What is Community Wind?

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2 What is Community Wind? Limited Liability Companies (LLC) Rural Electric Co-op Municipal Electric Utilities LOCALLY OWNED Native American Reservations Educational Institutions Typical owners include local LLCs, Municipal Electric Utilities, Rural Electric Coops, Schools & Universities, and Native American Reservations. At least one electricity consumer holds a financial stake in the project. Ideally,the project should be owned by the community although other partnerships are possible. 2

3 What is Community Wind? UTILITY SCALE 1 MW 20MW 1 MW 300 homes in the North East CLUSTERED DEVELOPMENT Typically, community wind projects range from 1MW-20MW in capacity, even though larger and smaller community wind projects exist. A utility scale project also implies that the project can satisfy the electricity of the majority of the population it caters. Another characteristic of Community Wind is clustered development. Clustered Development simply means that the turbines are located close to each other and to the community that owns them and/or benefits from them. Clustered Development is beneficial as it reduces transmission costs and reduces land used for siting turbines. 3

4 What is Community Wind? CONNECTED TO THE GRID Back-up Power Electricity Sales Excess Generation Sales Distributed Generation Adapted from Brooks, Community Wind Projects should be connected to the distribution grid because it benefits the community in several ways: First, since wind power is not continually generated, consumers of community wind-generated electricity can get back-up power from the grid. Second, some community wind owners treat the wind project purely as a business by selling the power to a local utility or a large power company, thereby making profit from it. Similarly, sales from the electricity generated in excess of the community s needs can also earn profits for the community wind project owners. This schematic represents the transmission and distribution grids that transmit electricity from its generation at a traditional power plant to homes. 4

5 Setting up Community Wind STAGE I: Project Conception 1. Determining Wind Potential 2. Garnering Community Support 3. Identifying a Customer 4. Using Supportive Policies STAGE II: Project Planning 1. Financing the Project 2. Using Public Financial Incentives 3. Other Planning Considerations Setting up a community wind project involves several logistical, financial and feasibility issues. Essentially, the process can be broken down into three phases: Project Conception, Project Planning and Project Construction and Operation. 5

6 STAGE I: PROJECT CONCEPTION 1. Determining Wind Potential Source: Bird et al., 2005 POTENTIAL AND INSTALLED WIND CAPACITY IN THE U.S. Plains States with a rural landscape Varying wind resource within a state Wind energy is frequently limited by the availability of wind. This map represents that wind potential of the United States. The beige shows the areas with the lowest wind potential while the blue shows the areas with the highest wind potential. Some of the best wind resources are available in states where the plains combined with the typically rural landscape allow faster winds to blow. However, wind potential varies not only from state to state but also within states thereby limiting the ability of different regions to set up community wind projects. Illinois, for example, has limited wind resources except for the central part of the state where two community wind projects were developed successfully. 6

7 STAGE I: PROJECT CONCEPTION 2. Garnering Community Support Increases Environmental Consciousness Economic Opportunities [Sometimes] you re in the supermarket and hear someone talking about wind energy, maybe there will be another person there shopping who can disseminate information. People talk, and we want to arm them with the correct facts. - Loren Pruskowski Sustainable Energy Development, Inc., Helderberg Wind Forum Helderberg Wind Forum Tours the Fenner Wind Farm Source: Helderberg Wind Forum. Community resistance can often prove to be barrier to the success of the project. Therefore, community wind project developers must make an effort to educate the community about the benefits of a small wind project before proceeding with it. The community must also understand that the small wind project will provide economic opportunities for them. 7

8 STAGE I: PROJECT CONCEPTION 3. Identifying a Customer POWER PURCHASE AGREEMENT between project developer and customer Ensures continuity of project Generates revenue to offset costs of production Xcel Energy: A customer for several Minnesotan Community Wind projects Source: St. Paul: Minnesota s Capital City It is important that community wind developers know ahead of time who their customers are. It is imperative that there is a continual, assured demand for the power these developers are planning to supply. Typically, in the community 8

