State Policy Information

  • A Comparative Analysis of Community Wind Power Development Options in Oregon

    A Comparative Analysis of Business Structures Suitable for Farmer-Owned Wind Power Projects in the United States (November 2004) was prepared for the Wind & Hydropower Technologies Program, U.S. Department of Energy, by Mark Bolinger and Ryan Wise.

    For years, farmers in the United States have looked with envy on their European counterparts' ability to profitably farm the wind through ownership of distributed, utility-scale wind projects. Only within the past few years, however, has farmer- or community-owned wind power development become a reality in the United States. The primary hurdle to this type of development in the United States has been devising and implementing suitable business and legal structures that enable such projects to take advantage of tax-based federal incentives for wind power. This article discusses the limitations of such incentives in supporting farmer- or community-owned wind projects, describes four ownership structures that potentially overcome such limitations, and finally conducts comparative financial analysis on those four structures, using as an example a hypothetical 1.5 MW farmer-owned project located in the state of Oregon.

    Read the Report

  • Advanced Renewable Tariffs for Wisconsin Analysis and Case Study

    "Advanced Renewable Tariffs for Wisconsin: Analysis and Case Study" was prepared by the University of Wisconsin Madison Energy Analysis & Policy Certificate Capstone Project.

    ART is a policy which aims to encourage customer-sited development of renewable energy. An ART is unique because a regular customer becomes the producer (who we will refer to as a Renewable Power Producer (RPP)), and the electric utility becomes the customer. This is different than net metering and a RPS; net metering is essentially running the kWh meter backwards-thus, the value for a kWh of renewable electricity is equal to the retail rate-while a RPS establishes a quantity obligation.

    There are many ways to establish energy payments for an ART. The various methods are primarily based on:

    1. Generation cost, which provides a payment based on the cost of the technology
    2. Avoided cost, which sets the payment based on displacing fossil fuel-based generation
    3. Premium rates, which establish energy payment at a specified level above the retail rate for electricity

    This analysis uses a generation cost approach-generation cost is the most common form and is consistent with the Governor‘s Task Force on Global Warming-to determine energy payments for each renewable technology.

  • Americans Making Power Act Proposes National Net Metering

    July 2010, Washington, D.C. - Rep. Jay Inslee (WA) has introduced the Americans Making Power Act, or AMP Act, which would establish a national standard for net metering. The legislation would allow Americans to feed back into the grid excess renewable power they generate through their homes, small businesses and even places of worship. This legislation would also improve reliability of the nation's electric grid by encouraging a more diffuse means of energy production.

    “Our new clean energy economy can start right at home.”

    —  Rep. Jay Inslee

    The AMP Act (HR 5692) addresses two main issues associated with a robust net metering policy; namely the actual net metering standard and a policy component designed to allow for the connection of a renewable energy system to the electric grid, also known as "interconnection." The AMP Act would accomplish this by modifying section 113 of the Public Utility Regulatory Policies Act (PURPA) of 1978. While some 42 states have already adopted some form of net metering and/or interconnection standards, there are many variations in policy and some states have yet to adopt net metering language at all.

    The AMP Act would set a minimum in standards and procedures for net-metering including a limit on the size of machine at 2MW, but would allow states to enact their own regulations over and above this minimum. As written, the owner-generator keeps all renewable energy credits generated by the machine. Additionally, the requirement to offer this program does not apply once the utility has reached a total of 6% of its peak load in net-metered projects (or 4% of it's peak by any one qualifying net-metered technology). This is re-calculated every 12 months. Customer-generators will receive a kwh credit on their bill for any excess generation. At the end of 12 months, if there is a net excess of generation, the customer-generator recieves a payment equal to the average wholesale rate for the previous 12-month period per net excess kwh.

    “Our new clean energy economy can start right at home,” said Rep. Inslee. “By empowering Americans, this legislation can help build the clean energy economy of the 21st century while saving families money. Imagine getting a credit on your bill from your utility company every month because you generated more power than you use.”

  • Analysis of Renewable Energy Feed-in Tariffs in the U.S.

    The National Renewable Energy Laboratory (NREL) has published a report analyzing the impacts that state level feed-in tariff policies can have on the renewable energy industry across the country. The report uses data and reports from around the world to highlight the various benefits that a feed-in tariff type of policy can have on renewable energy development.

