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Challenges and opportunities for community renewable energy projects: focusing on community wind

August 17, 2011


By Diane Henkels and J. Charles Griggs

Cleantech Law Partners 

Published Oregon Insider, Issue 465, revised version below:

Anyone who has spent any time on the Pacific Northwest beaches and coastal waters would notice the almost constant breeze, often from the northwest in fair weather, the southwest
in foul.  On a wind map you would see this expressed as a darker color indicating a wind resource that drops sharply just a mile or so inland.  The constant wind in this venue of incomparable scenic beauty especially presents a strong mix of opportunity and caution for developing wind as a renewable energy resource.  Many of the coastal communities rely on hydropower from the Bonneville Power Administration to meet their power needs, but, after maximizing energy conservation, wind, solar, biomass and other renewable energy resources provide other alternatives and a way to wean ourselves from fossil fuels.  This article focuses on community wind, one configuration of renewable energy that more easily adapts to the context of a location and enables a community to control and benefit more from energy development in its venue.

WHAT IS COMMUNITY WIND?

Community wind is a unique kind of wind energy generation and comprised about 5.6% of the over 5,000 megawatts of wind projects installed last year according to a U.S. American Wind Energy Association report released in April 2011.  While definitions vary from states and entities, the basic idea is usually expressed in terms of ownership, size, and benefit to the communities where the project is located.  For example, to qualify as a “community-based renewable energy” project in Maine, the project must be “locally owned” — that is, owners must be connected to the state and local ownership must exceed 50%, and the project capacity cannot exceed 10 megawatts (MW).  Even absent local ownership, and even if not small-scale, community wind may be considered such simply if benefits accrue primarily to the community where the wind project is located.  For example, according to Windustry, even a 50 MW wind project in Texas qualifies as community-based renewable energy, perhaps because the project involved local contractors and suppliers.

One example of community wind in the Pacific Northwest is the PáTu project near Wasco, Oregon, located about 30 miles east of The Dalles and about 10 miles inland from the Columbia River Gorge.  PáTu, also known as Oregon Trail Wind Farm, LLC, is a $22-24 million, 6 turbine, 10 MW wind energy project owned and operated by brothers Jeff and Ormand Hilderbrand, fourth generation farmers in the area.  They anticipate the project to generate local jobs and retail equipment sales along with the 31 million kilowatt hours (kWh) of electricity annually.

Another example is the Coastal Community Action Program (“CCAP”) project in Grayland, Washington about 70 miles west of Olympia and one mile from the Pacific Ocean.  CCAP is a non-profit social services organization which undertook the project to fund its work helping families and local, low-income residents.  This project is a $19 million, 4 turbine, 6 MW wind energy project.  A third example of Pacific Northwest community wind is the Lime Wind project located about 40 miles southeast of Baker City, Oregon, along I-84 and about five miles west of the Oregon-Idaho border along the Snake River.  Developed by long-time area resident and small business owner Randy Joseph and his family, Lime Wind will be the first example of wind energy generated on public land administered by the Bureau of Land Management (“BLM”).  The project should be operational in November 2011.  Lime Wind is a $7 million, 6 turbine, 3 MW wind energy project.

Another configuration that has community wind qualities of local ownership is the White Creek Wind Project, one of the largest public-power initiated wind project in the United States.  Four Washington consumer owned utilities ― Cowlitz PUD, Klickitat PUD, Lakeview Light & Power, and Tanner Electric Co-op, developed the White Creek Wind Project in Klickitat County, WA.

Community wind is much more developed in other parts of the United States, such as the Midwestern states of Nebraska and Minnesota.  In these states, wind energy presented new opportunities for many farmers to make productive use of the wind on their farms, and the different sizes and styles of projects gave farmers a range of options to invest in and benefit from the resource.  A history of farmer cooperation in the Midwest and the region’s consistent winds may explain the early development of community wind in the Midwest.

Subsequently, Community-Based Energy Development or “C-BED” statutes were introduced, which attempt “to develop renewable energy resources in a way that optimizes local economic development”.  Generally, local owners are not equipped to take on the high, up-front capital costs and large debt payments that renewable energy projects require.  C-BED statutes address this by adjusting the payment schedule between the utility and the owners: the utility pays a higher rate early on — while expenses for the owners are higher, and the utility pays a lower rate later — while expenses for the owners are lower.  The net present value for the utility remains the same, yet the front-loading makes the project more attractive to lenders, helping communities secure financing that might otherwise be impossible.

