The wind may be free, but the technology that turns wind into electric power is anything but—and that’s where Ken Valley sees his opportunity. Valley is president of Minneapolis-based Midwest Wind Finance, a company that provides project financing and investor matching for community-based wind farms across the country.
Midwest Wind Finance began as an idea in 2001, when Valley, who owned a Minneapolis company that offered farm equipment financing, heard more and more from his customers about the promise of generating wind-powered electricity on their land. Valley was particularly intrigued by the financial potential of community-based wind-energy developments—projects that typically generate fewer than 25 mega-watts and return a certain share of their revenues to local land-owners and service providers. In some states, including Minnesota, utilities are required to buy a certain amount of energy from community-based wind farms. Farms also receive a federal production tax credit.
But that tax credit isn’t valuable to everyone. As Valley notes, “You have to be a project owner with a large amount of passive income”—that is, tax-liable income from investments or business activities in which you are not actively involved—to make use of the credit. Farmers, ranchers, and other landowners interested in starting wind projects often lack both the capital to fund their developments and the passive income needed to take advantage of the tax credit.
Valley’s company, which he incorporated in 2005, matches potential wind farm owners with investors. Midwest Wind Finance clients—farmers, ranchers, and developers—pay for a climate analysis that reveals whether there’s enough wind in the proposed location to power a profitable farm. “We can tell you pretty quickly whether it’s doable or not,” Valley says.
If the location looks sufficiently promising, Midwest Wind Finance oversees necessary legal work, which includes creating agreements for land leases, wind leases, electricity sales, and permission to connect to the electricity grid. “The fear is that someone could put up a wind turbine next to your wind turbine, and if they were on the upwind side, they would get all the performance from the wind and you would get virtually nothing,” Valley notes.
With the feasibility studies and legal work complete, Midwest Wind Finance will sometimes lend the money (through its affiliated Wind Renewable Fund) needed to purchase turbines and other wind farm equipment. It also hunts for investors willing to buy out Midwest Wind Finance’s bridge financing within six to nine months. Investors take ownership of the project for a set period of time, usually 10 years. Investors are typically large insurance companies, corporations, financial funds, and other entities with large amounts of passive income. During their 10 years of ownership, investors own the farm, its income, and the tax credit, and make a small lease payment to the landowners.
The total financial package typically pays back their investment and offers an approximate internal rate of return, after taxes, of about 8 percent. About 50 percent of the total return is revenue, Valley says; 35 percent of the return is in the form of tax credits, and 15 percent comes from equipment depreciation and cash flow. After 10 years, or when the return on investment is complete, project ownership typically reverts to the landowners.
Valley sees investor and landowner interest in community-based wind energy increasing. States are being mandated to buy increasing amounts of renewable power, including wind, and the federal tax credit for wind farm owners will likely be extended through 2013 during the 2007–2008 Congressional session. And turbines, once in short supply, are becoming more available.
“We have signed deals worth in excess of $500 million, with many more to be added,” Valley says. California energy company Chevron has come on board as a general manager for the construction of many of Midwest Wind Finance’s projects.
