Author: Amy Wise
Dan Juhl has pioneered a business model for wind power schemes that helps landowners and investors share the benefits as well as the responsibilities. Here we look at how it works in practice and how it compares to European and Australian approaches.
Project overview
Dan Juhl, a leading exponent for community wind power in the US, has developed the the 'Minnesota Flip' business model, in response to Federal and State Government incentives for wind power development.
Its structure allows landowners to partner with investors for wind energy projects. These partnerships allow investors to take advantage of America’s renewable energy production tax credits (PTCs). Meanwhile, landowners can own a significant proportion of the project.
The tax credit — for each kWh of electricity produced from eligible renewable energy sources — is just one way the US supports the wind power industry. Minnesota has passed state legislation to support community-based energy development (C-BED). New laws require all the state’s electric utilities or energy retailers to consider community-based renewable energy projects when adding renewable generation to their supply mix. Energy retailers must also offer C-BED tariffs, which give wind developers a higher rate for energy during the early stages of a renewable energy contract, when the developer is still recovering the cost of installation. This is then balanced out by a lower rate once the cost is recovered through the sale of electricity. It basically allows C-BED projects to overcome some of the financial barriers to renewable energy projects more easily.
The C-BED legislation is supported by a 2007 law that requires energy retailers to source at least 25% of their energy from renewable sources by 2025. This gives Minnesota the strongest renewable energy standard in the US. On top of these laws, energy distributor and retailer Xcel Energy has committed to develop 500 MW of wind energy under C-BED by 2010.
Minnesota is now one of the top wind energy producers in the US, with 1,800 MW of installed capacity. It's ranked fourth in the US for wind energy production, behind only Texas, California and Iowa. A significant amount of this capacity has been developed using the Minnesota Flip business model.
How it works
The Minnesota Flip model allows community members, including landowners, to own part of a wind project in partnership with an investor. The investor is eligible for the federal PTCs available for qualifying wind projects.
Local investors with limited tax liability often provide start-up capital to cover planning permits, wind studies, interconnection and transmission studies. Outside investors with a larger tax liability can finance equipment and installation, and will often reimburse local investors' pre-development expenses.
A Limited Liability Company (LLC) is formed to own and operate the project, with the investor owning 99% of the company during its first ten years, since PTCs are generally only available during this period. After the first ten years, ownership ‘flips’ so the local owners take a controlling interest in the project for the rest of its lifetime — usually another 10 to 15 years or so.
The 'flip' means landowners can afford the turbines, while giving the PTCs to the investor who finances the project's set-up.
Forming an LLC protects participants’ personal and other business assets from any project liabilities. It also creates a favourable tax structure. The LLC will typically draw up an operating agreement that gives the majority of the financial and governance rights to the investor for the first 10 years of the project, then on an agreed date, ownership flips to the local owners.
The major benefits of this model are:
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Local owner groups who may lack the capital to develop a wind project can attract investors.
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Investors have access to tax credits and guaranteed marketability until the project provides enough revenue to reach the investor’s targeted rate of return.
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Local owners can profit early in the life of the project, before the flip happens. They can lease their land or receive fees for developing the project — which can include several stages of feasibility studies and the negotiation of a power purchase agreement with utility companies. Once the project is installed, local owners can also take on management responsibilities for operations and maintenance, generating more income based on a percentage of gross profits.
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Regional economic growth, with infrastructure built around wind power and the job opportunities that follow. These might be positions with manufacturers of turbines, blades and parts for operational equipment; service companies maintaining equipment and installations; and technical schools training people to work in the industry.
Who developed it?
Dan Juhl, a leader in developing Minnesota C-BED wind projects, campaigned successfully for stronger legislation to make it easier for locals to develop C-BED projects. The Minnesota Flip model is just part of his efforts to increase the viability of wind power projects. His aim is to encourage and support community-owned wind farms that benefit more from the money they generate — by keeping it in the local economy.
“If we're going to develop these wind farms, let's try to make sure big national corporations don't simply take control of them and take all the profits out of the state,” Juhl says. "C-BED is all about trying to keep the dollars here. It's a huge opportunity for rural Minnesota.”
Australian context
Many governments around the world have introduced legislation to support the development and continued growth of renewable energy generation. Countries like Denmark, Germany, Spain and France favour the fixed-price system, in which renewable generators like wind farms receive a premium fixed price known as a ‘feed-in tariff’ for every unit of electricity they produce. Any additional cost is passed on to electricity consumers. In this system, the price is fixed, and the market determines the quantity of energy generated. It's the most common way of promoting renewable energy uptake in Europe.
The Production Tax Credit (PTC) is a variation of the fixed-price system and is unique to the US. It offers tax credits to wind farm majority owners — worth about US$19 for each MWh — for the first 10 years of operation.
Other countries, including Australia and the UK, favour a fixed-quantity system, in which governments set targets for renewable energy generation over a set period. The market determines the price of this energy according to supply and demand, which it monitors through the sale of Renewable Energy Certificates (sometimes called Green Electricity Certificates). For example, Australia has set a target to produce 20% of its energy from renewable sources by 2020. Similarly, Britain has a target of 15% by 2020.
The European Commission and the Stern Review have shown how price-based support mechanisms achieve larger deployment at lower cost. The European Commission concluded that “well-adapted feed-in tariff regimes are generally the most efficient and effective support schemes for promoting renewable electricity.”