    A feed-in tariff is an energy policy that provides for a guarantee of payment to renewable energy developers for the energy that is produced. This type of policy can be thought of as an advanced form of a production-based incentive because payments are made for the actual electricity produced and not for how much capacity is installed. The most common feed-in tariff payment is based on the actual levelized cost of renewable energy generation. This method of payment provides a price adequate to ensure a reasonable rate of return on for investors. 

    The authors of the report delve into the various advantages of feed-in tariff policies and the number of challenges to implementing feed-in tariff policies in the U.S. The report also provides a review of the current state-level and utility-level feed-in tariff policies that are currently in place across the county and compares them with the successful models found in Europe. These states include Gainesville, Florida; various Wisconsin utilities; California; Vermont (report was written prior to passage of the state-wide feed-in tariff so this analysis focuses on the two utility-specific programs); Washington; and Oregon. The authors wrap up the report with a discussion of best practices for feed-in tariff policy design and implementation, followed by an analysis on how to use a feed-in tariff policy to achieve state renewable energy goals.

    The authors highlight one of the most important elements of a feed-in tariff policy - that it allows for more participants in renewable energy project development. In their analysis the authors state that there are significant impacts of a feed-in tariff on developing community ownership, but it will depend on how the program is structured and payments determined. 

    You can read the full report here (PDF).

  • Case Studies on Iowa Wind

    These case studies are from the Iowa Energy Center. Click here to view the case studies.

    Wind Projects

    Staples Residence, New Providence, IA (PDF 1.48 MB)
    Wind Turbine

    Akron-Westfield Schools, Akron, IA (PDF 174 KB)
    Wind Turbine

    Ashler Residence, Hamburg, IA (PDF 645 KB)
    Wind Turbine

    Clarion-Goldfield Schools, Clarion, IA (PDF 185 KB)
    Wind Turbine

    Eldora-New Providence Schools, Eldora, IA (PDF 170 KB)
    Wind Turbine

    Forest City Schools, Forest City, IA (PDF 171KB)
    Wind Turbine

    Hawkeye Dental, Ely, IA (PDF 1.23 MB)
    Wind Turbine

    Montgomery Residence, Bryan, IA (PDF 567 KB)
    Wind Turbine

    Neppel Energy, LCC, Armstrong, IA (PDF 236 KB)
    Wind Turbine

    Spirit Lake Schools, Spirit Lake, Iowa (PDF 151 KB)
    Wind Turbine

    Tjaden Farms, Charles City, IA (648 KB)
    Wind Turbine

    Tran Lam Residence, Vinton, IA (PDF 712 KB)
    Wind Turbine

  • Chapter 10: Tax Incentives


    In order to be financially competitive, most wind projects need to take advantage of federal and, where available, state tax incentives. It is critical to understand the role and mechanics of tax incentives while developing a commercial-scale community wind project because these incentives can represent one-half to two thirds of the total revenue stream over the first 10 years of operation due to the Federal Production Tax Credit (PTC) and Modified Accelerated Cost-Recovery System (MACRS) or other type of depreciation that can be applied to wind energy assets. You will need to consult a tax professional in the early stages of project planning to ensure that your financial projections are valid and accurately take into account the project’s tax burden and benefits.

    Ownership: 
  • Connecting Renewable Energy to a Smarter Grid

    Transmission Linemen
    Transmission Lineman
    photo: mnorri, some rights reserved

    There are many hurdles for connecting renewable energy projects to the existing electric power grid. Transmission lines already operate near full capacity. Substations may not handle new interconnections. Regulatory processes span state and federal authorities, and interconnection standards vary from state to state. Plus, it's not clear how to best allocate costs for infrastructure improvements between utilities, energy developers, and rate-payers.

    The good news is that both industry and government groups have invested in research on how to better connect renewable energy projects to the grid and how to construct a smart grid that can support a clean energy future. While there is clearly need for technology improvements, much of the research points to improved policies, consistency in standards, and adoption of best practices. Here are recently released reports on these topics.

    The sixth edition of the Interstate Renewable Energy Council's (IREC) Connecting to the Grid Guide provides a comprehensive introduction to a span of topics that relate to grid-tied renewable energy sources. The sixth edition has been revised to include information on IREC's recently updated model procedures, alternative billing arrangements for net metering, energy storage and several other emerging issues in the field. This guide is designed for state regulators and other policymakers, utilities, industry representatives and consumers interested in the development of state-level interconnection and net metering policies.

