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January 3, 1997
Paul Gipe

Financing Distributed Wind Development 1997


 


The following article appeared in an edited form in Independent Energy.


With restructuring fever sweeping the North American utility industry, the bankruptcy of Kenetech, and the reorganization of New World Power, developers are searching for another way to build wind projects. The route may be through small or distributed wind projects rather than California-style wind farms.

Unlike North America, where wind turbines are typically concentrated in large wind power plants of hundreds if not thousands of machines, European projects are far smaller. In Denmark and Germany, more than two-thirds of all wind turbines are installed as single units or small clusters most owned by individuals or cooperatives. In the Netherlands and Great Britain where more projects are operated by utilities or wind power developers, projects are often contain no more than one to two dozen turbines.

It is almost a truism among major North American wind developers and their financiers that transaction costs are nearly independent of project size. Transactions costs for a $25 million 25 MW wind plant are about same, they say, as those for a $125 million 100 MW wind project. Development of big projects can thus gain considerable economies-of-scale by spreading their transaction costs, often 5%-10% of a $25 million project, over far more kilowatt-hours. Not necessarily, say a growing number of independent developers.

While Zond Systems is busy trying to tie all the loose ends to its big 100 MW project for Northern States Power (NSP), others, such as Dale Osborn, are looking at small niche markets for 5-10 MW projects. Osborn, formerly a development manager with Kenetech, is a principal in Disgen, a firm he says can keep transactions costs low by keeping projects small. The target, says Osborn, is to keep transactions costs to as little as 10-15% of that for major projects. His firm, a rubric for distributed generation, capitalizes on his ties with utilities who have told him they want small renewable projects, that is, projects with as little risk as possible.

Dan Juhl agrees. Juhl, a principal in Danmar & Assoc., has a contract with NSP for a 10.5 MW project he expects to begin building later this year using Zond's new Z46 turbine. Leasing the land and permits is much easier for a small project than a big one, he says. It is also a lot less costly to interconnect small clusters of turbines than a 100 MW project. Juhl expects to connect the $11 million project to NSP's 69 kV line near Woodstock, Minnesota.

Northern Alternative Energy is another of the new breed taking root in the Midwest. Northern's Greg Jaunich has been in protracted negotiations with NSP for a contract to build a similar size project.

"There is clearly a market for small projects," says Osborn, "Traverse City is a good example." Traverse City Light & Power, a municipal utility serving the tourist haven in Northwestern Michigan instituted a "green rate" in 1995 and installed one 600 kW turbine in 1996 for the program's 165 subscribers. The single-turbine project cost less per installed kilowatt than the 5 MW Green Mountain Power project in Vermont or the 5 MW project installed by Central & Southwest in Texas.

Ontario Hydro has taken the European model of cluster development to heart too. After installing a single demonstration turbine at its Bruce Nuclear plant, the provincial utility is weighing several cluster projects as well as several individual turbines at prominent locations, one possibly on Toronto's lake front.

Though North American developers have found it difficult to raise financing for small projects without the equity participation of utility subsidiaries and the wind turbine manufacturers themselves, the situation is quite different in Europe. A recent European Union study on the financing of renewable projects found that European banks in general are willing to place as little as $5 million in debt for specific commercial projects.

In Denmark, Germany, and the Netherlands, banks specializing in rural development will often provide financing for as little as one wind turbine.

 

Germany's Ausgleichsbank

Wind energy's meteoric growth in Germany is partly due to the ease and availability of financing. From 75% to 80% of all wind turbines installed in Germany have used the Deutsches Ausgleichsbank (DtA). By the end of 1996 DtA will have loaned nearly 2 billion DM ($1.2 billion) to local banks for wind turbine installations since 1991.

Formed originally to help resettle German's forcibly repatriated at the end of WWII, the quasi-governmental bank's mission is to foster economic development. The DtA loans money to local banks at less than the market rate. These banks then loan money to enterprises meeting the Ausgleichsbank's objectives, including projects, such as wind energy, that provide environmental benefits. Under the European Recovery Program (ERP), wind projects can receive financing for up to 50% of total installed costs at 1.5-2% below the market rate (now about 6% in the states of former West Germany) for terms of ten years.

 

Denmark

Like Germany, more than two-thirds of the turbines in Denmark are single turbines or in small clusters. Normally a Danish investor puts up 20% equity in the project and finances the rest. But Danish banks will provide up to 100% financing by using title to the investor's home equity as collateral. One local bank, Ringkøbing Landbobank (farmers bank) has provided so many loans to investors in nearby cooperatively-owned wind projects that Locals have dubbed it the "wind farmer's" bank. Revenue from the wind projects goes directly to the bank until the loans are paid.

 

The Netherlands

In a typical project, Dutch farmer Noud de Schutter and his neighbor provided 20% of the equity for a 3.6 MW project comprising six turbines. Rabobank provided the debt at 4.9% with a term of 10 years by using the turbines as collateral (project financing). This was the first project financed by a new program, "Groene Fondsen," in the Netherlands.

The Dutch government, as part of its recently enacted Green law to encourage investments in environmentally desirable technology, allows investors in so-called Green Funds to earn interest tax free. This is an extremely attractive incentive in a nation where dividends are taxed at 50%. Within 10 days Rabobank, the first to set up a Green Fund, raised 450 million NLG ($270 million). The funds pay investors 3%-4.25% interest tax free for a 2-7 year period. The bank then loans the money to certified green projects for 1%-1.5% below the market rate for home mortgages.

Currently, there is a shortage of green projects in the Netherlands to use the money that has poured in. ABN-AMRO, for example, was quick to loan 70 million NLG ($42 million) at 4.5% to the Kenetech's 84 million NLG Eemsmond wind plant, Europe's largest and most troubled wind project.

"Wind still suffers from a perception problem in the investment community," says Brian Morrison, a principal in Morrison & Kibbey. "The industry has, unfortunately, been tarred by the failures of the two public companies" here in the U.S. Wind energy in North America remains further out on the risk spectrum than more conventional technologies regardless of its progress in Europe. But while small wind projects many not necessarily be beautiful, they may very well be more doable in the current market than mega-projects if Osborn, Juhl, and Jaunich are right.


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