Feasibility PlanCommercial Wind Farm

Development

Jon HinrichsMark HayesByron Blankenhorn

Wind Farm Development: US Market Analysis

Year

Wind Capacity

(MW)

Capacity Growth

RateWind Electricty Output (MWh)

Total US Electricity Output

(MWh)

Wind Output

vs. Total Output

Total Wind Electricity

Revenue ($Millions)

Total Electricity

Revenue ($Millions)

Wind Powered

Households1999 2,000 50% 6,132,000 3,395,775,886 0.18% 352$ 194,696$ 500,000 2000 3,000 33% 9,198,000 3,461,545,245 0.27% 527$ 198,265$ 750,000 2001 4,000 42% 12,264,000 3,528,588,425 0.35% 702$ 201,899$ 1,000,000 2002 5,696 7% 17,463,936 3,596,930,097 0.49% 998$ 205,600$ 1,424,000 2003 6,106 10% 18,720,996 3,666,595,410 0.51% 1,106$ 216,600$ 1,526,500 2004 6,718 36% 20,597,388 3,737,610,000 0.55% 1,250$ 226,900$ 1,679,500 2005 9,149 31% 28,050,834 3,810,000,000 0.74% 1,804$ 245,000$ 2,287,250 2006 12,000 17% 36,792,000 3,878,580,000 0.95% 2,408$ 253,820$ 3,000,000 2007 14,040 17% 43,046,640 3,948,394,440 1.09% 2,867$ 262,958$ 3,510,000 2010 22,487 17% 68,944,058 4,165,468,606 1.66% 4,839$ 292,392$ 5,621,662 2013 36,015 17% 110,421,700 4,394,477,039 2.51% 7,797$ 310,288$ 9,003,726 2017 67,488 17% 206,917,811 4,719,525,225 4.38% 14,725$ 335,866$ 16,871,968 2020 108,089 17% 298,739,669 4,978,994,490 6.00% 21,385$ 356,424$ 27,022,363

• 30% annual growth in wind megawatt capacity (MW) from 1999-2006• 17% projected annual growth rate in wind megawatt capacity (MW) through 2020• 1.8% projected annual growth rate for total US electricity capacity (MW) through 2020• Wind electricity increases from 1% to 6% of total electricity output from 2006-2020

*1MW ~ 250 householdsBlue Text = estimate from American Wind Energy Association (AWEA)

Market Drivers: Why Is Wind Electricity Growing?• Growing need for new power sources in the US ~ 1.8% annual demand growth• Higher oil and natural gas prices have lead to increased alternative energy development• Global warming: increased public awareness = increased demand for cleaner energy sources• Renewable Portfolio Standards (RPS): State requirements for renewable energy generation and development• Production tax credits (Federal) = $19 per MWh• Development of Renewable Energy Credit (REC) market - “energy use offsets”• Improving wind turbine technology: higher efficiency, lower cost• Potential Federal RPS at the federal level

Wind Farm Development: Industry Structure• Carrying Capacity

– Demand for wind energy is currently greater than the supply.– Renewable Energy Credits have tripled in price over the last 18 months.– Xcel Energy recently issued Request For Proposals (RFP) of 775 megawatts of wind energy.– Current lead times for wind turbines is approximately 18 months.– Transmission line capacity is becoming an issue in many areas.

• Uncertainty– The market has a low level of uncertainty due to the slow, stable growth of the electricity market.

• Complexity– The industry structure is complex due to the number of entities involved. These entities include electrical

engineers, environmental engineers, grid owners, land owners, utilities, equipment providers, local/federal governments.

• Industry Evolution– Renewable energy sources including wind energy are in the high growth phase. Overall wind energy has an

expected compounded annual growth rate of 17%, compared to 1.8% for electricity industry overall.– Wind turbine technology has also improved over time, resulting in more efficient energy production.

• Emerging Industries– Over time, new technologies may be developed for the generation of electricity.– In addition, other sources of renewable energy such as solar power may become more efficient and cost

effective.