9 STAGE I: PROJECT CONCEPTION 4. Using Supportive Policies RENEWABLE PORTFOLIO STANDARDS (RPS) State policies that require power providers to draw a certain portion of their electricity from renewable energy sources. Encourages utilities to buy energy from community wind developers RPS Target motivates developers to meet goals State RPS percentages and target years Source: Ross et al., 2006 In addition to gaining community support and customers, project developers must also seek state policies that aid them in setting up and financing a successful community wind project. Several State Governments have created an atmosphere that makes it conducive for small wind and other renewable forms of energy to flourish. One such policy is the state Renewable Portfolio Standards (RPS). These require utility providers within the state to draw a certain percentage of their electricity from renewable sources. RPS are created and enforced by state legislators and utility commissions. Typically, each state determines its RPS percentage and sets a target year by which that standard should be achieved. 9

10 STAGE I: PROJECT CONCEPTION 4. Using Supportive Policies INTERCONNECTION Connecting small renewable energy projects to a local utility through the grid. Provides opportunity to buy back-up power. Power lines of a transmission grid Source: Tony Boon. NET METERING Selling electricity generated by a small renewable energy project through a local utility. Decreases energy demanded from large power plants Generates profits from the sale of generated power Meter Source: Net Metering on a Solar Home. Two other supportive policies that go hand-in-hand are Interconnection and Net Metering policies. Interconnection allows the generator to connect the community wind project to the local utility s grid while net metering allows the generator to sell the excess power produced back to the utility. Interconnection allows the generator to buy back-up power in times of wind failure. Net Metering reduces the demand on the local utility during peak load times. Furthermore, net metering generates an additional economic incentive for the generator. 10

11 STAGE I: PROJECT CONCEPTION 4. Using Supportive Policies RENEWABLE ENERGY CREDITS Contracts that represent the ownership of positive environmental attributes associated with renewable energy. Provides funds for project developers Enable utilities to comply with RPS Allow citizens and firms to offset the environmental impact of their energy consumption Whole Foods Market: Buyer of 458,000 RECs to offset 100% of their nationwide electricity emissions Source: New York Metro. olspaces/wholefoods_main.htm Renewable Energy Credits (RECs) enable the positive environmental effect of renewable energy to be sold or bought. Every project is assigned a certain number of RECs based on how much power it produces. The developer can sell these thereby making money to help fund the project. The market for RECs consists of utilities, firms and individual consumers who buy these RECs. Utilities benefit from the purchase of RECs as it helps them meet the state RPS without actually having to produce the energy themselves. Citizens and Firms also benefit from buying these RECs as they can offset their energy consumption. 11

12 STAGE I: PROJECT CONCEPTION 4. Using Supportive Policies Ensures that the definition of an REC is met Prevents double counting of credits Maintains retirement date of credit Map showing Renewable Energy Credit Tracking Systems in the U.S. Source: Pew Center for Climate Change Source: South Dakota Public Utilities Commission In order to ensure that RECs are bought and sold appropriately, there are regional REC tracking systems that help regulate the REC market. They ensure that the power generated by the developer meets the REC definition. They also ensure that no single unit of power is counted twice in the assignment of RECs and that the retirement date of the credit is respected. 12

13 STAGE II: PROJECT PLANNING 1. Financing the Project PUBLIC FINANCIAL INCENTIVES Incentives provided by Federal or State Governments to help project developers attract external investors. Limited Liability Community Companies (LLC) Project Developers External Investors Debt Financing Equity Financing In order to finance a community wind project, project developers must find innovative ways to collect seed capital. Public Financial Incentives, such as those offered by the Federal or the State Government, are one such way to provide money for community wind. If the project developers are members of the community that benefit from the project, then they will be induced to invest in the project because they have a personal stake in its success. In this case, the community members are internal investors. If the project developers, however, are limited liability company, then apart from their own contributions, they require money from external investors. For this purpose, there are two forms of financing. Debt Financing is when the LLC lays down the initial investment and then recovers it from external investors. Equity Financing is when the LLC collects money from the external investors without incurring a debt itself. External Investors, through public financial incentives that will be introduced later, are encouraged to invest in these projects by buying bonds from the project developers. 13