    The National Energy Technology Laboratory (NETL), part of the U.S. Department of Energy (DOE) laboratory system, hosts a Modern Grid Strategy web site that regularly issues whitepapers. The Transmission Smart Grid Imperative outlines the technologies that are ready to be deployed while considering the complexities of building consensus for new transmission construction. Accomodates All Generation and Storage Options defines how a smart grid can be powered by small distributed energy resources (DER) which include both distributed generation and storage, as one of seven "Smart Grid Principal Characteristics" identifed by NETL.

    Perspectives for Utilities & Others Implementing Smart Grids by The Smart Grid Stakeholder Roundtable Group represents the outcome of meetings with a range of stakeholders including state agencies, consumer groups, environmental groups, commercial and industrial consumers, utilities and public utility commissions. The report was sponsored by the Office of Electricity Delivery and Energy Reliability with the goal "to help utilities and other smart grid project developers better communicate how and why they think smart grid technologies will benefit consumers and the environment, as well as the overall electric system in general."

    Under the Energy Independence and Security Act (EISA) of 2007, the National Institute of Standards and Technology (NIST), partnering with DOE and the Federal Energy Regulatory Commission (FERC), has "primary responsibility to coordinate development of a framework that includes protocols and model standards for information management to achieve interoperability of smart grid devices and systems..." The NIST Framework and Roadmap for Smart Grid Interoperability Standards, Release 1.0 is a draft of a framework that includes protocols and model standards for information management to achieve interoperability of Smart Grid devices and systems. NIST has currently identified 16 initial standards and is considering an additional 46 potential standards. 

  • Energy Self Reliant States

    If renewable energy generation can be dispersed widely, then it should be locally owned whenever possible. With local ownership, the neighbors of energy generation are also the economic beneficiaries, creating a constituency for rapidly expanding renewable power and transforming energy consumers into energy producers.

    The Energy Self Reliant States website expands on this foundation and is written by report co-author John Farrell, a senior researcher on the New Rules Project at the Institute for Local Self-Reliance. The potential for states and communities to pursue decentralized renewable energy inspired the highly acclaimed report Energy Self-Reliant States, published in late 2009.

  • Going Grid Neutral at California Schools

    2008: State and Consumer Services Agency Secretary Rosario Marin  announced the release of California's "grid neutral" guidebook; a step-by-step guide to help California schools and community colleges cut energy costs through on-site electricity generation.

    The program was spearheaded by the California State Architect and a team of environmental experts. It is the first comprehensive program for schools to use to create campuses that generate as much electrical energy as they consume in a year.

    Windustry staff thought that it might be useful to share these ideas with a wider audience.  While there is only a small segment specifically about wind energy, many ideas contained in this guidebook could be useful in other states. Please follow the link at more information for access to the full report and the full press release.

  • Minnesota Energy Legislation in 2007

    2007 was a landmark year for energy policy in Minnesota. The legislature passed the strongest renewable energy standard in the nation with overwhelming support from both sides of the aisle. This law makes Minnesota a leader in clean energy policy and creates a great opportunity for our state to reap the rewards of the booming renewable energy industry. With the passage of The Next Generation Energy Act of 2007, the legislature made sure much of the economic benefits of the increased renewable energy would stay in our rural communities.

    The bill also contains real solutions to global warming that will create tangible cost savings for Minnesotan families and businesses.

    The Renewable Energy Standard

    The strongest renewable energy standard (RES) in the nation became law this session when Gov. Tim Pawlenty signed a requirement that the state’s electric utilities obtain 25% of their energy from renewable resources by 2020. Minnesota’s utilities currently get about 6% of their energy from renewable sources. Under this new law, Minnesota will add between 5,000 and 6,000 MW of new renewable energy, a large part of which is expected to come from new wind turbines in our rural communities.

    The renewable energy standard is a market-based mechanism that requires utilities to gradually increase the portion of their energy that is produced from renewable sources like wind, solar, biomass, and geothermal energy. The RES uses tradable renewable energy credits to achieve reductions in a flexible, low-cost manner that creates competition among renewable energy generators and provides them with an incentive to continually drive costs down. Minnesota’s Renewable Energy Standard will help keep electricity costs low, spur economic development, increase energy independence and security, and lead to cleaner air.