Wind Farm Development: Major Competitors

COMPANY / LOCATION

REVENUES (Mil $)

PROFITS (Mil $)

MW of WIND

ENERGY

PLANNED DEVELOPMENT

NUMBER of CUSTOMER

S

FPL Energy / Florida

$15,710 $1,280 3,192 MW

700 MW 4,300,000

PPM Energy / Oregon

$11,460 $1,160 1,405 MW

557 MW 5,250,000

Mid American Energy / Iowa

$3,447 $266 695 MW 222 MW 713,000

Basin Electric / North Dakota

$1,050 $40 136 MW 600 MW 2,500,000

Aquila / Kansas

$971 ($100) 370 MW n/a 465,800

OMPA / Oklahoma

$160 $3 51 MW 0 MW n/a

Proposed Wind Farm

$25 $5 100 MW 25,000

Wind Farm Development: Basis of Competition

• Price: Utilities issue Request for Proposal (RFP) for wind energy supply. Wind Farm developers face competition in this process that can moderate energy purchase prices.

• Site Control / Proximity to the Power Grid: The distance of the wind farm to Utility transmission lines impacts the overall capital investment. ~$200,000 development cost per mile for transmission lines.

• Wind Access: 30% Capacity Factor. Turbine usage must meet this minimum standard. Competing companies may demand ~40% to determine feasibility of a wind project. The higher the factor, the better the opportunity to find a buyer and to negotiate a better PPA.

• Financial Resources: Utilities are more willing to work with developers who have the resources to support the project. Energy buyers work with large companies such as FPL in a leasing arrangement to secure wind energy.

• Track Record: A company with a successful model for site location, financing and development of wind energy will be able to compete more effectively for future RFP and secure more lucrative PPAs.

• Conclusion: Wind developers compete on a variety of factors - There is moderate price competition during the RFP process, however site location, access to reliable wind, ability to finance and strong track record allow companies to compete more effectively.

Wind Farm Development: Control• Control over setting prices – RFP process is competitive which indicate pricing power is controlled largely by the buyer

(utility). PPAs may last for 10, 15 or 25 years providing long-term revenue which benefits the supplier. Contracts can be renegotiated on 5 year terms and most long-term contracts include escalator clauses.

• Long Term contracts are based on providing base load energy. Additional revenue can be generated by trading on the open market using “Spot Rates”. However, if the wind farm is under-producing on a long term or short term basis there is a risk of incurring fees to cover shortfalls in output.

• Bargaining Power of Customers – Utilities are typically the customer and have moderate power to negotiate price. However, they are regulated to provide a base load of energy and need to acquire large blocks of energy to ensure service. Renewable Portfolio Standards indicate there will be continued demand for renewable energy and prices will increase.

• Control over Costs – Technology is available to all in the market.• Economies of Scale can be realized with larger wind farms. Reduced price per turbine with larger purchases as well as

variable costs (maintenance) spread across more units yield lower costs per unit.• Bargaining Strength of Suppliers – There are many suppliers however long lead times to obtain equipment indicate

that prices will remain high. There are domestic (GE and Clipper Wind) and international (Mitsubishi and Vestas) manufacturers. Raw material costs (steel) have increased 50-100% which increase costs for 60 meter and 80 meter towers. 80 M towers are preferred due to ability to increase capacity factor.

• Capacity Utilization is important – higher capacity factors over 30% will yield better bargaining for the PPA and a more consistent revenue stream. Additional energy produced will provide the ability to trade additional energy on the open market.

• Control over Channels of Distribution – Limited control exists due to the need to access the existing power grid and infrastructure.

• PPAs must be negotiated with utilities that own transmission lines. • The Local Utility (i.e. Xcel) controls the integrated system for accessing the Power Grid. A request to access the

grid (Que process) at certain locations can yield long lead times to be able to deliver the power at that location.• Proximity to Grid is integral to successful commercial wind farm development, the further away from the grid, the

more substantial the connection expense becomes• Power can be point-to-point or point to network. Energy is traded and can be pumped between states. This

indicates greater access to distribution channels and to potential customers.

NEED• Physical: Basic and constant need for electricity

• Social: Growing awareness of climate change leads to demand for clean energy, reduction in carbon footprint. Ethical issues surrounding global warming creates a need for socially responsible solutions for energy demand.

• Economic: U.S. Demand for Fossil fuels leads to Global geo-political instability: There is an increasing need for domestically produced energy sources. Renewable Portfolio Standards (RPS): States that are implementing minimum renewable energy goals create a need for renewable energy sources.

