Policies, Past, Existing, and Discussions

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.

Does "Buy America" Apply to Tax Incentives for Wind Farms?

When President Obama signed the American Recovery and Reinvestment Act in 2009, the legislation contained a Buy America provision. This section 1605 of the ARRA requires that all of the iron and steel and “manufactured goods” used in ARRA-funded projects for construction, alteration, maintenance or repair of “a public building or public work” be “produced in the United States.”

As the ARRA programs have been implemented, many renewable energy developers have wondered how the Buy America provision will affect their projects, since a majority of renewable energy manufacturing happens overseas. The U.S. Treasury has clarified that for those interested in the section 1603 cash grant in lieu of tax credits, the Buy America provisions do not apply. (See item 32 in this U.S. Department of Treasury's FAQ document.)

However, there are other incentives to which this requirement does apply—so it is important to consult with a qualified financial and tax advisor for any ARRA funded project. In order to help recipients of funding through the U.S. Dept. of Energy has provided guidance documents and assistance on this topic. Those resources can be found at The Buy American Provision web page of the Office of Energy Efficiency and Renewable Energy (EERE).

Additionally, guidance and instructions for applying for the section 1603 cash grant are available at the U.S. Department of Treasury. For additional legal analysis of the Buy America provision of ARRA and its impact on renewable energy development, visit the following web resources:

K & L Gates LLP
Hunton & Williams LLP

An Overview of Existing Wind Energy Ordinances

The National Renewable Energy Laboratory has issued a report that provides an overview of existing wind energy ordinances across the country. The increase in wind energy development also creates a new responsibility on the part of local governments to ensure that ordinances will be established to aid development of safe facilities that are embraced by the community.

The purpose of the report is to educate and engage state and local governments, as well as policy makers about existing large wind energy ordinances.

Click here to download the PDF version of the file (1.2MB)

USDA Farm Bill

2008 USDA Farm Bill

On May 22, 2008, Congress overrode the President's veto of the Food, Conservation, and Energy Act of 2008 (the "Farm Bill"). The Farm Bill is an investment in our nation's food and farm economy. It will ensure food security and promote healthier foods and local food networks, strengthen international food aid and reform commodity and farm programs, protect our natural resources and promote homegrown renewable energy.

The Farm Bill has historically addressed not only farm regulations, but also food security and protection of environmental resources. As our country seeks to reduce its dependence on foreign oil, our ranchers and farmers will continue to be vital players in the development and growth of renewable energy resources. Biofuels, wind energy, solar power and ethanol production are all addressed in the new Farm Bill 2008.

There are a total of 14 titles in the Farm Bill ranging from commodity programs to research to energy to insurance to nutrition. Renewable energy, specifically wind generated energy, is mainly addressed by 4 titles: Conservation, Rural Development, Research, and Energy.

Similar to the previous Value-Added Produce Grants and 9006 Programs, the 2008 Farm Bill will offer both grants and guaranteed loans for eligible projects under the Renewable Energy for America Program, or REAP. The USDA Rural Development website has information on applying and guidance documents for applications.

As a result of the delay in passing the 2008 Farm Bill, Congress has extended many of the programs from the 2002 Farm Bill including the Section 9006 Renewable Energy and Energy Efficiency Improvement Program. On March 6, 2008 the USDA annouced the availability of funding for these programs under Section 9006. The deadline for applications is June 16, 2008. The 9006 Forms for applications can be found here.


For the most up-to-date application information, contact your state Rural Energy Coordinator. Check back here for updates as they are announced and stay tuned to the USDA site for more information. Also, please see the attached "Farm Bill FAQ" pdf file.

Useful Resources for 2002 Farm Bill

Value-Added Producer Grant Program

Section 9006 Energy Title Grant Program:

"An American Success Story" (ELPC)

USDA Websites:

Farm Bill Section 9006

Value-Added Producer Grants

Previous Section 9006 Award Winners

2008 Award Winners and USDA 2008 Press Release

2007 Award Winners and USDA 2007 Press Release

2006 Award Winners and USDA 2006 Press Release

2005 Award Winners and USDA 2005 Press Release

2004 Award Winners and USDA 2004 Press Release

2003 Award Winners and USDA 2003 Press Release

 

More Information and Links

For more information about energy provisions in the Farm Bill:

--Environmental and Energy Study Institute- Energy and Agriculture Program
--Database of Renewable Energy Incentives- Renewable Energy Systems and Energy Efficiency Improvements Program summary
--North Dakota SEED- Farm Bill Energy Title resources
--Iowa Rural Development - Farm Bill

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.

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

Minnesota's Community-Based Energy Development (C-BED)

In 2005, the Minnesota legislature passed an omnibus energy bill which included important new mechanisms to support community wind. This system, known as C-BED, is intended to make it easier for community wind projects to be successful without putting an excessive burden on utilities. It accomplishes this by requiring utilities to create a new tariff utilizing a net present value rate for electricity, and the option of front-loading the rate in the first half of the contract's lifespan. This page is intended to provide information to make this new system easier to understand.

This section includes the following information:

Understanding C-BED: A short explanation of the original C-BED legislation and how it benefits community wind. Additional information on C-BED and the other contents of Minnesota's 2005 Omnibus Energy Bill is available in this fact sheet.

The Next Generation Energy Act of 2007: A short description of the changes to the C-BED legislation passed in 2007. Additional information on The Next Generation Energy Act and other energy legislation passed in conjunction are available in this fact sheet.

A simple example spreadsheet comparing front-loaded and fixed rates, in Microsoft Excel format

For More Information:
C-BED.org is a website for an organization (also called Community-Based Energy Development or C-BED) that includes detailed information about the program, including a C-BED calculator.

MN Public Policy History
Even before C-BED was created, Minnesota has had a long-standing commitment to supporting renewable energy and especially community wind development through public policy and regulatory action. A variety of programs, including Minnesota’s Renewable Energy Objective and Xcel Energy’s wind energy mandates, have created a steady market wind in Minnesota. Community wind has grown to fill an important role in this market through the support of the MN Renewable Energy Production Incentive for projects under 2 MW, Xcel Energy’s small wind tariff and standardized power purchase agreement for projects under 2 MW, and the Renewable Development Fund. Some Minnesota community wind projects have also taken advantage of federal programs such as USDA grants, the federal Renewable Energy Production Incentive, and the Production Tax Credit.

Minnesota farmers and entrepreneurs have used public policy support combined with their own resources and ingenuity to create a variety of profitable business models for locally owned wind projects. Schools, colleges, and local utilities have followed, seeing the opportunity to bring new investment and clean energy to their communities, while creating a source of community pride.

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