TODAY’S STUDY: New Energy Goes Country
Rural Electrification 2.0: The Transition to a Clean Energy Economy
Erik Hatlestad, Katie Rock, Liz Veazey, June 2019 (Clean Up the River Environment Minnesota, Center for Rural Affairs, We Own It)
Rural America faces a conundrum in the expanding development in renewable energy. Many rural areas in the country are providing the infrastructure for a clean energy future through transmission lines, wind turbines, and utility-scale solar. But, much of the power itself is not used locally in rural communities. Many rural communities are dependent on the energy resource mix of their rural electric cooperative. Nationally, these cooperatives derive 67 percent of their energy from fossil fuels.1
The U.S. public is increasingly demanding clean energy to pursue energy independence and reduce greenhouse gas emissions. As the price of renewables has dropped, investments in new clean energy generation have accelerated. Generation from solar and wind is expected to grow by 6 percent and 14 percent respectively in 2019.2 Maintaining flexibility in energy resources is key to controlling costs as the U.S. shifts to carbon free energy.
For years, electric cooperatives have argued the costs of transitioning to clean energy have been too high for them to move forward. Now, drops in the price per megawatt of wind and solar, even at an unsubsidized level, challenge that claim.3,4 A recent financial modeling of the energy mix of Colorado showed that transitioning to clean energy is affordable.5 Another report demonstrated 42 percent of the world’s coal capacity is unprofitable, and the U.S. could save $78 billion by closing coal plants, concluding that utilities can build new wind farms at a lower cost than the operation of existing coal plants.6 One recent analysis calculated that most U.S. coal power plants could be replaced by nearby wind and solar resources, at an immediate savings to customers.7 A 2018 report from Rocky Mountain Institute shows Tri-State Generation and Transmission Association, which includes 43 electric cooperatives and public power districts in Colorado, Nebraska, New Mexico, and Wyoming, could save at least $600 million by 2030 and reduce their risk by using their coal plants less and investing in more renewable energy.8
Beyond the powerful report conclusions, major utilities are making big commitments to renewable energy. Xcel Energy, an investor-owned and profitdriven utility, recently committed to 100 percent carbon free electricity by 2050.9 Also in 2018, Great River Energy, a generation and transmission cooperative serving 28 electric distribution cooperatives in Minnesota, committed to 50 percent renewable energy by 2030.10 In a fact sheet, Great River Energy says, “Renewable energy, particularly wind, is Great River Energy’s lowest-cost option for new generation resources… Great River Energy’s average wholesale rates will remain flat in 2019 with projected increases below the rate of inflation for the next decade.”11
In 2016, Kit Carson Electric Cooperative bought themselves out of their Tri-State Generation and Transmission Association contract to transition to 100 percent daytime solar generation, which is pro jected to save at least $30 million over 10 years.12 And, other Tri-State Generation and Transmission Association member cooperatives are looking into buying themselves out or increasing the association’s 5 percent cap on local renewable energy generation. Cooperatives across the country are locked into similar long-term, 40-plus year contracts with their generation and transmission cooperatives, some allowing only a couple dozen kilowatts or zero local renewable energy generation. These long-term contracts are often driven by outstanding debt for coal plants.
With the rapidly declining cost of clean energy and the rise in the cost of coal and other fossil fuel sources of energy, continuing to operate these plants is becoming increasingly costly. Rural communities beholden to these uneconomic assets held by cooperatives are on the path to higher utility rates, as well as insolvent and unstable utility organizations without a change in direction.
In 1989, the Colorado-Ute Electric Association encountered financial trouble resulting in bankruptcy. Tremendous trust was placed in two very strong-willed managers for the 30 years prior to filing bankruptcy. In hindsight, the situation could have been avoided but for a strong manager/weak board corporate culture. The managers failed to address the growing financial situation, and board leadership failed to adjust its vision of the future to emerging realities. Once the financial troubles grew to a crisis, creditors and regulators were unsympathetic to Colorado-Ute Electric Association’s pleas for help.13 This bankruptcy provides a lesson and opportunity for cooperative board members to ensure they are asking the right questions, staying grounded in the latest energy technology and market trends, and standing up for memberowner interests. This kind of forward-looking leadership will be required to usher in an equitable coal transition at electric cooperatives that takes workers, communities, and member-owners into account.
Rural communities could better pursue a clean energy future if current debt on existing coal plant infrastructure could be eliminated in exchange for a requirement to invest in clean energy and energy efficiency. Such a deal would incentivize the retirement of existing coal plants. These investments would help rural communities transition to energy independence and clean energy, but it could also provide cost savings through energy efficiency upgrades.