The C-BED model was created in Nebraska and Minnesota, adopted by other states, and used by Congress in developing wind energy policies.  Nebraska is the only 100% public power state in the country and has the 7th lowest power rates in the country.  That C-BED statute provides that no owner may control more than 15% of a project and at least 33% of the revenue goes to the qualified owners and local community.  Qualified owners are Nebraska residents or entities made of Nebraska residents which includes Nebraska tribal councils.  And there is a sales tax abatement of 5 ½% for C-BED projects.  The Minnesota C-BED statute limits ownership to 15% per owner and requires approval from the county where the project lies — provisions to reinforce the “community” element of the project.

PROJECT SITING

Renewable energy projects require at the outset enough resource to enable sufficient generation of electricity.  A first priority for a wind energy project of any size, therefore, is to determine wind speeds at the height desired.  An anemometer is used to measure wind-speed to determine for the developer and also for financiers whether the wind resource is sufficient at a given site.  An advantage of community projects is that, being generally smaller, that is, covering less geographic area, they may be sited in places that are not suitable for larger projects.

In addition to the wind resources, many other considerations may make a community project either particularly suitable or unsuitable.  While all aspects of land-use may enter into decisions regarding siting renewable energy projects, concerns that are especially prominent focus points for impact from wind energy projects are wildlife, including such as avian species as sage-grouse and golden eagles, and bats, view shed, and public health concerns, such as noise.

Different states regulate land use with different tools.  Some states, like Washington, have a state environmental protection policy (“SEPA”) that requires an analysis like the federal NEPA analysis for an Environmental Impact Statement or an Environmental Assessment for energy projects.  See Washington’s SEPA, codified at Chapter 43.21C RCW.  Though the State of Washington Energy Facility Site Evaluation Council coordinates evaluation and licensing for larger wind energy projects, and ultimately the Governor approves them, the EFSEC process, while open to smaller projects, is prohibitively expensive for the community projects.  These projects, such as the CCAP wind project process through a county process which also incorporates SEPA.

The CCAP wind energy project is located on private land and straddles two counties, Pacific and Grays Harbor, and had to go through two permit processes.  The Pacific County was lead agency on the SEPA for the two counties, and the process resulted in a Conditional Use Permit and a Mitigated Determination of Non-Significance.  This project became a pilot project for Washington Fish and Wildlife to help obtain data on the impact of wind energy on birds on the coast.  According to the environmental analysis, the agency found this project to be a “compelling and highly beneficial opportunity” to conduct monitoring and analysis of impacts on avian and mammal species, such as the Marbled Murrelet, found in that habitat area.  A technical advisory committee reviews this monitoring.  According to an interview with Craig Dublanko, CCAP Executive Director, wildlife impacts were surprisingly low about nine months after the turbines had come on-line.  The project is not in close proximity to residences, and while clearly visible from the ocean shore and highway 101, the turbines were not found to greatly impact viewshed, and the local community fully supported the project.

Other states, like Oregon, do not have a SEPA, but also regulate energy projects via a state or local processes.  In Oregon, ORS 469.320 requires a site certificate issued by the state’s Energy Facility Siting Council (EFSC) for projects of 105 nameplate MW.  Projects below that threshold of jurisdiction generally proceed through a county process, usually seeking a conditional use permit.  Note that it is the “average electric generating capacity” and not the “peak generating capacity”, or “nameplate capacity”, that determines a “small project” qualifying for review in Oregon.  “Average electric generating capacity” means the peak generating capacity of the facility divided by three for wind or solar energy facilities.  Projects, like wind turbines, are often referred to by their nameplate capacity (e.g. a “90 MW” project is referring to nameplate capacity and means a 30 MW average electric generating capacity project).  This is significant in siting because a project that is 35 MW or more average electric generating capacity, that is, at least 105 MW nameplate, must go through the EFSC Siting Council process rather than having the option of going through a local process.  This aspect of siting is very significant, and can be very strategic for many projects since the local or county process may be very different from the state process.

A wind project of any size may be brought through the siting council rather than the county process, which is considered since it gives a statewide body the ultimate decision-making authority.  However, the expense of complying with EFSC’s procedures is generally enough to induce smaller projects to seek county approval in which case the project is regulated by county ordinances and comprehensive plan.  Even where the project is not wholly subject to county jurisdiction such as on federal public lands, the process will still take the county process into consideration.   Also, the state process still requires consideration of local concerns, and therefore local limitations are not avoided by following the state or federal process.  Oregon’s thirty-six counties each have different ordinances, of which some, like those of Harney, Umatilla, and Gilliam County, apply more specifically to wind energy or other energy development.

