New financing mechanisms for renewable energy
New approaches to rural ownership aim to address
the limitations of the traditional methods of equity
financing. The five mechanisms listed here offer greater
flexibility to potential investors. Moreover, they are more
adaptable to alternative strategies for ownership,
including minority positions in production, or equity in
ancillary industries along the supply and marketing
chains.
Rural Business
Investment Program
Congress established the Rural Business Investment
Program (RBIP) in the 2002 Farm Bill to promote
economic development and generate income and job
opportunities in rural regions by encouraging venture
capital investments in smaller enterprises and by meeting
the equity capital needs of such businesses. RBIP is
funded through USDA’s Commodity Credit Corporation.
The program licenses Rural Business Investment
Companies (RBIC) through a competitive process. It
allows for a 3-to-1 leverage of private capital through the
use of federally guaranteed discounted debentures.
For every dollar of private capital raised by a licensed
RBIC, the RBIC can leverage three borrowed dollars,
which USDA guarantees. The debentures are discounted
because five years of interest is deducted on a pre-paid
basis, enabling the net proceeds to be invested as equity
(because there is no need to generate current income to
service interest payments).
Flip Model
The ownership flip structure was originally developed
in Minnesota to help an individual farmer to finance a
utility-scale wind turbine. Such projects require a large
amount of investment capital, but the average rural
landowner lacks a sufficient tax liability to fully capture
the related federal tax benefits, including both the
Production Tax Credit (PTC) and accelerated
depreciation. It is thus unlikely that most individuals
could develop such a project on their own.
Passive loss restrictions and at-risk rules further
contribute to the difficulty in individuals fully capturing
the full value of these tax benefits. Some farmers have
overcome this problem by partnering with outside, taxmotivated
equity investors.
Through such a co-ownership arrangement, the
farmer will have the needed capital and the outside
investors will be able to fully capture all the tax
advantages. The partners have typically organized their
wind project as a limited liability company (LLC) because
of its comparative advantages over other forms of
business organization.
The outside investor will control the majority of the
LLC, while the farmer has a minority ownership. After the
Federal Protection Tax Credit (PTC) for Renewable
Energy and depreciation are fully used by the outside
investor, the ownership will flip to the farmer, who then
becomes the majority investor, while the outside investor
owns a minority stake in the LLC.
The LLC form of business allows these partners to use
a tax structure favorable to taking advantage of the
production tax credits. It also allows the financial and
governance rights for the project to be split among the
landowners, developer and the equity investor.
Lease/Custom
Harvest Structures
Ethanol is currently produced mostly from sugars or
starches derived from fruits and grains. In contrast,
cellulosic ethanol is obtained from cellulose, the main
component of wood, straw and most plants. Since
cellulose cannot be digested by humans, the production
of cellulose does not compete with the productions of
food. Additionally, since cellulose is the main component
of plants, the entire plant can be harvested. The raw
material is plentiful. Cellulose is present in every plant:
straw, grass, wood. Most of these “bio-mass” products
are currently discarded or reside on cropland.
Although waste biomass will make a substantial
contribution towards large-scale cellulosic ethanol
production, waste biomass alone cannot serve as the
only source of raw material supply. The big question is
whether American agricultural systems can support
large-scale cellulosic ethanol production. Several studies
indicate that it is possible.
According to the “Near Term U.S. Biomass Potential”
report, dedicated energy crops would be required for
large-scale ethanol production from cellulosic biomass.
There are regions within the United States where
cellulosic biomass, such as switchgrass, can be
produced to support large-scale facilities. Landowners
and ag producers within these regions will have the
opportunity to participate and to take ownership of the
cellulosic ethanol market.
For landowners with limited ag production experience
and/or financial resources, lease or custom harvest
structures can be used to generate equity capital. The
landowner would lease land to an ag-producer to grow
cellulose crops or hire a custom harvester to harvest the
crops. Revenues from the rental payments can be used
to finance a cellulosic ethanol facility.
For the custom harvest, the landowner would hire
those with special equipment to harvest the switchgrass
or clean up the field of wheat straw or corn stover. In the
case of forest land, the landowner would hire someone
to thin the wood on CRP land. This model can be used to
promote participation from Native American tribes, lowincome
rural communities, and Conservation Reserve
Program (CRP) participants.
Renewable Energy Fund
The creation of a Renewable Energy Fund would
eliminate the need for multiple equity drives and address
the equity barrier for rural investors. Pooling equity
capital within rural communities will ensure that rural
residents own a share of cellulosic ethanol production
capacity in the future. Investment would be limited to
individual farmers, legal entities that own or manage
family farms and other individual investors living in rural
areas. There is about $26.8 billion of farm and non-farm
income available for investment within rural communities.
The cost of establishing an investment fund can vary,
depending on how the fund is set up. The least expensive
approach would be to establish an equity fund. However,
there are several factors which make this approach
somewhat problematic.
If the fund is going to be a public offering, or at least
catered to a general audience, the cost could be
substantial. For example, cost for a direct public offering
would include legal, auditing and filing fees as well as
printing, advertising, strategic coordination, and
marketing. These fees and expenses can be as high as 8
percent of total estimated offering.
Clean Renewable
Energy Bonds (CREB)
The Federal Production Tax Credit (PTC) has been the
major method of financing for renewable energy projects
since it was established in the early 1990s. The PTC,
however, was designed to benefit larger investor-owned
utilities and to attract their capital into the renewable
energy marketplace. Non-profit electric utilities provide
about 25 percent of the nation’s electricity. Their taxexempt
status makes them ineligible for the PTC.
The National Rural Electric Cooperative Association
(NRECA) proposed that a “clean energy bond” be
created to establish an incentive for nonprofit electric
utilities that comparable in scope to the PTC. The CREB
program was modeled after the Qualified Zone Academy
Bond program, enacted in 1998 to provide tax incentives
for the rehabilitation of public school buildings.
The Clean Renewable Energy Bond (CREB) program is
a new tax incentive authorized in the Energy Policy Act of
2005. It is currently available to municipal utilities and
rural electric cooperatives and is designed to promote
renewable energy investment and development. The
CREB program provides these nonprofit utilities with
interest-free loans for financing qualified renewable
energy projects.
