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How do you Finance Large Wind Projects?
This section is designed to help you plan the financial aspects of your project. The information presented here, in conjunction with the economic analysis tools suggested at the end of Chapter 5 of Harvest the Wind, should help you with your plans.
Once a basic style of project has been identified, there are several questions that should be answered when beginning to do the financial analysis:
- What rate structure will apply to the project? Will net metering apply?
- Remember that in Illinois, only projects less than 40 kW in ComEd territory will be eligible for net metering.
- If you are a Qualifying Facility under PURPA (see Chapter 7 in Harvest the Wind), you will be eligible to receive avoided cost rates.
- The value of wind-generated electricity increases if it can be sold as "green electricity."
- How much, if any, of the energy produced will be used on site?
- What production or tax incentives apply to the project?
- Read the list of incentives in Chapter 5 in Harvest the Wind carefully to see which programs are applicable for your project.
- Remember that wise use of incentives could be necessary to make your project economically viable. Adjusting your plan to make maximum use of the incentives is probably worthwhile. This will almost certainly be true for projects in Illinois, given the amount of wind available.
- What is the cost of buying and installing the turbine or turbines?
- The previous section on costs should help you make good estimates. More specific information is available from turbine manufacturers.
- What is the interest rate and principle of the loan; the amount of non-borrowed capital in a project and the forgone interest rate on the capital; and the applicable tax rates for income earned from the project?
- The Interest Rate and Principle of the Loan - One of the biggest costs of a wind project can be arranging financing. Once the installed cost per turbine is determined, the amount of capital that must be borrowed can be estimated. It is important to be realistic about the amount of equity that a bank will require for the project. In addition, the interest rate on the loan is important and can make the difference between a project that makes a profit and one that simply breaks even.
- Equity Investment and the Foregone Interest Rate - The equity investment in a project is the amount of capital that is not borrowed. This may come from private savings or direct investment by members of a cooperative or LLC, for example. It is important to know what rate of return (interest rate) is foregone by investing the money in the turbine project. This is crucial in determining changes in tax payments.
- Taxes - Depending on how the project is set up, it will be subject to different tax rates. For example, members of a cooperative will pay personal income taxes on the profits they receive from the project. It is important to understand which tax rates will apply to your business structure. For more information, see Chapter 8 in Harvest the Wind on ownership structures, and then consult a CPA.
What Will the Bank Want to Know?
With the exception of the smallest wind turbines, most wind energy projects require some kind of outside financing. In many cases, this means going to the bank for a loan, just as though you were buying any other large piece of equipment. A few banks and financial institutions in the Midwest are starting to become comfortable with financing wind projects. They have gained enough experience to know that wind energy can be a sound investment, so they have a good idea about what kinds of projects have the best chances for success. If wind energy is new to your area, however, local banks might be wary or have a lot questions about wind energy. This section outlines some of the information you should have available before approaching a bank for a loan.
A lender will want an overview of your project, including detailed cost estimates (for equipment, interconnection, installation, operation, etc.) and a legal description of the proposed project site, possibly including aerial photos and Platt drawings. You also will need detailed budgets of project expenses and income (probably monthly for at least 24 months, and annually for three more years). Other requirements could include the following:
- Existing and pro-forma financial statements
- How and to what level will the project be capitalized
- Your plans for using state and federal incentives
- Legal ownership structure
- Background of majority owners
- Personal financial statements (based on capitalization)
- List of all required contracts, permits, and easements and your progress toward obtaining them
- Copy of proposed power contract
- Risk mitigation plans
- Construction management plans
- Ongoing management and extended warranties plans
- Insurance coverage, including property/ casualty liability and business interruption
Credit Guidelines
Many lenders might require a minimum equity of 30 percent of the project costs. The term note will likely be amortized over ten years with quarterly or yearly payments.
Evaluation
The lender will evaluate your loan application based on the thoroughness and accuracy of your business plan; the validity and strength of your cash flow and financial statements; your securing of adequate capital for the project; and a legal review of contracts, permits, and easements. Some of the concerns a lender might have about financing wind projects include the availability of equity capital; the stability of power purchase contracts; the stability and availability of state and national incentives; the stability of the market for wind energy; and the availability of proven expertise in wind project design.
Sources:
AgStar Financial Services (Mankato, Minnesota) and Fishback Financial Corporation/First National Bank of Pipestone (Minnesota)
Important Information About Large Turbine Projects
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