Instead, incoming cash from ratepayers is being used to pay off debts from old, uneconomic coal plant infrastructure. By being relieved of these debtladen assets, cooperatives would have more resources to invest in clean energy, although there is a need to ensure that member-owners see economic benefits of these policies. In this report, we describe successful efforts and a path forward to expanding such efforts…
Message 1: Reduced agricultural productivity
Food and forage production will decline in regions experiencing increased frequency and duration of drought. Shifting precipitation patterns, when associated with high temperatures, will intensify wildfires that reduce forage on rangelands, accelerate the depletion of water supplies for irrigation, and expand the distribution and incidence of pests and diseases for crops and livestock. Modern breeding approaches and the use of novel genes from crop wild relatives are being employed to develop higher yielding, stress-tolerant crops.
Message 2: Degradation of soil and water resources
The degradation of critical soil and water resources will expand as extreme precipitation events increase across our agricultural landscape. Sustainable crop production is threatened by excessive runoff, leaching, and flooding, which results in soil erosion, degraded water quality in lakes and streams, and damage to rural community infrastructure. Management practices to restore soil structure and the hydrologic function of landscapes are essential for improving resilience to these challenges.
Message 3: Health challenges to human populations and livestock
Challenges to human and livestock health are growing due to the increased frequency and intensity of high temperature extremes. Extreme heat conditions contribute to heat exhaustion, heatstroke, and heart attacks in humans. Heat stress in livestock results in large economic losses for producers. Expanded health services in rural areas, heat-tolerant livestock, and improved design of confined animal housing are all important advances to minimize these challenges.
Message 4: Vulnerability and adaptive capacity of rural communities
Residents in rural communities often have limited capacity to respond to climate change impacts, due to poverty and limitations in community resources. Communication, transportation, water, and sanitary infrastructure are vulnerable to disruption from climate stressors. Achieving social resilience to these challenges would require increases in local capacity to make adaptive improvements in shared community resources.
A. Federal regulatory action
The Rural Utility Service, as the USDA administrator for electricity programs, has the ability to take certain regulatory action on rural electric cooperatives. The Rural Utility Service has done this in the interest of cooperative member-owners in the past.
In the mid-1990s, a generation and transmission cooperative of 12 distribution electric cooperatives in Louisiana, Cajun Electric Power Cooperative, went bankrupt due mainly to an investment in nuclear generation that they were not allowed to recover through their rates. “U.S. District Judge Frank Polozola has settled 22 lawsuits involving bankrupt Cajun Electric Power Cooperative and Gulf States Utilities Company over the River Bend Nuclear Generating Station. The settlement turns Cajun’s 30 percent share of River Bend over to the Rural Utilities Service, which holds liens on most of Cajun’s assets.”50 In the case of bankruptcy, Rural Utilities Service traded bad debt for ownership of the assets. Today, Rural Utilities Service could do something similar at a larger scale and take ownership of rural electric cooperative coal assets in exchange for forgiving the debt and rural electric cooperative investments in energy efficiency and renewable energy. Then, Rural Utility Service could work to quickly retire the use of these fossil fuel assets in the interest of the American people.
Since this option is a regulatory action with legal precedent, this option is worth consideration as it would require no legislative action. It could be possible without the passage of new legislation. However, this option might be limited in scope due to the current available Rural Utility Service budget. A budget with more money allocated to reducing stranded assets of rural electric cooperatives could deliver a more rapid response from cooperatives that would deliver larger investment in clean energy and a scaling down of fossil fuel resources.
B. Debt absolution (bailout)
To remove the barriers of debt to electric cooperatives reducing their fossil fuel generating capacity, one potential option is to simply absolve rural electric cooperatives of their debt associated with coal plants.
As major holders of rural electric cooperative debt, the federal government could create a fund to absolve rural electric cooperatives of their coal debt, with the goal of incentivizing cooperatives to make new investments in clean energy generation capacity. By eliminating federally held debt, cooperatives could, in theory, retire their stranded assets (coal plants) and invest in cost preferential wind and solar. However, it is unlikely the simple elimination of federally held debt would result in the desired clean energy transformation. Currently, the amount of debt held by non-government financiers is unknown. This private debt would still drive future resources decisions by many cooperatives. Further, there is no guarantee cooperative decision makers would take the lowest cost options of wind and solar. It is possible that board and management culture at many cooperatives could lead to perpetuated notions about the unreliability of wind and solar.
While the elimination of federally held coal debt would certainly impact cooperatives’ decision making, it would need to be delivered in conjunction with another solution or with strict stipulations to guarantee the desired outcome.
C. Credit asset swap
Adjacent to the concept of debt absolution would be the approach of a credit asset swap, the trading of new lines of credit for the retirement of coal assets held by rural electric cooperatives. A thorough argument for such an asset swap would require a more complete record of the debt and generation capacity held by rural electric cooperatives than the authors of this report were able to procure. A federal credit asset swap policy would need to be designed in such a way that there would be some guaranteed clean energy and energy efficiency outcomes.
