Financing a Large Wind Turbine Project: The Luther College Experience
by Jim Martin-Schramm, Professor of Religion, Luther College
One of the goals in Luther College’s new five-year strategic plan is to reduce the college’s carbon footprint by 50 percent. Luther has already achieved a 15.5 percent reduction of greenhouse gas emissions via a $1.5 million investment in energy efficiency. We hope to reduce our emissions by another 15 percent through an investment in a 1.5 - 1.65 MW wind turbine near the Luther campus. This article discusses the two options Luther has explored to finance the project.
The first financing option involves Luther College owning the turbine and consuming the electricity on campus. The second option involves Luther College Wind Energy Project, LLC (LCWEP) owning the turbine and selling the electricity to an investor-owned utility. In both cases, Luther would be able to reduce its carbon footprint by either retaining or acquiring from LCWEP at a nominal cost the Renewable Energy Certificates (RECs) associated with the turbine’s electricity generation.
All investor-owned utilities in the United States are currently required by federal law to purchase electricity from Alternative Energy Producers (AEP) that are 20 MW or smaller, though they can petition the Federal Energy Regulatory Commission to be relieved of this obligation under certain circumstances. Luther’s electricity provider, Alliant Energy, is currently obligated to purchase the power from LCWEP at no more than avoided cost. In addition, the Iowa Utilities Board has ruled that AEPs do not have to sell the RECs with the power; the RECs can be retained and retired or sold to another party.
The first option where Luther College owns the turbine and consumes the electricity is desirable in the long run but difficult to pull off in the short term. This is because Luther currently enjoys some of the lowest electricity prices in the nation. We still pay less than 6¢ per kilowatt-hour, and the energy portion of our bill (apart from the demand charge) is just under 4¢ per kilowatt-hour. It is hard to make any renewable energy project pay for itself with such low electricity prices. We do expect our electricity costs to increase by 5-7 percent per year over the next 20 years, but in the short term it is hard to make the project cash-flow positive without a major capital infusion to reduce the amount of debt. One source for such capital would be grants, but there are relatively few government grants or private funds to promote renewable energy among not-for-profit institutions. Since there are far more state and federal incentives that promote renewable energy in the for-profit sector, Luther has explored the second financing option.
Luther College formed Luther College Wind Energy Project, LLC in 2005 in order to apply for a new renewable energy production tax credit program that had been established by the state of Iowa. LCWEP is a for-profit venture and Luther College is currently the sole investor in this limited liability corporation. The Iowa Utilities Board has accepted LCWEP’s application for the state’s 476C tax credit program, which provides a tax credit equivalent to 1.5 cents per kilowatt hour sold to the grid. A 1.65 MW turbine with our wind resource is projected to produce 5 million kilowatt hours per year, which is about one third of the amount of electricity Luther consumes in one year. This amount of production will produce a tax credit equivalent to $75,000 per year. LCWEP will receive this tax credit for ten years based on annual production.
This summer LCWEP submitted an application for funding assistance to the U.S. Department of Agriculture’s Rural Energy for America Program (REAP). We learned in late September 2009 that our application for a $500,000 grant and a $1.3 million guaranteed loan had been approved. LCWEP was eligible to apply for funding through this program because it is a rural, small business as defined by the Small Business Administration. REAP provides funds for feasibility studies, energy audits, energy efficiency, and renewable energy projects. More information is available at http://www.rurdev.usda.gov/rbs/farmbill/index.html.
Luther also determined this summer that LCWEP can apply for a new, short-term financial incentive that was established by the stimulus bill Congress passed in February 2009. The primary federal incentive for wind energy projects has been the Renewable Energy Production Tax Credit (PTC). The American Recovery and Reinvestment Act allows taxpayers to utilize the federal Investment Tax Credit (ITC) or receive a grant from the Treasury Department in lieu of claiming the PTC for a renewable energy project. Both the ITC and Treasury grant are equal to 30 percent of the cost of eligible equipment. Assuming $3 million in eligible project costs, the 30 percent Treasury grant will provide another $900,000 for LCWEP.
There are some important and time-sensitive issues related to use of the new federal incentives. First, the ITC and Treasury grant only pertain to wind energy equipment placed in service in 2009 or 2010, or placed in service before January 1, 2013, provided construction of the project began in 2009 or 2010. Second, the grant is subject to a five-year recapture period, which means a portion of the grant must be returned to the Treasury Department if the project is sold in the first five years. Finally, in order for LCWEP to receive the Treasury Grant, Luther College has to make its investment in LCWEP via a separate C (blocker) corporation. No grants can be made directly to not-for-profit institutions. More information about these grants is available at http://www.ustreas.gov/recovery/1603.shtml.
The federal REAP and Treasury grants together with the Iowa tax credit significantly improve the economics for LCWEP. The other sources for financing are Luther College’s cash equity investment and a commercial bank loan from a local lender for the balance of the project costs. The sale of the electricity under a fixed-rate, six-year Power Purchase Agreement (PPA) will generate sufficient revenue to service the commercial debt and pay for the annual operating expenses. After six years the recapture period for the Treasury grant will have expired. At that time Luther College may decide to acquire the wind farm from LCWEP, pay off the commercial debt, and then consume the power on campus.
Jim Martin-Schramm is the author of Climate Justice: Ethics, Energy and Public Policy, which will be published by Fortress Press in January 2010. This article is drawn from material in the final chapter which explores Luther’s greenhouse gas reduction strategies in relation to its obligations under the American College and University Presidents Climate Commitment. For more information, contact Jim email@example.com.
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