    The Next Generation Energy Act of 2007

    The Next Generation Energy Act, signed into law this May, provides for concrete actions that will set Minnesota on a path to achieve 80% reductions in greenhouse gas emissions by 2050. Key components of the law include:

    Three times the current amount of investment in energy efficiency measures that will produce a 25% energy savings by 2025.

    • A goal to aggressively reduce our global warming pollution to reach an 80% reduction below 2005 levels by 2050.
    • The creation of an economy-wide climate change action plan by February 1, 2008. Arizona’s climate action plan will result in an estimated overall net economic cost savings of more than $5.5 billion from 2007 to 2020.
    • Required reductions in CO2 from the power sector. After August 1, 2009 there will be a moratorium on new power plants unless they can offset their CO2 emissions

    The Next Generation Energy Act also includes critical provisions that will help rural communities plan, build, and own renewable energy facilities themselves, thereby keeping energy dollars in local communities. The Act:

    • Allows counties to take over permitting authority to site wind energy facilities up to 25MW in size, an increase over the previous 5MW, and impose higher standards than state laws.
    • Allows local governments to own wind energy projects with more than two turbines without partnering with other entities.
    • Requires utilities to study the amount of renewable energy that can be connected to existing local transmission lines and substations with minimal upgrades, thereby using existing utility infrastructure more efficiently and delaying the need for new large transmission lines.
    • Requires that developers finish projects within 7 years or renegotiate land development agreements with landowners to extend these agreements.
    • Requires the Department of Commerce to consider the Community-Based Energy Development (C-BED) economic benefits that flow to all local interests, not just the project developer, when approving C-BED projects.
    • Allows C-BED developers to negotiate market-based rates unhindered by out-of-date price caps.
    • Requires utilities to consider contracting with C-BED projects to comply with the Renewable Energy Standard.
    • Allows utilities to partner with C-BED projects.
    • Requires a variety of studies on emerging community energy issues.

    “These changes in law will help cities, counties, school districts, and other local agencies develop, own, and benefit from wind farms. Local ownership of wind projects helps ensure that a broader spectrum of Minnesotans benefit financially from renewable energy, and it also helps make rural communities more energy independent.”

    -David Benson, Nobles County Commissioner

    More Information
    For more information about the benefits of community wind, click here.

    For the full text of the Renewable Energy Standard bill click here.

    For the full text of The Next Generation Energy Act, click here.

  • Minnesota Passes New C-BED Legislation

    New Law Passed to Advance Community Energy Projects
    Next Generation Energy Act Helps MN Farmers and Small Businesses Build Renewable Energy Projects

    St. Paul, MN – (5/25/07) Today Governor Tim Pawlenty signed the Next Generation Energy Act (SF145), which includes critical provisions that will help rural communities build wind farms, biomass power plants and other renewable energy facilities.

    The legislature passed the bill on Sunday with strong bipartisan support.

    This community-based energy development (C-BED) legislation helps rural communities plan, build and own renewable energy facilities themselves, thereby keeping energy dollars in local economies. A number of studies have shown that local ownership of wind farms at least triples local financial benefits relative to ownership of wind facilities by large outside companies (see references, below). “This legislation keeps Minnesota at the cutting edge of community wind energy development nationwide,” said Lisa Daniels, Executive Director of Windustry. She added, “Currently, Minnesotans own more wind power projects than residents of other states.” Thirty percent (275 MW out of 895 MW) of Minnesota’s wind energy capacity is community-based.

    Andrew Falk, a wind developer near Benson Minnesota said, “First, we must thank State Representative Aaron Peterson for his incredible work and leadership on this important issue. Communities want to take an active role in meeting the energy needs of the 21st century with locally owned renewable energy resources. This piece of legislation assists the utilities and the regulatory agencies in comprehending the value of community-based energy development (C-BED) projects. A key provision in the bill prevents wind energy development companies from buying wind rights from landowners and then not developing them within a reasonable time. “All over the country, wind energy is hot so large companies are buying up wind rights before the competition drives up prices,” noted Daniels. “The law protects landowners in this exploding market by requiring developers to finish building projects within seven years or renegotiate their deals with landowners.”