Federal and state law and guidelines impact wind energy siting.  Federal law, including the National Environmental Protection Act, the Migratory Bird Treaty Act, the Bald and Golden Eagle Protection Act, and the Endangered Species Act, all may apply to a community wind project.  Due to the growth in wind projects, the U.S. Fish and Wildlife Service has published voluntary Land-Based Wind Energy Guidelines based on recommendations developed by the Wind Turbine Guidelines Advisory Committee on avoiding or minimizing impacts to wildlife and their habitats related to land-based wind energy facilities.  These Guidelines and a draft Eagle Conservation Plan Guidance for protecting eagles and their habitats from wind energy facilities are available for public comment until May 19, 2011 (http:www.fws.gov/windenergy).

Developed prior to the federal guidelines, the Oregon Columbia Plateau Ecoregion WindEnergy Siting and Permitting Guidlines apply to areas within Wasco, Sherman, Gilliam, Morrow and Umatilla counties.  Until separate regional guidelines can be developed, Oregon Department of Fish and Wildlife recommends using these Guidelines for the entire State as a process roadmap during each step of a potential wind project’s development, construction, and operation. The Guidelines are the culmination of a unique collaboration between state and federal resource agencies, wind energy industry representatives, counties, environmental organizations and consultants. The Guidelines provide recommendations for siting, designing and permitting wind projects in a manner that supports both the conservation of important wildlife and habitat resources and the realization of the multiple environmental and economic benefits of wind energy.

Recently, the Oregon Public Health Division, in consultation with a steering committee, finalized a list of research questions looking in to what potential health impacts, if any, wind energy facilities may have on Oregon communities.  Scientists at Oregon’s Office of Environmental Public Health (OEPH) are now reviewing the best available research in order to answer those questions.  OEPH will release a draft of the report for public comment in the summer of 2011, with a final report due out in the Fall of 2011.  The PáTu Wind Project was sited with a conditional use permit in Sherman County.  The Sherman County Zoning Ordinance allows conditional use permit for wind powered electrical generating facilities.  Nested in the middle of acres, or even miles, of farmland with utility scale wind energy production, PáTu adds value to the family farm with minimal impact given its location on private farmed land.

MANDATES UNDER PURPA AND RENEWABLE PORTFOLIO STANDARDS

The financial success of a community wind project depends upon the rate a utility pays for the power generated.  The rate must be high enough to promise investors an adequate return but low enough to be just and reasonable for consumers.  Finding the right rate in the Pacific Northwest can be more amenable with some utility partners than others.  The federal Public Utilities Regulatory Policy Act (“PURPA”) directs states to require utilities to purchase power from “small power production” facilities.  16 U.S.C. § 824a-3(a).  A “qualifying facility” or “QF” is, with some exceptions, a small power production facility generating 80 MW or less, whose primary energy source is renewable (hydro, wind, solar or biomass, waste, or geothermal).  To be “qualifying,” a small wind facility must meet all requirements of 18 C.F.R. §§ 292.203(a), 292.203(c), and 292.204 for size and fuel use and be certified as a QF pursuant to 18 C.F.R. § 292.207.

The Federal Energy Regulatory Commission (“FERC”) directs states to set rates that utilities must pay QF’s to be based on “avoided costs”, 18 C.F.R. § 292.304(b)(2), that is, the cost a utility would incur if it obtained the power elsewhere.  18 C.F.R. § 292.101(b)(6).  This requirement applies to both investor-owned utilities (“IOUs”) and consumer-owned utilities (“COUs”); however, avoided costs for IOUs and COUs are not the same.  16 U.S.C. § 824a-3(f).  IOU rates are regulated by the Oregon Public Utilities Commission and must be approved after a process where others may intervene as parties to give input on the process and result.  COU rates are regulated by federal law.  The Bonneville Project Act grants COUs a preference over IOUs for federal power through the Bonneville Power Administration (“BPA”), 16 U.S.C. § 832c(a) and due to an expanse of federal hydropower projects in the Northwest, the BPA rates are much cheaper than market rates.  Because COUs have access to cheaper power than IOUs, their avoided costs are much less.  Therefore, community wind projects attempting to sell power to COUs are less likely to pencil out.

