Wind energy: green and growing in Minnesota

If you’ve heard of a wind boom here before only to see it die down, consider that several new factors are changing the landscape. For example, new blade technology requires less wind velocity to generate the same energy as earlier models, so even once less-than-ideal sites can be productive enough to operate a wind farm.

Another factor is Minnesota’s commitment to alternative energy, laid out in a bill passed by the Legislature in February. The bill requires that 25 percent of the state’s electric power demand be met by renewable sources by the year 2025, one of the most progressive state renewable energy portfolio standards in the nation. Intense focus on global warming and unfolding climate change could hurry things along even faster. Add an ever-increasing appetite for energy, and the outlook for wind and other alternatives grows even brighter.

The Minnesota ‘flip’

The piece that puts it all together for both landowners and potential investors today is an organizational structure that takes advantage of federal production tax credits. The “Minnesota flip” business model allows local owners (including landowners) to own a significant portion of a wind project while partnering with an equity investor that can use the tax credits and other economic benefits generated from the operation of a wind project.

Under this model, local owners team with an investor to create a limited liability company (LLC) to own and operate the wind project.

Forming an LLC shields participants’ personal property from liability claims; it also enables election of a tax structure favorable to utilizing the production tax credits, and allows the financial and governance rights for the project to be split among the landowners, developer and the equity investor. Typically, the LLC draws up an LLC operating agreement allocating the majority of the financial and governance rights to the investor for at least the first 10 years of the project, so that the investor can utilize all of the tax credits produced. Then, at a date determined by all participants, ownership “flips” to the local owners, who then receive a controlling interest in the project for the remainder of the project’s life.

A win-win business model

While details are negotiated based on the complex interplay of a variety of factors, the business model is a win-win for all participants. Local owner groups who may not have the capital to expend developing a wind project can attract investors, and investors gain access to tax credits and guaranteed marketability until the project provides enough revenue to produce the investor’s target internal rate of return.

Local owners also are positioned to profit early in the life of the project, before the “flip.” Projects can be structured so that local owners receive fees for the lease of their lands, and if they choose to develop the project, fees for developing the project, which includes several stages of feasibility studies and the negotiation of a power purchase agreement, with utility companies. Once the project is built, local owners also can serve as the management company responsible for operations and maintenance, generating more fees based on a percentage of gross profits.

But the wind industry is more than just energy production. The larger boon to regional economic growth will be the infrastructure built around wind and the high quality jobs that will follow: manufacturers setting up shop to make turbines, blades and myriad small parts for operational equipment; service companies maintaining equipment and installations; and technical schools training people to work in the industry.

Wind energy is a renewable resource whose time has come — a resource whose capture and distribution promise minimal downside for our environment and a green and growing upside for forward-thinking Minnesota landowners and investors.

Dan Yarano is an attorney at the law firm of Fredrikson & Byron in Minneapolis, where he chairs the firm’s Renewable Energy Practice Group. Yarano has assisted both rural farmers and large national energy companies in the development and financing of large and small community wind energy projects. You can contact him at dyarano@fredlaw.com.