14 STAGE II: PROJECT PLANNING 2. Using Public Financial Incentives PUBLIC FINANCIAL INCENTIVES Incentives provided by Federal or State Governments to help project developers attract external investors. Popularly used Public Financial Incentives and their use by member states of the Clean Energy States Alliance Source: Ross et al., 2006 Common Public Financial Incentives include the Renewable Energy Production Incentive, Property Tax Exemptions, Sales Tax Exemptions and Other Tax Exemptions. These will be discussed over the next few slides. 14

15 STAGE II: PROJECT PLANNING 2. Using Public Financial Incentives FEDERAL PRODUCTION TAX CREDIT (PTC) A credit offered to entities involved in energy generation from renewable sources for every 1 Kilowatt-hour for the first ten years of project operations. Investors are induced to become Pass-through Partners whereby they contribute only to seed investment in order to receive tax credits Business Energy Tax Credit 25% Owner Equity 5% Department of Energy Bonds 42% Investor Equity 28% Effective use of the Production Tax Credit for funding a community wind project in China Hollow, OR Source: Adapted from Ross et al., 2006 The Federal Production Tax Credit or the PTC is an incentive offered by the Federal Government by means of which investors in renewable energy projects can receive a tax credit for every kwh for 10 years. If investors decide to become pass through partners that is partners who do not buy any more bonds after the initial investment is made they can get up to 35% tax break for investing 25% of the total funding of the project. The project in China Hollow, OR, utilized the PTC to attract investors during the funding stages. As a result, you can see that 28% of the total funding came from equity financing from external investors. 15

16 STAGE II: PROJECT PLANNING 2. Using Public Financial Incentives STATE TAX INCENTIVES AND EXEMPTIONS State incentives usually comprise of exemptions from property, sales or income taxes, or credits for business and income taxes. Incentives vary depending on the size of the project WISCONSIN IOWA MONTANA Any Wind Projects Projects < 90 MW Projects < 1 MW State incentives are typically characterized by exemptions or tax breaks on property, sales or income taxes. Such incentives vary depending on the state and the size of the project. For instance, in Wisconsin, such incentives are offered to any wind project be it community wind or a large wind farm. Thus, Wisconsin encourages the development of all sizes of wind energy, an attribute that is not necessarily useful for community based renewable energy projects. In Iowa, however, the incentive is offered on a smaller scale i.e. only to projects that are less than 90 MW in capacity. In Montana, this is even smaller since incentives are offered only to projects that are less than 1 MW. Thus, in this way, by offering incentives to smaller projects, the development of community wind is encouraged in Iowa and Montana. 16

17 STAGE II: PROJECT PLANNING 2. Using Public Financial Incentives RENEWABLE ENERGY PRODUCTION INCENTIVES (REPI) Cash payments, rather than as credits, offered by the Federal or State governments to renewable energy project developers for every 1 Kilowatt-hour of energy produced for the first 10 years of project operations. Congress renewed REPI at $0.015/kWh from Benefits non-profit entities that are nontaxable entities and do not benefit from other policies. CALIFORNIA MINNESOTA FEDERAL $1.50/w $0.019/ kwh $0.015/ kwh The Renewable Energy Production Incentive (REPI) serves the same purpose as the PTC, except that it involves a cash repayment to the investor in place of the tax exemption or break. Congress recently renewed the REPI for a period of 20 years which makes REPI more reliable as it was previously subjected to the vagaries of the Congressional budget. The REPI serves the additional advantage of serving non-profit entities. Non-profits are not taxable and thus, cannot avail of the PTC. The REPI, since it is not contingent on taxes, can thus, benefit non-profit organizations. Currently, the Federal REPI is set at 1.5 cents or $0.015 for every kwh. Some states offer REPIs in addition to the Federal REPI. For instance, Minnesota offers a higher REPI of 1.9 cents or $0.019 per kwh and California offers an even higher REPI of $1.5 per watt. In this manner, the federal and state REPI can affect the influx of investment in community wind projects. 17