Furthermore, Oregon and Washington renewable portfolio standards do not promote partnerships between community wind developers and COUs.  A renewable portfolio standard (“RPS”) requires that a certain amount of power sold by a utility come from renewable energy generation.  The Washington and Oregon RPS apply to both IOUs and COUs but with important distinctions.  The Washington RPS, Initiative 937 (“I-937”), codified at RCW § 19.285, requires only large utilities, that is, those serving more than 25,000 consumers, to obtain electricity from new renewable resources, requiring 15% by 2020.  That exempts most COUs.  In Oregon, large utilities, that is, those serving 3% or more of the retail market, must provide 25% of their power through renewable energy sources by 2525.  ORS § 469A.052.  The utilities subject to this “25 by 25” mandate include Portland General Electric, PacifiCorp, and the Eugene Water and Electric Board.  Small utilities, that is, those having less than 3% retail market share, which includes Oregon COUs, are not required to comply with an RPS until 2025, and not at the same level, and even then exemptions may apply.  ORS § 469A.055, §469A.060.

In Washington, the CCAP project is an example of a COU deal where the RPS did apply to the utility.  When I-937 passed, Grays Harbor PUD approached the CCAP regarding their wind energy project and entered into a 20-year power purchasing agreement with CCAP at a rate of 7.5 cents per kWh, a rate that is advantageous to the project, but fair.  For the White Creek Wind Project, though only Cowlitz had to meet the RPS requirement, meeting post 2011-energy needs with non-BPA sources justified the project which had become an economically reasonable alternative.

In Oregon, the PáTu and Lime Wind projects are examples of IOU deals.  Portland General Electric entered into a 20-year power purchasing agreement with PáTu at the standard contract rate.  Similarly, Lime Wind has a power purchase agreement with Idaho Power for a rate that supports a forecast of a reasonable rate of return for that project, in combination with the financing package.

INTERCONNECTION AND TRANSMISSION

Electricity generated by renewable energy must be integrated into the electric grid in a way that will maintain and ensure the reliability and security of the grid.  Interconnection is the result of adding a distributed resource, such as a generator, wind farm, or other resource, to an electric power system.  In Oregon, three sets of rules regulate interconnection.  Oregon Net Metering Rules will apply if you’re planning to net meter your project which is less than 25kW for residential sites and less than 2MW for commercial sites.  Projects less than 10MW that are planning to connect to IOUs in Oregon and sell the generation to that utility will follow the Oregon Public Utilities Commission established rules referred to as AR 521.  And FERC Small Generator Interconnection Procedures (FERC SGIP) will govern projects less than 20MW planning to connect to investor owned utilities in Oregon but planning to sell power elsewhere directly connect to the Bonneville Power Administration (BPA) will follow FERC SGIP.  All projects greater than 10MW will follow the FERC LGIP procedures.  Interconnection entails a contractual agreement with the utility that is separate from the power purchase agreement.

Transmission is the process of moving bulk amounts of electricity over high-voltage lines (115-765 kV).  Community scale power might utilize high-voltage transmission lines to transmit bulk power to substations, where the electricity is converted to a lower voltage.  That low-voltage electricity is then distributed to homes and businesses on separate, lower-voltage distribution lines (generally ≤ 35 kV), or smaller generators can connect directly to low-voltage distribution lines; electricity is distributed locally, without having to be transferred to higher voltage transmission lines.  This is referred to as distributed generation.  Transmission service and interconnection are separate processes and may require separate agreements, typically handled by different departments within a utility company.  And in some cases, the service provided may involve using a utility to “wheel” the power, or use transmission lines to carry the power through one utility’s service territory, to the utility that is purchasing the power.  Transmission also may require an agreement and a fee that are independent of interconnection and power purchase.

This information is included in a very helpful guide for interconnecting energy generation projects to the grid, including a checklist for the application process and timeline for project development, available on-line through the Energy Trust of Oregon.  See

http://energytrust.org/library/reports/100908_Interconnection_Guidebook.pdf

Integrating the generated power into the grid may present challenges for the transmission provider.  For example, in the Pacific Northwest, Bonneville Power Administration expects to be providing transmission for 6,000 megawatts of wind power by 2013 and is determining a process of “balancing” this power.

In Washington, the CCAP interconnection was a local distribution line connection.  No transmission was required.  To minimize interconnection costs, CCAP set up near existing power lines and substations.  In Oregon, PáTu has a nearby substation and interconnects into the Bonneville Power Administration transmission.

FINANCIAL INCENTIVES AND PACKAGES

Grants, tax credits, low-interest loans, and other financial incentives are components critical to financing the majority of renewable energy projects, and this is also true for community-based renewable energy projects.  The final package for each community is unique; there are a number of methods in structuring the deals, and a host of incentives to choose from.  The PáTu, CCAP, and Lime Wind projects are just a few examples.

