Bring It on Home

Local ownership of renewable
energy helps ‘keep it on the farm’

Alan Borst, Ag Economist
USDA Rural Development,
Co-op Programs


ood, fiber… and now fuel. In the 21st century, U.S. farmers are challenged to meet the country’s needs not only for food and fiber, but also for much-needed renewable energy. An important policy question to be answered is: Who will have ownership of the facilities that will produce energy from rural Americans’ wind and crops?

According to the Renewable Fuels Association, 46 of 102 U.S. ethanol plants are farmer owned, with a capacity to produce 1.6 billion gallons of ethanol. Total U.S. ethanol capacity is 4.4 billion gallons, giving producer-owned plants a 39 percent share of the market (for a complete list, visit: http://www.ethanolrfa.org/industry/ statistics/#EIO). According to the National Biodiesel Board, as of April 2006 there were 65 U.S. biodiesel plants in operation with a total production capacity of 395 million gallons (for the list, visit: http://www.biodiesel.org/ buyingbiodiesel/producers_ marketers/ProducersMap- Existing.pdf).

Growers and local residents have been investing in ethanol and biodiesel plants across the country to share the market with larger agribusinesses. Many of these ventures have been very profitable over the past few years. This has attracted much outside investment in competing plants.

In 2004, less than 1 percent of installed U.S. wind energy capacity was owned by farmers. Most farmers with wind turbines on their property have leased their land to larger energy companies. Where farmers own the turbines, they may expect to double or triple their income over leasing. The “Windustry” website lists 52 farmer-owned U.S. wind projects, most individual and quite small (http://www.windustry.com/maps/CommunityDatabaseApril2 72006.pdf).

In the case of both biofuels and wind, greater farmer ownership implies both the potential for greater profits and the risks of greater losses. One challenge that has confronted rural Americans considering such a venture has been the question of how to organize it — selecting the best business model to follow.

There is a large matrix of U.S. public policies and programs at all levels of government that acutely influence the potential and actual economic performance of farmer-owned energy ventures. The way in which these policies and programs are designed and implemented can make or break the best designed renewable energy ventures.

Why promote local
ownership?

In the European Union, where a much larger share of energy is generated from local renewable sources, the promotion of local energy investment has been a major policy goal in recent years. Predac, an EU network of 23 energy organizations from 10 countries, has identified four arguments for favoring local ownership of renewable energy sources. Here is an adaptation of their list for the American setting:
  • Share the economic benefits of renewables. When project financing comes from a few large investors from outside the project area, profit flows away. Local investment allows rural residents to retain a greater share of the earnings. A September 2004 U.S. Government Accountability Office report modeled the relative economic impacts of locally owned and remotely owned wind systems. It found that locally owned wind systems generated an average of 2.3 times more jobs and 3.1 times more local dollar impact than do wind systems financed by out-of-area interests.
  • Support economic development in rural areas. In regions where agriculture or traditional industries are declining, renewable energy source projects offer an opportunity to diversify economic activities by a production that cannot be transferred elsewhere.
  • Improve local acceptance of renewable energy projects. Some renewable energy source projects face local opposition, including wind energy, which unavoidably modifies the landscape. Local investment is likely to reduce the risk of a strong opposition by allocating more benefits to those people who actually or potentially endure the drawbacks.
  • Play an educational role. Local investment can play a significant educational role by increasing the number of people directly and indirectly involved in projects, and thus the public awareness of renewable energy. By creating social links in the framework of a local project, it can also promote the emergence of new local projects through exchanges about the initial one. Federal policies to promote greater local energy ownership
    There is one major federal program specifically targeted at promoting farmer and rural small business ownership of renewable fuel facilities through grants and loan guarantees: USDA Rural Development’s Renewable Energy Systems and Energy Efficiency Improvements Program. It was authorized by Section 9006 of the 2002 Farm Bill. The program authorizes loans, loan guarantees and grants to farmers, ranchers and rural small businesses to: (1) purchase renewable energy systems, and (2) make energy efficiency improvements.

    In August 2006, USDA announced the awarding of $17.51 million in Section 9006 Grants to 375 recipients in 36 states. The grant program complements the Bush Administration’s overall effort to increase America’s energy independence through the development of renewable energy resources as well as improving efficiency of existing systems.

    USDA Rural Development grant funds can be used to pay up to 25 percent of the eligible project costs. Additionally, the program provides loan guarantees of up to $10 million to fund up to 50 percent of eligible projects. Eligible projects include those that derive energy from a wind, solar, biomass or geothermal source, or hydrogen derived from biomass or water using wind, solar or geothermal energy sources.