18 STAGE II: PROJECT PLANNING 2. Using Public Financial Incentives Source: Northwest Sustainable Energy for Economic Development (NW SEED) eed.org/about/d efault.asp Northwest Sustainable Energy for Economic Development helped the Klickitat County Public Utility apply for CREBs to fund the project at Luna Point, WA CLEAN RENEWABLE ENERGY BONDS (CREBs) Bonds sold to the general public by municipalities and public agencies to generate investment money for their renewable energy projects. Bond issuers get equity investments. Bond owners get tax credits for purchased bonds. Other financial incentives include the Clean Energy Renewable Bonds (CREBs). These are similar in nature to bonds sold by a project developer to equity investors, except in this case, the project developer is a municipality or a public agency. The Energy Policy Act of 2005 authorized $800 million in CREBs. Through CREBs, public agencies apply to the US Department of Energy for a certain number of bonds, adding up to a total value of money required for the project. If approved, the DOE can issue a certain number of bonds to the agency which will then be sold to external investors to earn money for the agency s wind project. Since CREBs are relatively new, it has not been used very often. Northwest SEED, a non-profit in Washington, helped Klickitat County Public Utility apply for CREBs to fund the Luna Point project. 18

19 STAGE II: PROJECT PLANNING 2. Using Public Financial Incentives GRANTS Specific monies given by a donor to a recipient for wind projects. Members of the Illinois Rural Electric Co-op Effectively Used Grants to fund a Wind Turbine Source: Illinois Rural Electric Co-op USDA Section 9006 Grant = $438,544 Illinois Department of Commerce & Economic Opportunity = $250,000 Illinois Clean Energy Community Foundation = $175,000 USDA Rural Utility Service = $1,300,000 Grants are a common direct way of securing funding for community wind, although this path can be relatively hard. Sources of grants include federal and state governments, state renewable energy foundations, and utility renewable energy funds. The Illinois Rural Electric Co-op that set up a community wind project in Pike County, IL, used the grants program effectively to fund their project. This list shows the break-up of the amount and the source of funding for this project. 19

20 STAGE II: PROJECT PLANNING 3. Other Planning Considerations EQUIPMENT PURCHASE Frequent delays with local manufacturers as well as maintenance contracts must be negotiated ahead of time. ZONING AND PERMITTING Community wind projects must comply with federal and local zoning ordinances. Vestas is a Large Manufacturer of Wind Turbines Source: Windfarm Free Mull Other Planning Considerations, aside from funding, also tend to play a part in community wind projects. Buying wind turbines and installing them can be a tedious task, given the great disparity between the demand and supply for these. Given the limited number of manufacturers, the demand currently is far greater than the supply, and several firms are backed up in terms of delivering turbines to the consumers. Moreover, turbine manufacturers tend to find community wind projects less profitable than others and thus, put community project developers lower on their list of priority customers. Also, zoning regulations for community wind can be more stringent and must be developed in a way that is conducive to individual turbines being scattered over the landscape. Having secured the funding and taken care of logistical details, community wind project developers have a fairly easy time running these projects once they are set up. There are however, some exemplary policies and incentives that ought to be noticed in order to develop more effective policy for community wind in the future. 20

