Savvy Land Owners Raise Royalty for Placing Wind Turbines

Right after the Federal Government passed the tax credit extension, the "fantastic news" for renewable energy industry to gain cost advantage, wind power developers are facing a new cost pressure by land owners who are starting to increase royalty for placing wind turbines on their territory.

In last week's Dow Jones story, it says in western Oklahoma and the Texas panhandle, property owners have been taking up the agreements that "resemble oil and gas leases, which typically provide for a leasing fee and a royalty payment based on the well's output."

"Many deals now reached include provisions that allow property owners to be paid a recurring fee for each turbine placed on their land and for the power each turbine generates."

As is calculated in the story, "a land owner can conservatively receive about $10,000 a year from each turbine placed on their land, and farmers often sign a deal for half a dozen turbines at a time."

That generates good profit.

The new income for property owners are directly exerting cost pressure of wind power prices and creating challenges for alternative energy to going mainstream.

the reason that caused the switch of the negotiating power is multifaceted.

The continuous slump of crude oil price in the past two weeks is one of the key factors. Crude oil prices fell from $150 a barrel in July to under $90 a barrel last week, today it closed at $82.3 a barrel. This reduced the viability for alternative energy that otherwise enjoyed a competitive edge since the resources of wind and solar power are basically free.

The other reason is many small alternative energy business owners are swiftly expanding and investing a lot more after the tax break authorized by the government in early October, along with the $700 billion bailout package. Therefore, the landowners suddenly obtained an unprecedented power in negotiating. And they are not letting it go.

On one hand, landowners want to raise the royalty as high as they can but are cautious about not to scare the developers away. On the other hand, wind power developers, with tax credit at hand renewed for another year, are taking up deals with a higher and higher royalty fees, making the increase more fierce.

The evolution is just starting and it is going to take a while for both sides to settle down on a reasonable agreements on royalties. But regardless, the nascent industry has started to experience the growing pain when it meets traditional challenges.