Community Wind Power
Back in 2001, I was introduced to the world of community wind by a Scottish club owner I met whose parents were about to start getting lease payments on a new community wind project about 200 miles north of Glasgow.
He was pretty excited, as his parents were on a limited income and certainly needed the extra money. Apparently a lot of folks in that area were in the same boat, too. But like most community wind projects, the benefits went far beyond those lease payments. Eventually, the project proved to provide local employment, an improved local energy infrastructure, and even more competitive pricing for consumers.
It was a successful project that paid off for both the local community and the project developer.
Of course, community wind is nothing new in Europe. But here in the United States, community wind projects still only represent a very small contribution to our overall wind power generation. Although with new calls for stronger domestic energy production and government support, this is changing. So let's take a closer look at domestic community wind development.
What is community wind?
Community wind projects are basically wind energy developments with significant local ownership. The power generated by these projects can either be used on site or sold to a utility; they are typically privately owned, or developed by tax exempt and nonprofit organizations like municipal utilities, schools, tribes, and rural energy cooperatives (RECs).
A key advantage to community wind is local economic development. You see, with community wind, local investors often contribute a large percentage of the equity base in the projects, or they structure projects so that ownership of the project is returned back to the local investors once corporate investors recoup their investment.
In the planning phase of these projects, local engineers, scientists, accountants, and lawyers are often hired to work through all the requirements to secure the proper funding and permits. The developers of these projects also source most of the materials for the projects like concrete, and other building materials from local businesses. And of course, local farms benefit from lease payments. In some cases, the only outside resources for community wind projects are the turbines.
Community Wind Incentives
As with most renewable energy development, government incentives are still necessary. Of course, these incentives don't even come close to the amount of money the government ponies up for fossil fuels. In fact from 2002 to 2008, subsidies for fossil fuels totaled approximately $72 billion, while subsidies for renewable energy during that time came to $29 billion.
Nonetheless, government support remains necessary for most renewable energy development. A major incentive for renewables has been the production tax credit (PTC). The PTC offers a 2.1 cent per kWh credit against federal income tax liability for the first ten years of a wind project. Because this credit is dependent on the investor possessing a large income tax liability, it is only suited for use in certain community wind structures. These are mostly the privately owned community wind projects like the equity "flip" ownership models. (We'll explain the "flip" model later in this report.)
Then there's the investment tax credit (ITC) and its grant option, which are essential in financing community wind projects with smaller tax bases like private LLCs and farmer-owned projects. The ITC and grant option contributed to a large number of community wind projects started in 2009, and will be a major force behind the development of community wind projects for the next few years.
Basically the ITC works by giving investors a credit worth 30% of the installed cost of the project. The credit was expanded by the American Recovery and Reinvestment Act in 2009 and offers three major benefits for community wind projects:
- The project developer or taxpayer(s) can take the ITC in lieu of the PTC.
- A cash grant worth the entire 30 percent credit can be taken upfront instead of the ITC, benefiting investors who don't have the tax liability to utilize the entire credit.
- It allows community wind projects to "double dip" and receive multiple sources of subsidized funding for the project — a provision that was previously not allowed when claiming the ITC.
The ITC grant option has given community wind projects a considerable financial boost, but it does have a few limitations. The project must be completed in 2009 or 2010, or started in 2009-2010 and completed by 2012, in order to qualify. The other major stipulation is that the projects that receive the grant must be owned completely by taxpaying entities, so this excludes municipal projects, tribal projects, public school projects, and other tax-exempt entities.
Another important source of funding for community wind projects is the Rural Energy for America (REAP) loans and grants. REAP is part of the 2008 Farm Bill that was passed by a bipartisan congressional override of former President Bush's veto. This bill replaced the 2002 Farm Bill and expanded on section 9006 of the former bill.
REAP is run by the USDA and offers wind projects owned by farmers, ranchers, and small rural business owners guaranteed loans and grants to cover research and development costs. Eligible applicants can receive guaranteed loans of up to $25 million and grants of up to $500,000.
REAP's predecessor — Farm Bill section 9006 — was integral in the development of the MinWind I & II projects, funding about 10% of the projects total costs. The MinWind Projects are two of the more well-publicized community wind projects that were developed by Juhl Wind (OTCBB: JUHL). We'll cover Juhl Wind in a bit more detail later in this report.
There's also the Renewable Energy Production Incentive (REPI). This is actually an important incentive run by the U.S. Department of Energy (DOE) that pays 1.5 cents per kWh for the first 10 years for renewable energy produced and sold by various public and nonprofit entities. Eligible groups can include municipal utilities, state governments, public schools, and tribal governments. This incentive makes up for the tax credits and grants that tax exempt groups cannot take advantage of.
