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Choosing a Business Structure

 

Let's assume you've established that you have a good wind resource on your property, and you have decided to undertake a wind energy project. But how will you do it? As with any business venture, there is more than one way to structure your involvement. Do you want to own a wind turbine by yourself, or join forces with a partner? Or do you want to sell or lease your land to someone else? The structure you choose for your wind energy business will depend on three main factors:

 

Time and Effort.

You need to determine how much of your own time and effort you are willing to put into this venture. Some business structures will require more participation from you than others. For example, if you decide to own your own turbine, you will be responsible for repairs and maintenance. So you must either contract for maintenance or find yourself climbing your turbine tower now and again with a toolbox in your hand.

 

Risk and Return

In most business ventures, this rule hold true: The greater the risk, the greater the return. How much risk are you willing to undertake, and how great a return are you looking for? You should consider the amount of risk you can take with your wind project in light of your other financial commitments.

Legal Feasibility. Depending on the laws of your state or county at the time, some forms of ownership may be difficult to pursue. Others will be more advantageous. Sound legal advice is imperative before you choose a business structure.

 

There are three basic ways to harvest wind energy:

 

    1) You can contract with a wind developer or other owner

    2) You can form a joint venture with others

    3) You can own the turbine or turbines yourself

 

Contracting With Developers

 

Contracting with a wind developer involves the least time, least effort, least risk, and, of course, the least reward. Usually developers approach property owners with specific projects in mind. Once you sign a contract to allow wind turbines on your land, you are not obligated to do any more work. This business structure is currently the most common form of large-scale wind ownership, mainly because turbines are so capital intensive.

 

A wind developer is an individual or company that constructs, owns, operates, and manages wind energy systems. Developers essentially act as "middlemen" between landowners who have good wind resources and power suppliers or power marketers who buy electricity. Sometimes electric companies own the wind generation and contract directly with landowners to host the turbines.

 

Under this model, landowners can enjoy a fairly hands-off or involvement-free method of harvesting wind energy, as the developer assumes all financial obligations and liabilities. Many developers will sign contracts with landowners for guaranteed payments.

 

Developers think in terms of "projects." A project might consist of one turbine or hundreds of them, based on the amount of electricity the developer expects to sell. Contracts between developers and electric companies are called Power Purchase Agreements (PPAs). The price of wind-generated electricity has declined rapidly, which has helped build the market for wind energy. Currently, developer typically receive about 3 to 5 cents per kWh for PPAs.

 

Most of the wind energy produced by developers in the U.S. has been a direct result of state mandates requiring utilities to invest in wind energy. A few projects have been implemented because of "green marketing" programs, in which utilities produce clean energy and sell it at premium prices. The outlook for wind energy throughout the U.S. is good, so developers are continuing to look for landowners who are willing to sell rights to their wind energy.

 

There are three primary types of arrangements landowners and developers make regarding wind energy:

 

    * Leasing Land

A developer may lease or rent your land for the life of the turbines, which is usually about 30 years. You might be compensated with a lump sum or annually through a royalty payment for the amount of electricity produced. Basing the lease on a share of revenues can help capture future increases in the value of wind power. Landowner payments are typically about $2500 to $5000 per wind turbine per year- depending on location, wind resource, value of the the electricity and other factors. In this arrangement, you retain ownership of your land.

      

    * Wind Easements

A wind easement is a deed or will executed by the owner of a particular plot of land or air space to ensure a wind energy developer adequate exposure to the wind. Easements run in perpetuity unless the deed provides for termination. Developers usually compensate for easements with a payment up front.

      

      Wind easements must be in writing and must be filed, recorded, and indexed by your county recorder's office. They must include 1) a description of the real properties benefited and burdened by the easement, 2) the vertical and horizontal angles and distances from the turbines in which an obstruction to the wind is affected, 3) all terms and conditions for granting or terminating the easement, 4) the responsibilities of the benefited party and the burdened party, and 5) any other provisions.

      

      Wind easements can affect your tax picture. Any properties benefited by a wind easement cannot be appreciated by the value of the easement, but any properties burdened by a wind easement must be depreciated by any value lost to the easement. These are factors to consider in arranging a wind easement.

      

    * Purchasing Land

Developers will sometimes purchase your land outright and build their turbines. You reap a one-time profit, but once you've sold the land, you have no access to that wind resource.

 

Investing With Others

 

Developers make their money by selling wind-generated electricity to power suppliers or power marketers. In order to make a profit, they must produce that electricity as low cost as possible. If you can sell your wind energy yourself, perhaps with other partners but without a developer as a middleman, you might earn greater revenue than a fixed lease payment. But you'll also assume greater risk and responsibility.

 

If you decide to build a partnership or pursue a joint venture to retain equity in wind turbines on your land, you can choose from several options:

Pass-Through Entities. A pass-through entity business structure allows tax credits and operating gains and losses to be allocated to the members of the entities rather than remaining with the entity itself.

 

Cooperative.  In this form of business organization, the business is owned and controlled by those who use its services. Returns are based on patronage, not investment. Your cooperative can be either tax-exempt or non-tax-exempt. Cooperatives have a long tradition in the rural U.S.

Limited Liability Company. The characteristic factor of a limited liability company is that owners are not liable for things that go wrong that are not the owners' responsibility. This offers owners some legal protection in case of accidents and disasters. In this type of structure, gains and losses are allocated to the owners, who pay taxes on them.

Partnership. In most partnerships, liability for the project's debts and liability for personal debt are joint-and-several. This means that if only one partner has money, he or she is going to pay if anything goes wrong. Partnerships are a little more risky.

 

Individual Ownership

 

If you choose to own a turbine yourself, you assume all responsibility for the work and all the risks. You also receive all the profits. You may decide to purchase a small turbine to offset your own use, or secure financing for a larger turbine that produces enough electricity for you to sell any power you don't use.

 

Wind turbines vary greatly in size, and the installed price is in direct proportion to size. A large-scale turbine is a big investment, but smaller turbines cost more per kWh produced. A quick rule of thumb for the installed cost of medium to large wind turbines is $1,000 per kW installed, which assumes some economies of scale for multiple turbines installed concurrently. Total installation costs for an individual large turbine may be 50% higher. The price for small farm-sized turbines may be double or triple the cost of large-scale development, so the value of the electricity generated is an important consideration.

 

Your Wind Resource

If you are interested in harvesting your wind energy resource, you should know the value of your wind resource before you enter negotiations with developers, other investors or financers. Developers look at the same factors you would consider when they evaluate a site:

 

    * The site must have a strong wind resource (minimum annual average of 11-13 mph).

    * The site must be close to high-voltage three-phase power lines so the turbines can be connected to the electric grid.

    * The site should be in a rural location that won't raise objections from neighbors.

    * The site should be elevated above surrounding terrain and be free of obstacles that could diminish its wind resource.

 

Developers often look for a site where they can contract for adjacent land in order to protect their wind access from future buildings or trees that might obstruct the wind resource. It's a good idea for you to know as much as you can about your land and the value of your wind resource before you begin negotiating with developers, other investors or landowners, or pursue your own financing. The more you know, the more value your land has.

 

In Summary

As you can see, there are many ownership structures to choose from. Which structure you choose will depend on your current financial situation, your goals, and possibly the enthusiasm or availability of others. Talking with other turbine owners about their business structures can be enormously helpful.