    Awards are made on a competitive basis for the purchase of renewable energy systems and to make energy improvements. Since 2003, when the program was established, USDA has provided $87.3 million in grants and $34.3 million in loan guarantees to 844 applicants. A complete list of the grant recipients can be viewed at: http:// www.rurdev.usda.gov/.

    VAPG program, tax credits
    help producer-investors

    The Value-Added Producer Grant program provides grants of up to $100,000 for business planning or feasibility studies, or up to $300,000 for working capital for any value-added agricultural activity, including renewable energy projects. Eligible applicants are independent producers, farmer and rancher cooperatives, agricultural producer groups and majority-controlled producer-based business ventures. In the past few years, many ethanol, biodiesel and wind energy projects have received funding through this program. Details for this program can be viewed at: http://www.rurdev.usda.gov/rbs/ coops/vadg.htm.

    Tax credits for small ethanol and biodiesel producers have also been instrumental in enabling the expansion of farmer-owned biofuel facilities. Under current law, small ethanol producers (defined as those producing 60 million gallons per year or less) receive a 10-cents-per-gallon production-income tax credit on up to 15 million gallons of production annually. The credit is capped at $1.5 million per year per producer. The small ethanol producer tax credit promotes local ownership.

    In 2004, the incentive was strengthened by allowing the credit to be passed through to the farmer owners of a cooperative. The legislation also allows the credit to be offset against the alternative minimum tax. In 2005, a similar tax credit was created for small producers of agri-biodiesel.

    Wind energy projects have not enjoyed the same small producer benefit. Since 1999, farmer-owned ethanol facilities have more than doubled their share of total ethanol production, from 17 to 39 percent while only a very small fraction of wind energy projects are farmer-owned.

    The Producer Tax Credit and accelerated depreciation are two general taxbased incentives that can only be used by wind project developers with a sufficiently large tax liability. Farmers and other local investors generally lack enough tax liability to get the full benefit of the PTC. This also means that forms of business organization that involve lower taxation, such as nonprofits and cooperatives, are less able to take full advantage of these tax-based incentives.

    State policies for local
    energy ownership

    The following two recent examples are some of the more aggressive policies for promoting local ownership of renewable energy facilities.

    To qualify, a C-BED project must be locally owned by Minnesota residents and projects must have support of the county board in which the project is located. All utilities are required to negotiate C-BED proposals, but no utility is required to purchase power from C-BED projects. With the availability of the new C-BED tariff structure, the ILSR concludes that locally owned, community-based wind projects could constitute more than 60 percent of all new renewable electricity coming on-line between 2005 and 2010. Xcel Energy, the largest Minnesota electric utility, recently announced its commitment to secure wind resources of up to 500 megawatts of C-BED energy by 2010. Other Minnesota utilities are currently pursuing C-BED projects.

    While Minnesota is a leader in promoting community wind and Missouri is pushing the envelope in promoting local ownership of biofuel facilities, there is a whole array of federal and state renewable energy incentives that have an influence on the promotion of local ownership. A website with an inventory of federal and state renewable energy incentives can be found at: http://www.dsireusa.org/. An inventory of federal and state biofuel incentives and laws can be found separately at: http://www.eere.energy.gov/afdc/ laws/incen_laws.html.

    Business models for local ownership
    According to the Renewable Fuels Association website, 25 of the 46 farmerowned ethanol plants are organized as Limited Liability Companies (LLCs). The others are organized as partnerships or cooperatives. Some are organized as combinations. Many of the plants have non-farm investors. The National Biodiesel Board list shows that nine biodiesel facilities are organized as LLCs. Several soybean cooperatives also own plants.

    The business model of choice in the U.S. ethanol industry has been the ‘franchise’ model. A few specialized engineering firms have standardized ethanol plant design and the project development process. These engineering firms guide farmer-investors through every aspect of plant development—from feasibility to plant opening and beyond, including financing, contracting, marketing, procurement and management.

    A very small percentage of U.S. wind-generated electricity comes from farmer-owned turbines. However, as noted above, this is rapidly changing in Minnesota. Mark Bolinger, a research associate with the Lawrence Berkeley National Laboratory, has analyzed community wind business models in the Energy Journal article “A comparative analysis of business structures suitable for farmer-owned wind power projects in the United States.”

    High stakes
    With a farm bill due next year and many pieces of energy legislation in different stages of consideration, this is now a high-stakes issue. A message from the website of Iowa Congressman Steve King nicely encapsulates some of the tone many rural legislators are taking:

    “We have long lamented the small portion farmers receive of the value-added food dollars, a few cents of a $3 box of corn flakes, for example. However, we can give ourselves the chance to hold onto the value of turning our grain, wind and biomass into energy if we act now. Securing a commitment to ensure as much local ownership as possible is the key.