    The legislation also makes it easier for local governments to own wind energy projects, and it allows counties, rather than just the state government, to permit projects as large as 25 MW. “These changes in law will help cities, counties, school districts and other local agencies develop, own and benefit from wind farms,” said David Benson, Nobles County Commissioner. He added, “Local ownership of wind projects helps ensure that a broader spectrum of Minnesotans benefit financially from renewable energy and it also helps make rural communities more energy independent.” “Farmers all over the state want to earn more hard dollars from wind farms,” added Daniels, “but, our current regulatory and tax system makes entry into this new business opportunity needlessly cumbersome. This new law removes some barriers and will help us deal with future ones.”

    The legislation includes provisions that:

    • Allow counties to take over permitting authority to site wind energy facilities up to 25 MN in size, up from 5 MW, and impose higher standards than state law.
    • Allow local governments to own wind energy projects with more than two turbines without partnering with other entities.
    • Require utilities to study the amount of renewable energy that can be connected to existing local transmission lines and substations with minimal upgrades, thereby using existing utility infrastructure more efficiently and delaying the need for new large transmission lines.
    • Require that developers finish projects within 7 years or renegotiate land development agreements with landowners to extend these agreements.
    • Require the Department of Commerce to consider the C-BED economic benefits that flow to all local interests, not just the project developer, when approving C-BED projects.
    • Allow C-BED developers to negotiate market-based rates unhindered by an out-of-date price cap.
    • Require utilities to consider contracting with C-BED projects to comply with the Renewable Energy Standard adopted by the State in February.
    • Allow utilities to partner with C-BED projects.
    • Require a variety of studies on emerging community energy issues.

    For information about the economic benefits of community wind relative to other development, go to:
    http://www.windustry.org/community/default.htm#Why%20Community%20Wind
    For the text of and other information about the Next Generation Energy Act, SF 145, go to:
    http://www.revisor.leg.state.mn.us/revisor/pages/search_status/status_detail.php?b=Senate&f=sf145&s
    sn=0&y=2007

    Windustry is a non-profit organization working to increase wind energy opportunities for rural landowners and communities by providing technical support and creating tools for analysis.

    ** Media Contact: Lisa Daniels 612-870-3462 **

  • Net Metering

    Net metering is a way for you to connect your small wind turbine behind the meter at your home, business or farm.  This system is designed to allow energy generated at your home farm or business to offset some or all of the electricity you use.  If your generator is producing more electricity than you can consume the excess is sold back to the utility.  The price that a project receives for the excess electricity varies from state to state and from utility to utility.

      Net metering can be very helpful for the economics of a wind project because it allows a qualifying facility to receive retail rate for a portion or all of the electricity generated.  Currently more than 35 states and the District of Columbia have net metering programs requiring utilities purchase power from systems that qualify for the program.  Each state has different rules and regulations.  To find out if net metering is available in your state, what systems qualify and how to take advantage of the programs visit the Database of State Incentives for Renewable Energy.

    Read more about net metering on the Green Power Network or find a summary of net metering programs by state from AWEA.

  • New Report from ILSR: "Minnesota Feed-In Tariff Could Lower Cost, Boost Renewables and Expand Local Ownership"

    This January 2008 policy brief from the New Rules Project of ILSR highlights how several European countries, and more recently the Canadian province of Ontario, have adopted a simple yet powerful strategy to expand renewable energy and benefit local economies. It is called a feed-in tariff: a mandated, long-term premium price for renewable energy paid by the local electric utility to energy producers. Evidence shows that a feed-in tariff achieves greater results at a lower cost than do other strategies like tax incentives or renewable electricity standards.

    Click here to go to the New Rules Project website and download a copy of the report.

  • Office of Energy - Minnesota Department of Commerce

    The Office of Energy at the Minnesota Department of Commerce is working to move Minnesota toward a sustainable energy future, managing energy assistance funds, advocating in the public interest on energy utility rates and facility siting. We provide information and assistance to residents, builders, utilities, non-profits and policy-makers on home improvements, financial assistance, renewable technologies including wind energy information, policy initiatives, and utility regulations.

  • Property Taxation of Wind Generation Assets

    "Property Taxation of Wind Generation Assets," North American Windpower, May 2006, Vol. 3, No. 4, pp. 31-34. This article, written by Warren Ault, summarizes research he did for Windustry in 2005 into the actual and potential local economic benefits of wind power, focusing particularly on a survey of the varieties of approaches throughout the United States to the use of local property taxes. Click on the link below to download a PDF copy of the article.

