Policy - State Level

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 **

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

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

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