OPPORTUNITY

• State Government: States are implementing or increasing RPS requirements. In April 2007 Colorado extended and enhanced their RPS requirements to 2020: 20% of all energy must be generated from renewable sources.

• Federal Government: Bush Administration has introduced the Advanced Energy Initiative – accelerated development and use of advanced and clean energy technologies. Extension of Tax incentives for developing renewable energy sources is likely.

• Global Governments: The world has accepted global climate change since early 90s and the U.S. has recently acknowledged climate change. Global pressure exists to reduce reliance on fossil fuels. Kyoto Protocol (U.S. has withdrawn) is in place which member countries must reduce greenhouse gas emissions to targets by 2012 and beyond. U.S. target would be 7%.

Venture Analysis – Need & Opportunity

• Performance- Domestic and Renewable Energy Source- 80 MW Wind Farm- Annual Production: 209,000 MWh of electricity- 30% Capacity Factor: Wind causes intermittent electricity generation- 53 Turbines- 1.5 MW Turbines: GE, Vestas, Nordex, Enercon (see appendix)- Renewable Energy Credits (RECs) – certified by Green E and traded on RPS and Voluntary markets.

• Cost- Installation Cost: $1,000 per KW ($1,500,000 for 1.5 MW turbine) - Operations/Maintenance/Management: $44 per KW- Land Lease is under ownership

• Availability- Power Purchase Agreement is made w/ the utility- Ability to sell to additional customers if traded on spot market

• Social- Substantial and increasing social benefits through clean and renewable energy

• Environment - Northeast Nebraska site

• Range of Product- Electricity and Renewable Energy Credits (RECs).- Purchase Price: $60 per MWh

• Production and Delivery- Generated on-site and delivered to the customer through Utility/Government owned Transmission Lines

Venture Analysis – Product Description

• Renewable Energy Credit (REC) is generated for each MWh of electricity generated

• Green-E is the REC certifying entity that inspects the power facility and audits output

• RECs can be sold into “RPS” and “Voluntary” market– RPS Market = States requires RECs to be bundled and sold with electricty per PPA – Voluntary Market = RECs can be stripped from energy and to business and residential customers

• RECs increase value of electricity in RPS markets

• Contracts for REC output varies in each market– RPS Market = PPA includes contract to purchase RECs, modeled into price of energy– Voluntary Market = RECs priced per MWh, avergae contract length 1-5 years

• Market Pricing Trend for RECs– 2002 = $0.25– 2004 = $0.50– 2005 = $1.25– 2006 = $2.00– 2007 = $3.00– Future contracts for voluntary market RECs are being priced between $4-10

• REC Risks?– US government will standardize energy production credits in the near future– Green-E certified RECs might be chosen as market standard– Similar production credit system should still benefit revenue flows to renewable energy producers

Product Description: Renewable Energy Credits (REC)

• Typical Customers– Purchasers of Electricity

• Companies in the Electric Utilities Industry. These companies include investor-owned, cooperative, municipal, state, and federal utilities.

• Investor-owned utilities account for 75% of the sales in the industry.• The average market-cap of investor-owned utilities was $6.6 billion in 2005. Many of these companies are in the top 200 of the

Fortune 500 list.– Purchasers of Renewable Energy Credits (RECs)

• Electric utilities, corporations, and residential customers. Approximately 80% of REC purchases are to satisfy state-base Renewable Portfolio Standards, and the remaining 20% of REC purchases are made by corporations and residences under a voluntary program.

• Target Market Opinion of Wind Energy– Purchasers of Electricity

• Electric utilities are reluctant to develop wind farms since the electric output constitutes a low percentage of total output for each utility.

• Utilities prefer to purchase wind power from 3rd party suppliers.• Due to history of regulation, many utilities are reluctant to change.

– Purchasers of RECs• Progressive, early adopters who support renewable energy production. • There is a high level of regional loyalty in regard to REC purchases.

