Rising Wind

They started working on Wolf Wind in 2002, finally bringing it on line last year. It wasn’t just construction that took time, but also getting equipment, getting permits—especially from the Midwest Independent System Operators, a nonprofit membership group of utilities and other industry players that decides whether and where power can be loaded onto transmission lines—and getting financing. “We hooked up with an equity partner and they wrote out all the big checks for us,” Wolf says.

The arrangement is a form of “flip financing” commonly used for wind energy projects. “Basically, for the first 10 years, our equity player owns the towers and is the 99 percent owner” of the project, taking 99 percent of profit and of the federal tax credit, Wolf explains. As 1 percent owners, Wolf and his relatives get 1 percent of those things, plus a management fee from the equity investor. “The biggest return in the first 10 years for the local participants is that management fee. And then, of course, if you have the wind turbines situated on your land, you get the wind-energy lease payment.” The cousin on whose farm the project sits gets that lease payment, but “still has complete control of the farm land itself, and is allowed to plant any crops that he wants to.”

Wolf declines to name specific fees associated with Wolf Wind Development and cautions that every wind project has its own unique economics. But in general, he says, “we like local participants to see a return of $15,000 to $20,000 per tower per year” in the first decade of a small project like Wolf Wind. For Pheasant Ridge, he’d expect a bigger return.

After 10 years, local participants have the right to buy the project back from the equity partner at a discounted rate, Wolf says. The rate is based on projected revenues, a calculation of how productive the turbines are and what price per kilowatt hour of electricity the project can command in a 20-year power purchase agreement with a utility.

The Production Tax Credit that draws equity investors expires after the first 10 years, and it wouldn’t be of much use to local participants in the project even if they could continue to tap it. The credit is based on the amount of renewable energy produced and must be used to offset passive investment income. Patrick Pelstring, a partner in Chaska-based Wind Energy Developers, says that as a result, equity backers of wind projects tend to be big institutional investors, among them Morgan Stanley, Edison Capital, and farm and construction equipment maker John Deere. “It’s not uncommon that the tax credit coming through might be two, three, four million dollars a year,” Pelstring says, so the investor needs to have that kind of tax obligation and that kind of passive income for the next 10 years. In addition to the tax credit, equity investors are generally looking for an annual return of 10 to 15 percent.

Wolf says the useful life of wind turbines is about 20 years. So when local participants take full ownership, they hope they’ll get another 10 years of good use from the equipment, “and that’s when the real returns come back to the community.” John Dunlop, a senior engineer and technical advisor for AWEA in Minneapolis, says returns to local owners can increase at that point to three or four times what they were in the initial decade of the project. If that was in the range of $15,000 to $20,000 per turbine per year on a small project, as Wolf suggests, it becomes a net of $45,000 to $80,000 per turbine annually later on.