Wind Project Development 101

1. Wind ProjectDevelopment 101 Presented by Locke Liddell & Sapp LLP Bill Swanstrom (713) 223 – 1143 bswanstrom@lockeliddell.com Elizabeth Mack (214) 740 – 8598 eemack@lockeliddell.com David Montgomery (713) 226 – 1337 dmontgomery@lockeliddell.com John Arnold (713) 226 – 1575 jarnold@lockliddell.com

2. Key Market Drivers • Increased Focus on Clean Energy • Increased Focus on Domestic Energy • Production Tax Credit • Renewable Portfolio Standard

5. Key Market Challenges • Low Pricing in PPA’s • Permitting Delays • Turbine Availability • Land Acquisition • Transmission Constraints

7. Texas Wind Development Highlights • Texas is now the number one wind energy producer in the nation -- approx. 2900 MW • Texas is widely viewed as having the most progressive Renewable Portfolio Standards in the country • Original RPS called for 2000 MW by 2009 • In 2005, the RPS goal was increased to 5880 MW by 2015, and 10,880 MW by 2025

8. Texas Wind Development Highlights(cont.) • Wind development in Texas continues to be very robust • Offshore Wind -- the Next Wave?

12. Proposed Wind Projects in Texas

13. New Developments • Turbine Financing • Merchant Wind Plants – Hedge Products • Expanding Share of Tax Equity • Private Equity Funds Seeding Development • Strategic Investors Driving Acquisition Market • Financial Structures For Municipal Project Ownership - CREBs

14. Environmental Review on Wind Farms Driven by: • Required Permits • Expectations/Requirements of Lenders and/or Equity Investors • Including for issuance of environmental opinions • Best Practices

15. Permits • Generally, if project is on private land, and privately funded, then very few permits typically required: • No material air emissions • Generally no wastewater discharge (possible sanitary or washwater) • Generally no hazardous waste • Stormwater • Wetlands (nationwide permits) • County road crossing/state highway access rights, etc. • Projects on federal land may trigger full NEPA review – generally not an issue in Texas

16. Best Practice • Private NEPA-style review: • Identify potentially significant issues early in process • Ensure/enhance local acceptance • Support image of wind projects as environmentally friendly and conscientious • Key environmental issues in wind projects, and focus of environmental review, include: • Birds/Avian Survey • Endangered and Threatened Species • Cultural/Archeological Resources

17. Avian Impacts • Most significant environmental issue raised by wind farms • Migratory Bird Treaty Act – no bird kills, strict liability • Four season avian survey • Turbine and collection/transmission system design • Generally no post construction monitoring – but winds of change are blowing

18. Endangered/Threatened Species • Both avian and terrestrial • Federal ESA – incidental take permits available, but easier to redesign project • State endangered species laws (Parks and Wildlife Code) – no incidental take

19. Cultural Resources • NHPA - extensive review, but only if federal permit • Texas Antiquities Code • no protection for cultural resources on private land • development on public land requires THC review and approval – lengthy process

20. Wind Lease Aspects • Options • Wind Leases • Easements • Title Issues

21. Options • Almost every Wind Lease in Texas arises from exclusive option with term of 2 – 7 years • Option Fee is usually calculated as $/acre • During Option Term, grants exclusive right of ingress/egress to: • install met towers and conduct wind studies • survey land and perform title work • conduct other due diligence: geotechnical, foundation and soils tests • Accommodations with Owner regarding farming, ranching, hunting and other surface use aspects

22. Wind Leases • Exclusive right to use as Wind Farm for a term of 30 – 80 years (incl. extensions) • Installation and operation of turbines, transmission and gathering lines, substations, O&M buildings, roads, etc. • Consideration varies widely • Pre-construction bonuses/delay rental and per-turbine bonuses up to $10,000 • Royalties ranging from 3% to 6%, with Minimum Rent protections (per acre or per mW installed) • “Surface damages” for turbines, lines, roads, substations, O&M buildings, control buildings, wells, etc. • As with Option, accommodations with Owner regarding farming, ranching, hunting and other surface use aspects

23. Easements • Also acquired by Options, either incorporated into Wind Lease or standalone • Access Easements when surrendering leased but unused land • Transmission Easements to get to market • Overhang Easements for turbine blades

24. Title Issues • Lender subordinations • Oil/gas lessee surface waivers and drillsite agreements • Marital joinders – community property states • Probate matters • Adverse possession claims

25. Resolving the“Chicken or Egg” Dilemma • Senate Bill 7 (1999): renewable portfolio standard (“RPS”) of 2,880 MW of renewable generation by 2009. • SB 20 (2005) RPS of 5,880 MW of renewable generation by 2015. • Texas is not maximizing its use of available wind resources, because of the “chicken or egg” dilemma:

26. For transmission utilities: difficult to know if a new transmission line should be built if there are no existing generation facilities. • For wind farm developers: difficult to obtain financing or plan generation if there is no existing transmission infrastructure • Stand off has prevented the development of sufficient transmission infrastructure to bring the available wind generated electricity to load centers and has led to curtailment

27. The Solution: Senate Bill 20 and the CREZ • SB 20 authorized the PUC to identify CREZs to: • ensure that sufficient transmission infrastructure is built to meet RPS • improve coordination between the transmission and renewable generation • reducing the regulatory hurdles by establishing that there is a need for transmission upgrades • To implement Senate Bill 20, the PUC promulgated Commission Rule 25.174

28. The CREZ Rule: • To designate a CREZ or CREZs PUC considers the following criteria: • Wind: areas with sufficient renewable energy potential, i.e., wind resources • Transmission: the solution to move the power to load centers • Financial Commitment: to ensure wind developers meet their half of the chicken and egg equation

29. The CREZ Proceeding • Shell WindEnergy Inc. is a participant • SWE is working with Horizon and RES Americas, Inc. to support a CREZ in Briscoe County, Texas. • Strong competition from FPL others with installed generation. • Contested hearing in May • Final Order designating a CREZ or CREZs on July 5, 2007.