzsimons, Jewett, Burton, Wolff & Rangel, PLLC San Antonio, Texas Copyright © 2021 by Rocky Mountain Mineral Law Foundation; F. Parks Brown

A previous version of this article was published by the Oil, Gas and Energy Resources Section of the Texas State Bar in its Section Report for September 2020 (Vol. 44, No. 3) and by the Business Law Section of the Texas State Bar in its Section Report for Fall 2020 (Vol. 49, No. 2).

Synopsis

I. Introduction

II. Rentals and Royalties

III. Security, Removal, and Remediation

IV. Easements, Interference, and Retained Rights

V. Mineral and Groundwater Development Issues

VI. Lease Modification and Termination

VII. Liability and Damage Concerns

VIII. Conclusion

I. Introduction

Landowners in certain regions of Texas are now accustomed to the presence of wind towers and high-voltage overhead transmission lines that necessarily accompany such activity. Maps depicting the average strength of wind flow across the state almost invariably match up with the locations where initial wind farm development has occurred during the past two decades. Just as with oil and gas deposits, developers are drawn to areas where the most valuable resources are located. However, solar radiation is more evenly distributed across the surface of the Earth than mineral deposits and wind flow patterns.¹ While solar resources are more plentiful in sunny West Texas, it is entirely possible to collect sunlight and operate a viable solar facility in just about any corner of the state. For this reason, the

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burgeoning solar industry will soon make its presence felt on a diverse range of properties in Texas and will impact a broad range of landowners over coming decades. Competitive Renewable Energy Zone (CREZ) transmission lines were initially constructed along routes designed to reach the location of specific wind energy generation sources located far from the eventual consumers.² But now that the range of available energy resources includes solar radiation, generation facilities can be seemingly located anywhere--so long as the chosen collection site is near a transmission line with enough spare capacity. In this sense, the situation for the solar industry is the reverse of the wind industry, with the location of solar projects dictated by the routes of existing transmission lines and only to a limited degree by the relative strength of the resource in the area.

Several factors recently combined to unleash an explosion in solar energy leasing and development activity statewide. Congress previously instituted investment tax credits (ITC) to solar developers that provide incentives covering up to 30% of the cost of solar facilities. The impending step-down of these credits between 2019 and 2022³ was recently averted by an extension of the ITC credit at a rate of 26% through the end of 2022 under pandemic relief legislation.⁴ Local school districts and taxing authorities may offer tax breaks and incentives to developers in return for investment in the local economy and the creation of new jobs.⁵ Utilities, municipalities, and corporations face mounting political pressure to purchase electricity from renewable sources, creating a captive market in search of long-term power purchase agreements with solar projects. In addition to the foregoing elements, the unique nature of the Electric Reliability Council of Texas (ERCOT) marketplace allows developers, utilities, lenders, buyers, and sellers to rapidly expand the solar industry on

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a scale that would be almost inconceivable in other states--in a manner similar to the exponential growth of the wind industry during its early years in Texas.

To demonstrate the coming wave of project development, consider that only 2,281 megawatts (MW) of installed solar capacity existed in Texas at the beginning of 2020.⁶ By the last quarter of 2020, an additional 15,833 MW of facilities had procured an interconnection agreement from the owner of a transmission line.⁷ This means that the total capacity of installed solar facilities in the ERCOT service area will likely increase eightfold between the beginning of 2020 and the end of 2023. But the true extent of the leasing boom is only apparent when considering proposed facilities that have yet to obtain an interconnection agreement with a transmission line operator, which constitute the approximately 75% of the 92 gigawatts (GW) of planned capacity for all solar projects currently under study in the ERCOT service area.⁸ Published statistics indicate that an enormous number of proposed projects are now competing for financing and limited transmission capacity. These proposed solar facilities now comprise the majority of the generating capacity for all power plants and energy facilities being considered for connection to the ERCOT grid.⁹ While solar power only contributed a small portion of the total generating capacity of power facilities at the beginning of 2021, all indications are that it will constitute a large share of the added capacity from this point forward.

It can be inferred that many of these projects are unlikely to complete the lengthy process of obtaining financing, permits, tax incentives, interconnection agreements, site control, and power purchase contracts that are necessary to support construction of a facility. At the beginning of 2020, a total of 246 solar projects were under consideration by ERCOT out of the total 584 interconnection requests for power generation facilities in the overall queue,¹⁰ with the proposed solar facilities ranging in size from 2 MW to 1,200 MW in capacity.¹¹ The average generation capacity of a facility in the permitting queue at that time was approximately 220 MW, requiring around 1,500 acres of open land for panels and supporting

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facilities. Altogether, the combined megawattage of all proposed solar projects constituted around 60% of the interconnection volume under consideration by ERCOT.¹² This is no small fact, considering that the queue covers a wide variety of energy generation sources including natural gas plants, coal plants, and wind farms. During the past year leading into 2021, the amount of solar development and leasing activity has only increased--as has its proportionate share of the overall development portfolio under study.¹³

For the landowner and attorney alike, it can be anxiety-inducing to negotiate a long-term lease agreement for the construction and operation of a large facility used in an emerging and technology-driven industry. Unlike when leases are negotiated for oil and gas exploration or other established energy development practices, the landowner's counsel does not have the benefit of hindsight provided by several decades of previous lease transactions, governing statutes, court decisions, and development history on which to base the desired contractual terms. There is additional concern that the lease will fail to capture the full potential value of the transaction for the landowner, or that a critical omission will result in real harm to the landowner's ownership interest in the property or its natural condition. However, an experienced transactional attorney can take comfort in the fact that a typical solar lease has many similarities to a ground lease, a wind lease, an oil and gas lease, a surface use agreement, and other contracts involving the use of real property for energy development activities. The important task for the drafting attorney is to master the nuances of this particular industry and determine how they will translate into contractual terms that protect and benefit the landowner.

The purpose of this article is to provide guidance to the landowner's counsel with respect to important contract terms negotiated within each solar lease. These specific lease terms address fundamental questions considered by the landowner, such as the proper degree and method of rental or royalty compensation; securing the eventual removal of facilities, cleanup of the property, and return of the property to the landowner in a desirable condition; limits on the scope of the operator's easement rights with respect to the leased premises and surrounding lands; assignment of the lease, termination, and lender-related issues; protection of the landowner from property damages and other liability concerns; and the interplay between solar facilities and mineral development activities on the same property.

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II. Rentals and Royalties

For many landowners, the primary focus of initial contract negotiations will be compensation--and justifiably so. The landowner will surrender exclusive control of the property to the solar developer and expects to receive value in return that will far exceed existing income from agricultural operations, grazing leases, and hunting activities. The standard solar lease may last for three to five decades once all of its renewal terms and option periods are exhausted, so it is important to make sure the contract provides for payments to the landowner that remain satisfactory for the life of the lease. The following material examines several different methods for obtaining such compensation, which present varying degrees of complexity.

The first principle to recognize is that the solar lease is a "ground lease" in the most basic sense of the term; the lessee will fence its facilities off from the surrounding lands and the acreage will be productive for electricity generation in direct proportion to the amount of land covered by the lease. For this reason, rent is typically offered and paid to the landowner on a per-acre basis for the portion of the property used for the lessee's operations, including all acreage covered by solar panels, inverters, and related equipment. The rent obligation may also cover areas used for transmission...