    “We have great companies which have partnered with our communities and farmers to build many of our current facilities. It is the perfect model. We have the raw products and capital, and they have the expertise for design engineering, construction, management and marketing. We will continue to work together as ownership partners. Since the passage of the Energy Policy Act, all of Iowa has been abuzz with discussions of ethanol, biodiesel and wind energy facilities.

    “When that discussion is going on in your community, you should ask how much local ownership is part of the proposal. If local farmers and local investors will not have a viable opportunity to become owners, you should consider a different business model that is in the best long-term interest of your community. If this isn’t considered now, we will look back and again lament receiving a small portion of the end dollars generated by our labors, while others reap the real financial rewards.

    “Without a doubt, just as our agrarian forefathers met this country’s needs for food, present day farmers will meet this country’s need for renewable energy. The question hanging in the balance is: “Who will share the real profits?” We have now hitched agriculture’s wagon to an energy future. Let’s keep our hands on the reins.”




    Studies: farmer-owned ethanol plants contribute more to local economies


    Two recent reports stress that producer ownership of biofuels plants does far more to stimulate the rural economy than do plants owned by absentee investors.

    The National Corn Growers Association (NCGA) study — “Economic Impacts on the Farm Community of Cooperative Ownership of Ethanol Production” — concludes that:

    “Since a farmer-owned cooperative ethanol plant is literally a member of the community, the full contribution to the local economy is likely to be as much as 56 percent larger than the impact of an absentee-owned corporate plant.” John Urbanchuk of LECG, LLC, conducted the analysis.

    The Institute for Local Self-Reliance (ILSR) has also issued a report that urges the U.S. Department of Energy to change what it terms a “piecemeal approach” to commercializing ethanol from cellulose and develop a comprehensive strategy that emphasizes a local, producer ownership. “The future of American agriculture may depend on this,” says David Morris, ILSR vice president and author of “Putting the Pieces Together: Commercializing Cellulosic Ethanol.”

    Keeping profits at home
    In many ways, the economic impact of farmer-owned and absentee-owned ethanol plants on the local community is similar, the NACG study points out. Yet, there are two important differences that significantly increase the impact of a farmer-owned plant: Most absentee-owned facilities are owned by centralized agribusiness corporations.

    “By putting money directly into the pockets of local residents, farmer-owned ethanol plants have spurred economic growth in rural communities across the country,” said Bruce Noel, chairman of the NCGA Ethanol Committee. “When farmers and other local investors are given the opportunity to participate in the ownership of ethanol plants, the economic benefits to the community are magnified enormously.”

    Nearly half of all ethanol plants are owned and operated by farmer cooperatives or LLCs and account for 38 percent of total ethanol production. However, during the past two years there has been substantial influx of non-farmer capital into the ethanol market. According to the Renewable Fuels Association, only two of the 43 ethanol plants under construction are majority farmer owned.

    “It’s unfortunate that there currently aren’t more opportunities for farmers and other locals to invest in the plants being constructed in their communities,” Noel said. “With locally owned plants, the profits stay in the community and that discretionary income is what truly facilitates rural development.”

    “Any ethanol plant — regardless of who owns it — is good for corn farmers and good for the U.S. economy,” Noel said. “But if you’re talking about the effects on the local economy and farm income, ownership matters. Those plants that are farmer-owned undoubtedly have a more pronounced impact on the local economy.”

    ILSR sees gains from farmer ownership
    Congress made clear in the Energy Policy Act (EPAct) that its focus was on farmers and rural development, Morris stressed, adding that Congress required that projects “demonstrate outstanding potential for local and regional economic development.” In addition, EPAct requires that a priority be given to projects “that include agricultural producers, or cooperatives of agricultural producers, as equity partners in the ventures; and...have a strategic agreement in place to fairly reward feedstock suppliers.”

    The ILSR report proposes that DOE’s strategy take into account a key element of the Energy Policy Act: a mandate for 250 million gallons per year of cellulosic ethanol by 2013. ILSR argues that the various incentives contained in the Act — direct grants, loan guarantees and direct purchasing — will not significantly accelerate that time line. Therefore, ILSR has urged DOE to use the EPAct’s resources to achieve its qualitative goals: maximizing the benefits to the nation’s farmers and rural communities.

    “Given the mandate, the country will achieve EPAct’s quantitative goals regardless of what DOE does,” says Morris. “On the other hand, the future structure and prosperity of American agriculture may well depend on how DOE and USDA craft their biofuels strategy.”

    “Will we have over 1,000 farmer-owned bio-refineries, allowing virtually all full- time farmers in the country to directly benefit from the coming age of biofuels?” Morris asks. “Or will future agriculture look the same as current agriculture, with millions of small producers selling to a handful of dominant processing companies?”



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