The PáTu financing structure was a standard partnership flip.  The partnership flip requires forming a tax partnership between developer and investor.  The investor makes a major, initial investment in the project, and the investor receives proceeds from the project until reaching a pre-arranged return (often after all tax benefits are used up).  Then the partnership “flips”, and the proceeds start flowing to the developer.

PáTu utilized the Section 1603 cash grant program through the U.S. Department of the Treasury.  This grant, for small wind turbines, equals up to 30% of the cost of the project.  The grant is taken in lieu of the federal Investment Tax Credit (“ITC”).  PáTu also utilized the Oregon Business Energy Tax Credit or “BETC” as it is commonly known.  BETC provides a 50% state tax credit to those investing in “energy conservation, recycling, renewable energy resources, and less-polluting transportation fuels”.  The credit can be taken over 5 years at 10% per year or the credit can be transferred to a pass-through partner for a lump-sum cash payment.  PáTu also utilized the Oregon State Energy Loan Program (“SELP”).  SELP provides long-term, low-interest loans for projects that save energy, produce energy from renewable resources, use recycled materials to create products, or use alternative fuels.  SELP helps borrowers access interest rates based on the state’s credit after the state issues bonds to fund the loans.  Through SELP, PaTu secured a $12 million, 20-year, 6.25%-6.5% loan.  Finally, PaTu received, although did not end up utilizing, an offer from the Energy Trust of Oregon, a non-profit tasked with administering the Oregon public purpose charge.  The Energy Trust offered PaTu $1.2 million in exchange for 58% of the renewable energy credits (“RECs”) from the project.

The CCAP financing structure was an inverted, or pass-through, lease structure.  The developer is the lessor and the investor is the lessee.  The lessee, or investor, sells the power generated by the project and then pays the proceeds to the lessor, or developer, as rent.

The CCAP project utilized two federal Residential Energy Assistance Challenge (“REACh”) grants through the U.S. Department of Health and Human Services.   REACh grants are awarded to projects that relieve the energy burdens of low-income individuals.  These grants enabled CCAP to conduct feasibility studies.  CCAP also utilized a direct state grant of $5 million. According to CCAP’s Craig Dublanko, this substantial financial assistance may not have been necessary had the wind resource been better.  Finally, CCAP was the first community wind energy project in the U.S. to utilize the federal New Markets Tax Credit (“NMTC”) through the U.S. Department of the Treasury.  NMTC provides a tax credit for making equity investments in a designated Community Development Entity (“CDE”), and the CDE then makes investments in low-income communities.  The tax credit totals 39% of the cost of the investment made and is claimed over seven years.  CCAP involved two investors investing in two different CDEs.

The Lime Wind financing structure is an example of “blue-collar financing”.  The project is debt financed up front — there are no outside investors, and none of the financial incentives are available until post-construction, after the project is up and running.

The debt financing came primarily through a $4.5 million loan for construction costs.   Lime Wind secured additional loans through a number of other financial institutions.  Lime Wind utilized a federal grant through the Rural Energy for America Program of the US Department of Agriculture for $500,000.  This program encourages the commercial financing of rural renewable energy and energy efficiency projects.  Like PáTu, Lime Wind also utilized the Section 1603 cash grant program through the U.S. Department of the Treasury and the Oregon BETC.  Finally, Lime Wind signed an agreement to sell the renewable energy credits produced by the project to the Bonneville Environmental Foundation (“BEF”).  

CONCLUSION

In addition to producing cleaner energy, an important added benefit of community renewable energy projects is the economic return to the community which occurs through a multiplier effect where goods and services related to a project originates in the community itself.  Various tools are used to measure the economic return, one of which, the Jobs and Economic Development Indicator (“JEDI”) is available through the National Renewable Energy Laboratory (“NREL”). (http://www.nrel.gov/analysis/jedi/about_jedi.html).  While slower to develop in the Pacific Northwest, community renewable energy, including community wind, is picking up steam in Oregon.  Agencies in the Pacific Northwest are learning to distinguish utility scale projects from community projects and are recognizing that these projects provide an opportunity to learn more about the impact of renewable energy.  Between the time it takes to determine and confirm a wind resource to the time a project actually comes on-line has taken several years in the cases of PáTu, CCAP and Lime Wind, which are not unique in this way.  Further, many of these projects involve a personal commitment of time and capital resources that strain the community project developers, not to mention substantial sweat equity.  The strain may be substantially lessened with long-term steady policies tailored for community projects in individual states and at the federal level.  Supportive policies strengthen the opportunity to learn more about renewable energy, increase the local economic benefits of the renewable energy industry sector, and decrease reliance on, and carbon emissions from, fossil fueled electric power production.

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