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Flipping the production tax credit to farmers

Innovative financing is at long last opening the gates for community wind power developers to access the federal production tax credit (PTC), currently worth $19 for every megawatt hour of wind power sold to the grid. Until now, only companies with enough money on their books to carry a substantial tax burden could benefit from the PTC, putting turbine ownership out of bounds for private citizens and any other investor not able to make use of the credit.

Based on leveraging a federal tax credit, the American wind power market has long been closed to local investment in local projects, but some creative financing in America's rural Midwest is opening the doors to an entire new ownership model

Flipping the production tax credit to farmers

Innovative financing is at long last opening the gates for community wind power developers to access the federal production tax credit (PTC), currently worth $19 for every megawatt hour of wind power sold to the grid. Until now, only companies with enough money on their books to carry a substantial tax burden could benefit from the PTC, putting wind turbine ownership out of bounds for private citizens and any other investor not able to make use of the credit.

In the Midwest that is all changing. With utilities starting to facilitate local ownership of local wind turbines, an upstart band of Midwestern community wind developers focused its attention on leveraging the PTC, which is payable for the first ten years of project operation. Working creatively with companies that specialise in securing financing as a ten-year loan, the developers found a way.

The system they came up with is dubbed "flipping." It provides for technical ownership of a wind plant for the first ten years by a company that can make use of the PTC, before ownership reverts to the land owner. "For the first ten years of a project the PTC investor owns 99% and the landowner owns 1%. Then, after the ten years, the ownership gets flipped," says Ken Valley of Midwest Wind Energy Finance, one of a group of specialised firms helping community wind ventures get off the ground.

Midwest Wind began its community ownership program four years ago when few were interested in small-scale projects. It specialises in lining up PTC investors and helping structure the projects. "Up until we got started in the market it was almost impossible for landowners to get their projects financed," says the company's Ken Valley. "It was also very difficult to get the legal work done and if something with a turbine failed, the landowners were on the hook. But now, as the market matures, there are ways to structure these 20-year deals so that the investor gets his money in a ten-year flip model. It ends up being a win for everybody."

The attraction of flipping is increased in Minnesota by the state's Community-Based Energy Development (C-BED) statute, which compels utilities to provide purchase agreements for 800 MW of community wind projects by 2010 (page 29). C-BED creates a market structure for utilities to buy wind power at a higher rate during the first ten years, essentially helping pay down the loan. For the second ten years -- and out from under the burden of a mortgage -- a community group takes ownership.

Getting easier

The financing model has helped spark a broadly defined community ownership model -- and means that small-scale developers in Minnesota are learning to come out ahead over the 20-year lifetime of a project. "As the market matures it becomes easier for a landowner to get better terms," Valley says. "Our niche is projects between four and twenty megawatts. Most of them involve six or seven turbines. We work with the landowners and developers and put them together with the financing."

A new twist was added to the Midwest Wind business model last month when the firm signed up for 340 MW of DeWind turbines for use in future community projects (previous story). "This gives landowners additional options for securing turbines in a tight market, although we'll finance projects with any type of turbine. The goal is making sure the project gets built," says Valley. "These communities can have a hard time making it work and there are a lot of issues that have to be confronted. My model is dealing with one of the major issues out there -- helping communities get the financing they need."

Midwest is not alone in the market. California's Edison Capital and Iowa's John Deere Financial, the credit arm of the ubiquitous John Deere agricultural machinery supplier, are also involved. John Deere last year bought 30 MW of wind turbines from Indian company Suzlon, with seven of them destined for Minnesota. At the time, the company's Karl-Heinz Mertins said the company sees community based wind energy as an economic opportunity for rural America. "Instead of everybody being on their own, John Deere would like to buy wind turbines and distribute them throughout the country," he said. "[Deere] would like to streamline the business while taking the time and cost out of wind energy installations."

Last month the company declined to comment on its wind power activities. It did, however, advertise for an electrical engineer to plan and supervise wind plant construction, including the electrical engineering design and interconnection. In the advert John Deere Credit said it had "recently entered the renewable energy arena with a business unit that focuses on community-based wind projects." The company has already invested in a host of wind energy projects in the rural US, which not only will drive additional income for farmers but will also meet our nation's growing demand for electricity. As the demand for wind energy continues to grow, John Deere Credit is poised and ready to provide project development, debt financing, and other services to those interested in harvesting the wind domestically and abroad."

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