Project Financing

Chapter 13: Power Purchase Agreement

PPA
A power purchase agreement (PPA) is a contract to buy the electricity generated by a power plant. These agreements are a critical part of planning a successful wind project because they secure a long-term stream of revenue for the project through the sale of the electricity generated by the project. Securing a good PPA is often one of the most challenging elements of wind project development.

This section covers the basics of a power purchase agreement and things to consider as you negotiate with a power purchaser. The main topics covered in this section are:

Ownership: 

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: 

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 9: Financing


Most commercial-scale community wind projects are multi-million dollar investment endeavors that require outside financing assistance. This section will give you some background on how to approach a bank or other financing entity. Loan terms will affect the bottom line of your wind energy project revenue, so understanding the requirements and options for financing your wind development are critical. Getting organized in the beginning will put your project in a much better negotiating position for acquiring favorable financing. With enough due diligence documentation, your project will be less risky and more attractive to a financing entity.

Ownership: 

Depreciation

Double-declining balance, five-year depreciation schedule (I.R.C. Subtitle A, Ch. 1, Subch. B, Part VI, Sec. 168 (1994) (accelerated cost recovery system)) is another federal policy that encourages wind development by allowing the cost of wind equipment to be depreciated faster.

Production Tax Credit (PTC)

Provides the owner of a qualifying facility with an annual tax credit based on the amount of electricity that is generated. By focusing on the energy produced instead of capital invested, this type of tax incentive encourages projects that perform adequately. In 2007, the rate for the PTC is 1.9¢/kWh. The PTC increases from year to year based on the consumer price index.

Passive Tax Appetite

Income from certain types of investments qualifies as passive income. Tax paid on this income is considered passive tax. To take advantage of the Federal Production Tax Credit (the PTC) and Modified Accelerated Cost Recovery System (MACRS), you or a project partner must be paying taxes that fit into this category of tax liability. For more information about what qualifies as passive activity see IRS Publication 925: Passive Activity and At-Risk Rules: http://www.irs.gov/publications/p925/ar02.html

Passive Income

Certain types of income, as defined by the IRS, such as rental income or income from businesses, in which the earner serves only as an investor and is not actively engaged in running the investment as defined by the IRS. See Passive Tax Appetite.

Net Present Value

A common financial concept (and a critical component of Minnesota’s C-BED tariff), reflecting the idea that having a given amount of money today is more valuable than receiving the same amount of money in the future. 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 establish a tariff that provides for a rate schedule resulting in a net present value rate of up to 2.7¢/kWh.

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