  • Renewable Portfolio Standard (RPS)/Renewable Electricity Standard (RES)

    A minimum renewable energy requirement for a region's electricity mix. Under an RES, electricity suppliers are required to provide some percentage of its supply from renewable energy sources. RPS proposals frequently ease that requirement by including a tradable credit system under which electricity suppliers can meet the requirement by buying and selling renewable energy credits (RECs).

  • States Advancing Wind Peer Network

    Clean Energy States Alliance (CESA) would like to invite you to join a new States Advancing Wind Peer Network group as part of the DOE's Wind Powering America State Outreach Project. The goal of this initiative is to create a peer-to-peer network for sharing information on the merits, approaches, best program practices, and policy tools available for states to accelerate wind project development. The information that will be provided will include briefing papers and notices of in-depth webinars on specific topics such as best siting practices, innovative policy tools, and emerging finance mechanisms for wind projects, as well as real-time information on state wind activities. The objective is to provide objective, quality, targeted information for state officials and those interested in state wind policy, not to overwhelm you with too much information too frequently - and to seed opportunities for collaboration.

    The goal of DOE's Wind Powering America project is to rapidly accelerate the market penetration of wind technology to secure the substantial energy, economic, environmental, and national security benefits for America. The Department has chosen to work with 25 diverse states and organizations to promote information sharing, including CESA - whose role is to work with state agencies and officials across the nation to advance outreach efforts and to provide targeted technical assistance.

    Clean Energy States Alliance is a nonprofit organization representing leading state clean energy programs across the country. Established in 2002, CESA works with over 20 state clean energy funds and programs. CESA assists its members in multi-state strategies to develop and promote clean energy technologies and to create and expand markets for these technologies.

    To join the listserv, please send an contact  Anne Margolis  with "Wind Listserv" in the subject line and include your contact information.

     

  • Understanding C-BED (2005)

    Minnesota’s original (2005) Community-Based Energy Development (C-BED) legislation offers some important benefits to community wind projects, but understanding how it works can be a little challenging. This article will try to explain the major aspects of the C-BED program and illustrate how community projects are helped with a simple example.

    (Please note that the C-BED legislation was updated in 2007 and that parts of this article are no longer applicable, although many of the concepts are.)

    Summary
    Nuts and Bolts - Net Present Value

    Example

    Further Reading

    Summary

    First, the legislation sets out ownership rules in its definition of C-BED projects, defining “qualified owners” as Minnesota residents, nonprofits, LLCs, non-electric co-ops, local governments and school systems, and tribal councils. No single qualified owner may control more than 15% of the project (except for one- and two-turbine projects), and the project must obtain the support of the county board where it will be installed. If new transmission lines must be built for the project, landowners whose property will be crossed by the lines must be given an opportunity to invest. The upshot of these rules is that more individuals are given a stake in the project, and its benefits will flow broadly to the community. (Projects can be joint ventures between qualified and non-qualified owners, but qualified owners must have the majority share, and the C-BED tariff benefits will not be received by the non-qualified owners.)

    Second, public utilities are required to set out a C-BED tariff. This tariff has two important differences from other tariffs. First, it has to allow for rates with a net present value of up to 2.7 cents per kilowatt hour over the 20-year life of the power purchase agreement (more on this shortly). Second, the tariff must provide for a higher rate in the first ten years of the contract than in the second ten years. The higher early rates will make it easier for project to obtain financing, while the use of net present value calculations makes sure that the utility’s bottom line is not jeopardized. While utilities are required to file a C-BED tariff and are directed to give consideration to C-BED projects when looking for new generation, they are not obligated to enter into any contracts with a C-BED project. This, too, helps make sure that C-BED contracts will be fair to all parties. Finally, C-BED projects have the option of negotiating a rate with different provisions than those specified in the legislation if they wish (for instance, choosing not to vary the rate over time). Any contracts which include the “front-loaded” rate must be approved by the Public Utilities Commission.

    Nuts and Bolts – Net Present Value

    The key to understanding the advantages of the C-BED tariff is the concept of net present value rates. This is a common financial tool, which basically reflects the idea that having a given amount of money today is more valuable than receiving the same amount of money in the future. That is, I’d rather have $100 right now than know I’ll receive $100 in five years, because I can put that money to work in the meantime. Similarly, in order to understand how much a series of payments is worth, all of the amounts need to be converted to their “present value” by applying a discount factor to the future payments. The further into the future the payment is, the less it’s worth today. By adding up the present values, we can determine the “net present value” of all the payments. So, would I rather have $400 today, or $100 a year for five years? That depends on the discount I apply to the future payments (or, put another way, how much interest my $400 will earn if I put it in my savings account or some other investment).