Finally, the last major federal incentive for community wind projects is the accelerated depreciation section in the Internal Revenue Code. This allows wind energy plants and equipment to be depreciated in six years versus the standard 20 year depreciation.
State Support for Community Wind Development
A number of states also offer programs for community wind development that can supplement the incentives offered by the federal government. Nebraska and Minnesota have developed Community-Based Energy Development (C-BED) Programs that have helped to fund more than 550 MWs of community wind projects that are either fully operational or under contract.
The programs work by creating favorable pricing and regulation for wind developed with significant community ownership. The programs encourage utilities to structure power purchase agreements so that developers of community wind projects can quickly earn a return on their investment, or more easily meet their debt obligations.
Oregon is another state that has created a tax credit and loan program for community wind development. Their program offers easy access to low-interest financing and tax credits for renewable energy projects. The credits are worth up to $20 million per project and can be sold to outside investors if the developers do not have enough tax liability to make full use of the credits.
There are plenty of other states that have programs and incentives for renewable energy development, although they are not necessarily created with consideration given solely to community wind development.
Below is a list of states, as well as their respective programs which offer some incentive or benefit to community wind development:
California: Self-generation Incentive Program
Idaho: Bonneville Environmental Foundation
Illinois: Illinois Clean Energy Community Foundation
Iowa: Alternative Energy revolving Loan Program; Renewable Energy Production Tax Credits
Maine: Community Energy Production Incentives
Minnesota: Rural Energy Revolving Loan
Montana: Bonneville Environmental Foundation
Oregon: Bonneville Environmental Foundation; Energy Loan Program; Energy Trust Grant Programs
Pennsylvania: Sustainable Energy Funds; State of Pennsylvania Energy Harvest Grant Program
South Dakota: Property Tax Treatments for Five MW or Less Projects
Vermont: Clean Energy Development Fund Grant and Loan Program
Washington: Bonneville Environmental Foundation
Privately Owned Community Wind Projects
There are two common business structures for privately owned community wind projects. The first is an LLC in which farmers, ranchers, and local investors organize themselves, and pool their resources to cover the capital costs of the project. The other structure is the equity "flip" structure, which combines corporate investors with local investors, affording the local investors a larger equity pool. In exchange for the equity investment, the corporate investors receive tax credits and an increased share of revenues during the early years of the project.
The MinWind I-IX projects in Luverne, Minnesota, are an extensively studied example of privately owned community wind. Since their inception, the MinWind projects have been very successful — creating 62 full-time jobs as well as nearly $7 million dollars (adjusted for inflation) in economic output during the construction period. During the operational stage of the project's lifecycle, nine long-term jobs and $1.2 million annually in economic output have been created.
MinWind I & II were developed by Juhl Wind Inc. and brought online in 2002. Their success led to the quick development of MinWind III through IX, all of which came online in 2004. It's how the MinWind projects are organized that is integral to both their perceived and real success.
Each project is organized around a single 1.65 MW wind turbine; two 950KW Turbines in the case of MinWind I & II. The projects are then organized into an LLC in which local farmers and residents own the turbines. The project management is then contracted out to various sources that take care of development, maintenance, and the eventual decommissioning of the sites.
The projects only have 33 investors per site, all of whom must be Minnesota residents. Of those investors, 85% must be residents of rural communities. Each Project must have different owners and no one owner can control more than 15% of his or her project. To ensure that the benefits from the MinWind Projects stay in the local communities, the planners of MinWind I-IX structured the projects so shares could easily be transferred amongst the investor's families.
Each of the MinWind Projects cost approximately $1.8 million from start to finish — about 10 percent of which was funded through Farm Bill section 9006 for rural renewable energy development. In essence, almost $20 million was pumped into developing the MinWind projects with a significant portion of that investment entering the local economy. The MinWind projects will also have a sustained economic impact as revenues are generated for the shareholders throughout the project's lifecycle.
The MinWind Projects also offer the residents of southwestern Minnesota a few fringe benefits. The residents of Luverne have something to be proud of because there are so many locals involved in the projects, and the projects were some of the first utility scale community wind projects in the country. The projects have also created greater diversity in Luverne's skilled labor market.
Many people dream of being pioneers of something, and the investors in MinWind have become community wind pioneers. Hundreds of people have visited the MinWind projects to learn how they operate and see first-hand how the projects impact rural farm communities. The projects have also helped companies like Juhl Wind, in neighboring Woodstock, become successful developers of community wind projects in the upper Midwest.
