A Clean And Profitable Era Dawns For Rural Electric Cooperatives

Rural electric cooperatives provide power for huge swaths of the country, providing electricity to 56% of the United States’ landmass. And now, thanks to federal clean energy tax incentives, they could cut consumer costs in low-income communities across the country.

Non-profit and member-owned, they were established in the 1930s via the Rural Electrification Act and serve more than 90% of the nation’s persistent poverty counties. For the regions they serve, rural electric cooperatives are indispensable, with power generation inextricably linked to economic prosperity.

A new analysis shows these rural cooperatives could reduce energy costs by 15-20% from today’s levels by adopting clean energy, with the least cost energy pathway delivering 80-90% clean electricity within the next decade.

Many of the cheapest wind and solar resources in the country are located in rural electric cooperative service areas, but in many cases, cooperatives have lagged in taking advantage of these resources for their customers. As non-profits, cooperatives lack access to capital compared to investor-owned utilities and they have long been unable to take advantage of clean energy tax credits since they have no tax liability. And while coal use decreased from 41% of all cooperative electricity in 2016 to 32% in 2021, this still falls behind the rest of the country as coal accounted for 22% of electricity generation for the nation in 2021.

IRA supercharges rural clean electricity through a 75% discount

The Inflation Reduction Act (IRA) enables investments in rural power larger than the 1930s New Deal funding that originally brought reliable electricity to America’s rural areas, and it’s just in time. New research from UC Berkeley shows that accelerating the transition to clean energy with IRA resources can lower electricity prices and greenhouse gas emissions, improve health, increase the share of generation that cooperatives own, and drive billions of dollars in investment in rural communities.

The transition to clean energy could make rural electric cooperatives stronger and more reliable while simultaneously lowering the cost of electricity to their customers, and dramatically improving the health of families in these areas while reducing greenhouse gas emissions.

The IRA took several steps to help electric cooperatives bring clean energy to rural areas across the country. First, through the extended and expanded investment and production tax credits, the legislation made wind, solar, and storage the cheapest sources of electricity by far.

It also made key changes to how non-profit entities like cooperatives can take advantage of the tax credits and get 30% off project costs. Specifically, it allows for non-profit, tax-exempt organizations to be refunded in cash for the value of the tax credits. This will allow cooperatives to own resources directly instead of relying on purchasing power from private companies.

The IRA also included an additional 10% off, for a total of 40% off, for projects paying a prevailing wage located in “energy communities,” which have a high overlap with regions that electric cooperatives serve. If in addition, projects are built with American-made clean energy, cooperatives could get another 10%, for a total of half off project costs. Some of the best wind and solar resources in the country located near these rural utilities creates a significant opportunity for cooperatives to take advantage of these tax credits to provide cheaper electricity to their customers.

Beyond simply making clean energy cheaper and providing access to important tax credits for non-profit rural cooperatives, the IRA created a $9.7 billion fund for cooperatives to purchase clean energy and zero emissions systems. These funds can be distributed as grants, loans, or other financial assistance in a flexible, competitive grant program administered through the U.S. Department of Agriculture.

To disburse this funding, the “Empowering Rural America” (New ERA) program will accept letters of interest this summer from the end of July to the end of August, and applicants can apply for grants up to 25% of project cost, which when added to the tax credits outlined above, results in up to 75% off total project costs. With such a short window, cooperatives, their boards, their communities, and the technical assistance providers who serve them, need to move fast to qualify for this opportunity.

The new funding opportunities for rural cooperatives don’t stop there – the “Powering Affordable Clean Energy” (PACE) program will administer another $1 billion in largely forgivable loans through the Rural Utilities Service that applicants can use to purchase renewable energy systems like wind, solar, and storage.

The “Rural Energy for America” (REAP) program, which focuses on financing and grant funding for agricultural producers and rural small businesses, now has an additional $2 billion available from the IRA to help these entities acquire renewable energy systems and energy efficient equipment.

Cooperatives will also be able to apply for funding through the Department of Energy’s Energy Infrastructure Reinvestment (EIR) program that will provide up to $250 billion in loan guarantees to help retool, repower, repurpose, or replace fossil fuel infrastructure in favor of clean energy.

Together, these programs create the largest-ever federal investment in rural electricity and an opportunity for communities to finally take control of their energy future while decreasing greenhouse gas emissions, improving health, and driving economic development.

Eleven cooperatives demonstrate the opportunity

To demonstrate the immense benefits of capitalizing on this opportunity, the new UC Berkeley study analyzed 11 generation and transmission cooperatives across the country to find the cheapest combination of energy resources to reliably power these regions through 2032. The findings illustrate that the most affordable portfolio is one where wind, solar, and batteries dominate. By working together, they can provide more than enough electricity at all hours of the year – even for those with high electricity demand or low clean energy output.

Clean is cheap: First, the analysis shows the cheapest electricity generation portfolio for each rural electric cooperative, if all unabated coal generation is retired by 2032– and the cheapest solution in each case includes 80-90% clean electricity, largely fueled by solar, wind, and batteries. Across the board, this transition to clean electricity reduces wholesale electricity costs by 15-20% on average compared to 2022 while reducing greenhouse gas emissions by 80-90%.

The reduction in electricity costs is made possible by recent dramatic declines in renewable energy and storage costs, IRA incentives, and the availability of high-quality solar and wind power in rural cooperative service territories.

Clean is more reliable: Second, UC Berkeley’s hourly grid analysis reveals that much of the renewable generation, particularly wind power, occurs largely at the same time as demand from rural energy customers. Therefore, the amount of energy the cooperative utilities have available during times of peak demand, or their “reserve margin,” significantly increases with more clean energy—contributing to reliability.

Reliability, via the reserve margin, is further bolstered by deploying batteries alongside renewable energy generation. Overall, the reserve margin of most utilities substantially increases from approximately 15-20% below peak load on average in 2022 to approximately 15-20% above peak load in the least cost generation mix by 2032.

That means clean energy can help rural utilities deliver more reliable electric power to their customers from the power generation they own and can reduce the need for purchases on the wholesale market from about 40% in 2022 to about 15-20% in 2032.

In addition, given the good correlation between wind and solar resources with load, by investing in battery storage, utilities could meet the load requirements at all hours of the year, including periods of peak load and low renewable generation.

Clean is good for cooperative balance sheets: Third, by directly owning resources, cooperatives can leverage the renewable resource potential in their regions, enabling investment in their member cooperatives, with up to $80 billion between the 11 utilities. Together they’ll be able to make this investment without too much increase in debt, even as they pay back the initial investment in power generation over time, as more than half of the required upfront investment could be offset by IRA tax credits.

Loans and grants from the New ERA and other IRA programs could also further reduce the debt required to make the transition happen. For example, cooperative utilities investing up to $4 billion in clean energy, with the combination of tax credits and USDA’s New ERA program, can pay down up to 75% of clean energy project costs.

Seizing the opportunity

Thanks to the New ERA program and direct-pay tax credits, along with PACE, REAP, and EIR, rural electric cooperatives have a unique opportunity–become America’s clean energy leaders, drive rural economic prosperity, and lower costs to members.

All electric cooperatives can harness this once-in-a-century moment to leverage IRA incentives and funding while cutting costs for their customers by acquiring clean energy.

The new federal incentives described here represent the largest-ever federal investment in the cooperative utilities that serve so many of our neighbors who are challenged to afford expensive electricity provided by coal and natural gas – rural families can finally benefit from clean power and the resulting prosperity.