    C-BED requires utilities to determine the net present value of their rate schedule using the standard discount factor that they apply to their other business decisions. That means calculating the expected payments over the life of the contract and applying the discount to find the net present value of the series of payments. The net present value is then divided by the total energy produced over the 20 years, resulting in the “net present value rate” – the present value of every kilowatt-hour the project will produce over its lifetime. C-BED requires that the utility offer a tariff that provides for a rate schedule resulting in a net present value rate of up to 2.7 cents per kilowatt-hour.

    Different payment schedules can result in the same net present value. Since utilities are concerned with long-term planning, they are more concerned about protecting the net present value of a contract than about the specific amount of each payment. For community wind projects, however, the payment schedule can be very important, since they are faced with high capital costs and need to make large debt payments in the first part of the project’s life. By providing for a front-loaded payment schedule, in which the utility pays a higher rate early on and a lower rate later, the net present value of the payments can be maintained, while allowing a C-BED project to increase its income while its expenses are high. This higher income during the debt-service period can help make the project more attractive to lenders and improve access to financing.

    Example

    The simple C-BED spreadsheet contains a comparison of the front-loaded rate with a fixed rate, and may make it easier to understand how the net present value rate works. For this example, we’ve assumed a single wind turbine producing 5,200 MWh per year and annual debt payments of $150,000 for the first ten years. We’ll use 3% as the utility’s discount rate (a fairly standard rate for businesses), 3.5 cents/kWh for the flat rate example, and 4.2 and 2.8 cents/kWh for the rates in the front-loaded example. (You can plug in your own numbers in the Assumptions tab and see how the outcome changes on the other tabs.) To keep things simple, we’ll ignore insurance, maintenance, etc. and assume that debt service is the project’s only expense and that the turbine produces the same amount of electricity every year for twenty years.

    Looking at the Summary Comparison tab (copied in the table below), we can see that the total amount of cash received (the “nominal sales”) by the project is greater under the fixed rate, by about $100,000. After debt service, the fixed rate comes up with nominal net revenue of about $2.24 million, while the front-loaded rate results in net revenue of $2.14 million. Why, then, would the project opt for a front-loaded rate?

    Flat Rate Front-Loaded Rate
    Total Nominal Sales $3,744,000.00$3,640,000.00
    Nominal Net Revenue(afterDebtService)$2,244,000.00$2,140,000.00
    Present Value of Total Sales $2,785,063.29 $2,787,159.11
    Present Value of Net Revenue $1,505,532.87 $1,507,628.68
    Net Present Value Rate ($/kWh) $0.0268 $0.0268
    Sales:Debt Service ratio (years 1-10) 1.248 1.456

    Despite the higher nominal value of the fixed rate, the front-loaded rate has nearly the same present value (actually higher by about two thousand dollars). Providing higher dollar amounts in the first half of the project means that the money paid early on can go to work for the project, rather than having its value reduced by discounting over several years. In other words, the sooner the project can get its hands on the money, the more it’s worth. The increased value of the high payments early on are enough to outweigh the lower payments in the second half of the contract.

    Comparing the detail pages for each structure, we notice that the annual nominal revenue after debt service is nearly twice as much under the front-loaded scenario. By delivering more money early on, the front-loaded rate achieves a higher income-to-debt-service ratio, a key ratio banks consider when evaluating whether to issue a loan. A strong revenue stream early in the project’s life will make it easier for the project to get financing. Later, after the debt has been retired, the project can afford to accept a lower rate, since it will have fewer expenses.

    That explains why a wind project might opt for a front-loaded rate even if the nominal value of the payments is lower. Why would a utility be willing to consider such a payment structure? Well, as we saw, the net present value of both cash flows is nearly the same. On a per-kilowatt-hour basis, the utility would be faced with a net present value rate of 2.68 cents per kWh in both cases (just under the C-BED maximum). From a long-term perspective, the contracts would cost the utility about the same amount, and so they’re likely to be relatively indifferent between the two structures. Thus, the front-loaded rate creates a tremendous benefit for community wind projects in terms of helping them achieve financial feasibility, while not increasing the long-term cost to utilities.