Another popular way to structure a community wind project is to form an LLC with an equity flip mechanism. The "flip" structure essentially blends a corporate tax investor with a group of local equity investors. A large corporation with significant tax liabilities will fund the project; the corporation then takes most of the profits and the PTC for the entire 10 years of the credit.
During the beginning portion of the "flip" the local investors will profit from their portion of equity, or in the case of some flip structures, a set interest rate on initial equity that was paid to the corporation as a loan. When the PTC runs out, the equity flips, and the corporate investors either relinquish control of the project, or they can sell their interest back to the local investors at the original principal rate of their loan.
One may make the assumption that the equity "flip" model does not have as great an impact on the community as some of the other forms of ownership, but this is not the case. As will be discussed later, the equity "flip" model has a greater economic impact during the construction phase that helps to balance out the slightly diminished impact during the project's operational phase.
Tax Exempt Community Wind Projects
Besides privately owned community wind projects there are publicly owned and tax-exempt community wind projects. These types of projects are owned by municipalities, schools and universities, rural electric cooperatives, and tribal organizations. These projects are almost completely community owned; they offer a number of benefits to the community.
Hull Wind One in Massachusetts' Boston Harbor is a community wind project that is owned and operated by the Hull Municipal Light Plant (HMLP). The project became operational in 2001 and is a great example of how a municipal utility can benefit from small-scale commercial wind. HMLP installed a single 660 kW wind turbine at a total cost of about $750,000 with $30,000 per year in maintenance costs.
What makes these municipal projects unique is that there is no need to secure power purchase agreements (PPA) because the utility is its own consumer. The utility can realize all the benefits of the renewable resources and then pass some of that down to the consumer.
In the case of Hull Wind I, the turbine generates roughly 1.59 million kWh annually valued at 12.8 cents per kWh. The value of the energy is based on HMLP's purchase price per kWh from the Massachusetts Municipal Wholesale Electric Company, the benefit per kWh received through the sale of green tags, and the Renewable Energy Production Incentive (REPI). Hull Wind I was so successful that Hull Wind II, a larger 1.8 MW turbine, was proposed and brought online in 2006 at a cost of approximately $2.2 million.
The town of Hull earned a return on its investment for Hull Wind I in six years, and estimates put Hull Wind II's ROI within seven years. The success of Hull I & II has created a sort of renewable energy fever, resulting in Patrick Cannon, chairman of HLMP's board of overseers, now considering a potential investment in offshore wind or wave generated electricity.
Both tax-exempt and privately owned community wind projects provide jobs, environmental benefits, and economic security to local communities. Local contractors, manufacturers, engineering, and consulting firms bid on the projects; lawyers and administrative personal are hired during the planning stages; and permanent jobs are created for the operation and maintenance of the sites. Regardless of the type of project, community wind is fast becoming a new and much-needed form of rural economic development.
Job Creation Comparison of Community Wind Projects
Job creation from energy production can be broken down into two phases: the initial construction phase and the operational and maintenance phase.
A 2009 presentation by the National Renewable Energy Laboratory (NREL) at the Windpower 2009 Conference in Chicago examined the economic development impact of four types of community wind projects. The projects examined were MinWind I-IX, Hull I&II, a 10 MW joint LLC equity flip project in Texas, a group of equity flip LLCs in Minnesota combined for purposes of comparison, and a traditional non-community-owned wind project.
To compare the benefits of these projects, the economic impacts were broken down as ratios per MW of installed capacity.
Figure 1 is compiled from NREL data and illustrates the differences in local jobs per MW created by various wind project structures:
Note: from Lantz & Tegen of NREL, 2009
The projects with the highest percentage of local ownership will create more jobs during the operational phase; these projects will have a bigger economic impact because the levels of local equity are highest in these types of organizations. The "flip" structures, on the other hand, created more short-term jobs — mostly because the inflation-adjusted project costs were higher.
There's no doubt that the wind industry is maturing. And today, as feed-in tariffs and renewable portfolio standards are fast becoming popular forms of renewable energy subsidies, the number of community wind projects will only continue to rise.
The fact is community-based wind projects create considerable economic value for local communities. Rural America sees an increase in demand for skilled labor; farmers can safely and efficiently diversify their crops; overall, the nation benefits from the very real environmental, social, and national security benefits that sustainable, domestic energy development offers.
Community wind is helping to reshape the American landscape, and in the process, extending the American dream to a new generation of entrepreneurs.
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