One of the world’s fastest growing energy technologies is wind power. Landowners on windy sites face a choice – to lease their land to wind developers or to own the turbines themselves. Leasing land provides a landowner with a relatively risk free venture with a steady stream of income. Owning a wind energy project involves more risk but offers landowners significantly more potential revenue. A recent report compares the financial impact on landowners of various local ownership structures.
In November 2004, Mark Bolinger and Ryan Wiser [Ernest Olando Lawrence Berkeley National Laboratory], released a report titlled “A Comparative Analysis of Business Structures Suitable for Farmer-Owned Wind Power Projects in the United States.” According to the authors, landowners around the country that are leasing their land to a wind developer typically receive $2,000 – $10,000 per year for each turbine [for turbines that are typically >1MW]. The wide range in payments are in part due to some landowners receiving a flat payment per turbine while others receive a payment based on the amount of energy a turbine produces.
The authors compare 4 ownership possibilities for a hypothetical 1.5 MW wind project. The key to financial viability of each of the first 3 ownership models is to structure the project so as to maximize the utilization of all available tax and production incentives. The success of the 4th method, the on-site ownership model, is primarily dependent on the site’s characteristics. The four types discussed are as follows:
Multiple Local Owner
Projects under this structure are organized as limited liability company (LLC). One or more farmers provide equity for the project by purchasing shares. The remaining costs are financed via loans or grants. Power is sold to local utility and the investors split the income and tax benefits proportionately, according to their individual level of investment.
Minnesota-style Flip Structure
Projects under this structure are organized as limited liability company (LLC). A single farmer/landowner partners with a corporate entity that is able to take advantage of all or most of the Federal production tax credit. Initially the landowner contributes as little as 1 percent of the equity for the project and the corporate partner contributes 99 percent. During the first 10 years of the project the corporate partner gets 99 percent of the cash flow and tax benefits. In year 11 (or possibly later if necessary) the ownership “flips” to 99 percent landowner/farmer and 1 percent corporate partner. Now the local partner owns a debt free wind project and receives 99 percent of the cash flow for the remaining life of the project.
Wisconsin-style Flip Structure
Projects under this structure are organized as limited liability company (LLC). Multiple farmers/landowners partners pool enough capital through sale of shares to cover 20 percent of the project cost. Then they loan this money to a corporate investor interested in taking advantage of the tax credits. The investor contributes another 30 percent of the cost and borrows the remaining 50 percent from a financial institution. The investor now owns 100 percent of the project with a debt/equity ratio of 70 percent/30 percent. For 10 years, the corporate entity pays down the debt, is able to take advantage of all or most of the Federal production tax credit and the landowners/farmers are paid only the interest portion of their initial loan. In year 11 the corporate investor drops out of the project and keeps the principal from the original loan from the farmers as a buyout. The ownership “flips” to 100 percent landowners/farmers who now own a debt free wind project and receives 100 percent of the cash flow for the remaining life of the project.
Projects under this structure are organized to provide power to the farm rather than selling power to the local utility. The project is built and interconnected to the utlility system and power from the wind project offsets electricity that would otherwise have been purchased from the utility. The value of the electricity produced by the wind turbine is much higher (retail rate rather than wholesale) than in the other ownership models but on-site projects can’t take advantage of the Federal tax credits and they will also be subject to stand-by charges and demand charges from the local utility.
The authors conclude that all four ownership structures can be viable options for wind projects depending on the local situation.
- A Comparative Analysis of Business Structures Suitable for Farmer-Owned Wind Power Projects in the United States – Lawrence Berkeley National Lab, November 2004
- New Rules Project’s section on Small-Scale Wind Energy Incentives -Minnesota