• Buying Decisions– Purchasers of Electricity

• Buying decisions based on Request For Proposals (RFP) from utilities. This is a competitive process with multiple bids.• Decisions are made by a central authority, based on wind studies, site evaluations, and grid evaluations. Financing for project and

track record of wind farm operator are also taken into consideration. Many people are involved in the decision process.• Budgeting cycle is between 12 months and 30 months for connection process. The project may take 2 years to 3 years between

RFP and completion.– Purchasers of RECs

• Buying decisions made by CEO, marketing department, or operations personnel within a corporation.• Decisions are based on price and reputation of provider.• Budgeting cycle is approximately 3 months.

• Payment Policy / Distribution Channel– Purchasers of Electricity

• Billing usually occurs on a monthly basis, and payment is done via wire transfer within 10 to 15 days of receipt of the bill.• Purchases typically made directly by utility, or may occur on the spot market for electricity.

– Purchasers of RECs• Billing varies between monthly, quarterly, and yearly. Most RECs are pre-paid by the customer.• Typically purchases are made through a REC retailer/broker. Major customers such as utilities may purchase RECs directly.

Venture Analysis – Target Market

• Major Benefits– The Renewable Energy Credits produced by the wind farm qualify for state-level Renewable Portfolio

Standards.– Independent wind farm development limits the risk of wind energy for utilities. Customers purchase the

wind energy via a power purchase agreement. The wind farm developer is responsible for financing, construction, and maintenance.

– The location of the wind farm has a high expected wind capacity. This benefit may result in lower prices for customers of the energy.

• Uniqueness of Benefits– The high wind capacity of the site is a unique benefit. Although other high capacity sites exist, they are

limited in supply and may be difficult for some competitors to obtain.– Limited amount of competitors in the geographic region.

Venture Analysis – Unique Benefits

• Financial– Many “angel” investors in the renewable energy development markets– Potential funding assistance from states to meet RPS minimums– Limited personal capital in the management team (less than $100k)

• Physical Assets– Land ownership is secured for development site– Wind resource is rich in the proposed geographical area (northern NE)– *MET tower equipment for weather studies

• Human Resources– Experience with wind resource research and validation– Knowledge of REC sales marketplace

• Industry Contacts– Solid contacts with “Green” investors– Solid contacts with REC retail marketers– Poor contacts with utilities and large wind developers

• Experience– Limited in terms of sale of energy, technology development– Solid in terms of marketing and financial analysis

Resources / Capabilities of Venture

• Switching Costs to Target Market– High For Wholesale Buyers: Power Purchase Agreements (PPA) lock customers into supply agreements– Low For Retail Buyers: Residential and Business users have limited switching costs

• Agreements with Suppliers / Customers

Existing Barriers– PPAs that are in place with existing producers and utilities reduce the ability to sell new energy– Very limited supply and long lead times on wind turbines (18-36 months)– Large energy companies want to own new generation facilities

Creation of Barriers– Once PPA is signed with wholesales buyer (utility), the wind farm is revenue generating machine– Large wind farm will reduce ability for new developers to utilize existing grid infrastructure

• Control of the Distribution Channel

Existing Barriers

– VERY LARGE BARRIER TO ENTRY!!– Too expensive to create grid independent electric delivery system for large wind farm– Distribution is completely dependent on regional utilities (NPPD – Nebraska Public Power District)– Regional utilities can restrict or deny transmission agreements, NO REVENUE FOR PRODUCER

Creation of Barriers– Transmission agreements are binding, secure right to deliver energy, SECURE REVENUE– Establish customer base in close proximity to reduce impact of transmission agreements

Barriers to Entry: Existing Barriers / Creating New Barriers

• Marketing Risks– Price of energy dips due to development of more efficient source (nuclear, tidal, solar, fusion other)

• Technology Risks– Grid system cannot support development of large MW load wind facility– Current wind turbine technology becomes obsolete during development cycle (3-5 years)

• Government Risks – Regulations and Laws– Public utilities (NPPD) can reject new project development, even if the project is viable– No RPS in Nebraska will reduce immediate demand for renewable energy sources in region– Ethanol is primary focus of Nebraska energy legislation and grants

• Competitor Risks– Request For Proposal (RFP) process can squeeze out small developers by proposing low energy prices– Utilities prefer to work with energy developers who have a track record of project development

• Operational Risks– Lack of funding: site development is a long and expensive process– Wind resource study fails, site generate energy needed to be profitable– Grid Connection Process: infrastructure cannot support development, too expensive to improve grid– Equipment Failure (Turbines / Blades): insurance is standard for large wind developments– Inability to meet transmission agreement and PPA minimums: default of contract