    All utilities are faced with slightly different financial situations, and have differing expectations for the future. Therefore, they’ll each have different discount rates. Still, the general principle demonstrated here will apply to each. And again, the C-BED legislation explicitly states that while the utilities are required to develop a tariff offering a front-loaded rate, they are not required to enter into any contracts using it. So if a community wind project chooses to negotiate a front-loaded rate, the utility will have plenty of opportunity to make sure that the structure is workable for them and fits into their long-range financial planning.

    Further Reading

    Additional information about C-BED can be found at www.c-bed.org

    Wikipedia has a good entry on net present value, which includes links to additional information about cash flows and discount rates: http://en.wikipedia.org/wiki/Net_present_value

  • Windustry Newsletter - Spring 1999

    Spring 1999 Newsletter


    Minnesota Wind Breakthrough

    The future of wind in Minnesota became much brighter January 21, 1999, with the promise of 400 MW to be built by 2012. Rejecting Northern State Power's analysis, the Public Utilities Commission (PUC) decided with a vote of 4-0 that the development of an additional 400 MW of wind is in the public interest. "The public demand for clean, renewable energy was recognized in this decision," said Bill Grant, Director of the Midwest Chapter of the Izaak Walton League of America. The PUC deliberations had received substantial public attention, including unprecedented public hearings in St. Cloud, Moorhead, Winona, Pipestone, Mankato, and St. Paul. Citizen testimony was overwhelmingly in favor of moving forward with wind development, in which Minnesota is seen as a national leader in wind energy production and technology. John Dunlop, Great Plains Representative for American Wind Energy Association, said "With the completion of the initial 425 MW required by state law and the additional 400 MW ordered by the PUC, wind businesses will provide as much electricity as used by one out of every six Minnesota households."

    NSP is currently contracting projects for the first 425 MW as defined by the 1994 Prairie Island legislative agreement. The agreement called for 400 additional MW to be built if wind power was deter-mined to be the least cost option and in the public interest. Dunlop said, "The PUC has affirmed the state’s leadership in a transition to clean, renewable energy."


    Governor Ventura meets with citizens and students from SW Minnesota

    Newly elected Governor Jesse Ventura and Government Relations staff Joe Bagnoli, sat down with concerned citizens and leadership from Southwest Minnesota, students from Lake Benton High School, and wind and environmental advocates with the SEED coalition, to hear concerns over the future of wind energy in Minnesota. On January 13, one week before the PUC wind decision, citizens and advocates appealed to the Governor to promote wind development in Minnesota, especially in counties hard hit by low agricultural prices. Ventura agreed that a deal was a deal and NSP should hold up their side of the bargain. Concerns were also raised regarding the Renewable Development Fund, specifically where the funds were and how they could be accessed. Afterwards, meeting participants lobbied various members of the Senate and House to favor and support increased wind development and clean environmental standards in Minnesota.

    1999 Legislative Watch

    A Renewable Development Fund is to be established as part of the Northern States Power (NSP) Prairie Island legislative agreement of 1994. According to the 1994 statute, $500,000 must be paid per dry cask per year, if the nuclear waste remained on the island beyond 1998. This means $3.5 million this year and probably $4.5 million next year. Who is going to administrate this fund and how are some of the questions to be answered this session. NSP is of the opinion that fund is an internal one that the company itself would control it. The SEED coalition (Sustainable Energy for Economic Development) is holding the positions that the process must be "publicly accountable" and that the fund must have a "strong preference" for projects in Minnesota.

    On The Windustry Trail
    Don't sign on the dotted line until...

    In March, Windustry conducted a series of Town Meetings on Wind Rights. Landowners were presented with a outline of legal contract considerations to help them identify issues before signing wind easement contracts. Meetings were held in Pipestone, Lake Benton, Slayton, Moorhead and St. Charles. More town meetings, Harvesting the Wind: A Landowners Perspective are being held in early April in Lake Wilson. These meetings are intended to provide even more opportunities for landowners to discuss issues and gather information on the wind development that is taking place in Southwest Minnesota. We have wind energy experts, banking and economic development professionals as speakers to talk about the benefits of the various payment options, tax implications, long term value of the land, and different ways of developing wind projects that include local ownership. All the meetings are free and open to the public.

     

    Click on the link below for a pdf version.