21 BEST POLICIES Oregon Source: Northwest SEED Northwest Sustainable Energy for Economic Development (NW SEED) is an organization in Oregon that provides technical assistance to project developers Oregon Business Tax Credit For a 25% investment, investors get Years 1 & 2 10% credit Years 3, 4 & 5 5% credit Qualifying Facilities sell renewable energy to utilities at the Avoided Cost Rate. Oregon as a state with a good wind resource, has two policies that are particularly noteworthy. The Oregon Business Tax Credit, allows investors to get a 35% tax credit for laying down a 25% investment initially. Moreover, qualifying facilities i.e. facilities that generate energy from renewable sources and have been approved or have qualified as a renewable energy producing entity can sell renewable energy to other utilities at the avoided cost rate. This means that qualifying facilities make a lot of money from renewable energy sales. It also induces other non-qualifying facilities to indulge in renewable energy generation in order to keep up with their competitors. 21

22 BEST POLICIES California Self-Generation Incentive Program Net metered systems are exempt from costs associated with interconnection. California s net metering policy allows your utility meter to run backwards while your turbine is producing excess power. - California Energy Commission Brochure Clipping from a California Energy Commission Consumer Brochure Source:American Wind Energy Association NAL.pdf As a leading wind energy state, California too has commendable policies. The Self-Generation Incentive Program gives project developers $1.50 per watt of wind energy capacity as long as the project is less than 5 MW in capacity. Moreover, California mandates net metering standards for projects between 50kw - 1MW in capacity and ensures that project developers receive almost the retail rate for their energy. Most importantly, costs associated with connecting to the grid, exit charges etc. are excluded for wind projects. The quote and picture on this slide show excerpts from a California Energy Commission Brochure that encourages customers to start community wind projects. 22

23 BEST POLICIES Iowa Iowa PTC can count against state income tax, business tax or financial institutions tax for up to 10 years. Projects < 450 MW $0.01 / kwh Iowa s Abundant Wind Resource Supplemented by Progressive Policies Encourages Wind Development Source:American Wind Energy Association Alternative Energy Revolving Loan Program: Projects receive ½their loan at 0% interest for a period of 20 years. The Iowa PTC helps community wind projects 1 cent/kwh in tax credits. Moreover, the Alternative Energy Revolving Loan Program allows project developers to receive interest free loans for up to half the total cost of the project. Such incentives have helped Iowa with its abundant wind resource tap into the renewable energy market effectively. 23

24 BEST POLICIES Minnesota & New York Minnesota REPI. For a total 200 MW capacity, Projects < 2 MW $0.015/ kwh Washington Proposed RPS allows projects to double-count RECs. 1 MW-hr 2 RECs Illinois had defined zoning regulations for siting turbines. NYSERDA offers 50/50 grants to renewable projects. Minnesota REPI Allows Smaller Entities, like Carleton College, To Have Their Own Turbine Source:Minnesota Department of Commerce The Minnesota REPI 0.5 cents higher than the the Federal REPI. The state of Washington has proposed an RPS that allows projects to double-count their RECs. This means that for 1 MWh, each project is awarded 2 RECs. Illinois has set an example by defining zoning regulations for siting turbines. NYSERDA offers grants to cover ½ the total cost of the project for renewable energy. 24

25 GUIDELINES FOR PROJECT DEVELOPERS Test Community Support Prepare Comprehensive Due Diligence in Advance Identify All Possible Funding Sources Identify Important Policy Drivers Communicate With Successful Project Developers Communicate With Utilities Plan for An Unstable Turbine Market Prepare to Manage an Operational Project In conclusion, there are 8 important guidelines that must be kept in mind by a project developer. 25

26 References Brooks, C. 1st February, MPA-Environmental Science & Policy, Columbia University: Community Wind CESA Working Group. Bird, L., Bolinger, M., Gagliano, T., Wiser, R., Brown, M., and B. Parsons Policies and Market Factors Driving Wind Power Development in the United States. Energy Policy. 33: Ross, B., et al. April Community Wind Development: Supportive Policies, Public Financial Incentives, Best Management Practices. Environmental Science and Policy Spring Workshop, School of International & Public Affairs, Columbia University. 6/Community%20Wind%20Development%20-%20Final%20Report.pdf Cover Photo: Atlantic County Utility Authority: Back Photo: DOE/NREL, Cielo Wind Power 26