Risks: Fatal For the Business

Wind Farm Pro-Forma Year Year Year Year Year Year Year Year Year Year Year

Revenues and Expenses 0 1 2 3 4 5 6 7 8 9 10Energy sales 11,914 12,033 12,153 12,275 12,397 12,521 12,647 12,773 12,901 13,030Government Tax Incentives 1,906 1,906 1,906 1,906 1,906 1,906 1,906 1,906 1,906 1,906Renewable Energy Credit sales 715 722 729 736 744 751 759 766 774 782 Total Revenue 14,535 14,661 14,788 14,917 15,047 15,179 15,311 15,446 15,581 15,718 Installed Turbine Cost (84,000) Operations / Scheduling variable (1,500) (1,530) (1,561) (1,592) (1,624) (1,656) (1,689) (1,723) (1,757) (1,793)Parts variable (300) (306) (312) (318) (325) (331) (338) (345) (351) (359) Insurance fixed (400) (408) (416) (424) (433) (442) (450) (459) (469) (478) Property Taxes fixed (650) (663) (676) (690) (704) (718) (732) (747) (762) (777) Interconnection Fees fixed (150) (153) (156) (159) (162) (166) (169) (172) (176) (179) Utilities fixed (120) (122) (125) (127) (130) (132) (135) (138) (141) (143) Admin fixed (80) (82) (83) (85) (87) (88) (90) (92) (94) (96) Subtotal Operations Expenses 0 (3,200) (3,264) (3,329) (3,396) (3,464) (3,533) (3,604) (3,676) (3,749) (3,824)Depreciation (4,200) (4,200) (4,200) (4,200) (4,200) (4,200) (4,200) (4,200) (4,200) (4,200)Net Income (84,000) 7,135 7,197 7,259 7,321 7,384 7,446 7,508 7,570 7,632 7,693

Total Revenue 14,535 14,661 14,788 14,917 15,047 15,179 15,311 15,446 15,581 15,718Total Fixed Cost 5,600 5,628 5,657 5,686 5,715 5,746 5,777 5,808 5,840 5,873 Total Variable Cost 1,800 1,836 1,873 1,910 1,948 1,987 2,027 2,068 2,109 2,151 Break Even Revenue 6,392 6,434 6,477 6,521 6,566 6,611 6,658 6,706 6,755 6,804

Installation Expense Assumptions: Cost / MWWind Turbine 300,000$ Site Identification 200,000$ Engineering 100,000$ Construction 100,000$ Feasibility Studies 75,000$

Utility Interconnection 75,000$

Permitting 50,000$ Legal Fees 50,000$

Other Property Development 50,000$

Start-Up of Facility 50,000$ Total Cost per MW 1,050,000$

Total MW 80

Total Cost / 80MW Farm 84,000,000$

Revenue Assumptions- Summary:Total MW 80Hours / Year 8,760 Capacity Factor 34%Yearly Output (MWh) 238,272 Price per MWh 50.00$ Energy Revenue 11,913,600$

REC Price / MWh 3.00$ REC Revenue 714,816$

Federal Tax Credit / MWh 8.00$ Tax Credit Revenue 1,906,176$

Conclusions• Compelling Need

Scientific evidence and public opinion support Climate Change and a demand for clean and renewable energy sources. Additionally, geopolitical concerns lead to a need for domestic energy sources. RPS are here to stay which will drive demand.

• Target Market Utility companies, and co-ops have made it clear they are looking to pursue Wind Farm Projects. REC prices have seen rapid increases over the past few years.

• Unique BenefitsCleanand renewable energy. Key Inputs will not increase in price (wind).

• Competitive AdvantageSite identification is complete.

• Risks/Profitability Large initial capital investment. Moderate risks with securing a PPA and access to the power grid are the most significant. As long as energy prices and tax breaks are maintained and REC prices are growing profitability is attainable.

Recommendations• Secure PPA – contract with utility or regional power provider is necessary to ensure there is a buyer for electricity• Access to the Power Grid - ensure the site location can transmit electricity to grid.• Financing – Secure $84,000,000 capital investment