First, the credit asset swap would need to demand that newly extended credit would only be offered to wind, solar, and storage projects, and not natural gas. Many utilities still find “base load” natural gas appealing either for the return on investment guarantee in regulated markets, the background of their current management and workforce, or the argument that wind and solar are unreliable.
Second, the policy would need to be constructed in an advantageous way to allow cooperatives to retire all their coal resources. A very rough, simple way to express this would be to find the total value of electric cooperative debt (both public and private) tied up in coal and/or fossil fuel infrastructure. Another way to express this would be identifying the ratio of net asset value of fossil fuel assets relative to total assets, multiplied by the total outstanding debt, to give us a measure of the fraction of cooperative debt associated with fossil fuel assets. Then, find the total necessary fossil fuel megawatt capacity that would need to be replaced. With those two numbers in place, one could identify a dollar per megawatt number that could guide the creation of a credit asset swap policy. Ideally, this calculation would include an estimate of the electric load that could be reduced with greater investments in energy efficiency and shifted to better match supply with demand response.
Challenges arose for the authors of this report in researching this number. The 2018 to 2019 federal government shutdown delayed the receipt of the lion’s share of any publicly available data reflecting debt held by the Rural Utility Service. Further complicating matters, the authors of this report could not identify a reporting infrastructure on privately held debt by rural electric cooperatives. Therefore, a more robust recommendation, formula, or process on a best path forward remains for future discussion.
Securitization is a financial strategy which allows utilities to use future ratepayer revenues as collateral for new bonds, which can finance more economic, read clean, generation assets.51 Securitization is a way for utilities to raise lowcost debt for near-term financing needs, providing utilities compensation for the unrecovered value of their stranded assets. It allows the utility to gather the value of stranded assets in retiring coal and nuclear plants while minimizing the impact on ratepayers without increasing rates on customers.
By pooling future ratepayer revenue and selling them as a private bond to investors, ratepayers can pay the same rates for electricity service while paying off the bond, rather than paying higher rates required to raise capital to finance a given project. While this keeps rates low for ratepayers, it may not direct new investment into clean energy on a faster schedule specifically named in the policy.
Securitization has been a strategy that utilities have used for quite some time for financing new utility projects including investments in wind and solar. The strategy, according to a Sierra Club Report, protects both ratepayers from rate increases and shareholders (in the case of investor-owned utilities) from profit loss. Securitization, therefore, can be effective at leveraging existing coal assets for new wind and solar projects…
However, securitization is not a viable option for many cooperatives across the country. More than 20 states have laws allowing utilities to securitize their assets and others are currently considering securitization legislation. A piece of national legislation could extend this financial tool to electric cooperatives across the country.
E. Rural Utility Service Refinancing
Another option for drawing down electric cooperative coal debt and retiring the rural electric cooperative coal fleet would be to allow federal refinancing of the loans for the stranded assets.
For instance, the Rural Utility Service could offer advantageous refinancing of both public and private debt for cooperatives willing to meet certain terms. These terms would, of course, ensure new investments in renewables as well as other energy efficiency upgrades and modernized infrastructure.
A major advantage of this proposal is that it would be an adjustment to an existing program offered by the Rural Utility Service. An adjustment to the Rural Utility Service’s Electricity Program that would offer such a shift in funding would need to be made through the farm bill.
Any or multiple mechanisms discussed above could be passed as stand alone federal legislation. However, a more realistic course of action would be to package one or multiple of these strategies in existing legislation in Congress.
The Agriculture Improvement Act of 2018, generally known as the farm bill, made some minor changes to electric programs offered by the Rural Utility Service. However, most focus in recent years to Rural Utility Service financing has been concerning rural broadband. Certain clean energy programs within the farm bill, such as the Renewable Energy for America Program, historically have enjoyed strong bipartisan support.
Support for rural broadband and clean energy could be provided together in a revisioning of selfsufficient, resilient rural communities for the 21st century. A vision that combines financing of microgrids, small scale wind and solar generation, storage capacity, and connectivity would redefine the rural cooperative business model to better take advantage of the natural advantages of rural communities. These new technologies will provide economic opportunity and new career opportunities as part of a just transition to a clean energy economy. Coupling these services with new financial investments would better capture the value produced for rural areas. “Just Transition” as defined by the Climate Justice Alliance “is a vision-led, unifying, and place-based set of principles, processes, and practices that build economic and political power to shift from an extractive economy to a regenerative economy.”59,60 Additionally, a quintessential part of a just transition is “deep democracy in which workers and communities have control over the decisions that affect their daily lives.”61 Electric cooperatives with a core principle of democratic member control have an opportunity to carry out this just transition through community engagement and deep democracy to plan out the transition to 100 percent renewable energy in their communities.
Future farm bills could offer a potential opportunity for a debt restructuring mechanism that could retire rural electric cooperatives’ coal generation fleets in exchange for new clean energy developments. As the farm bill typically contains amendments to the Rural Electrification Act, this would be the most appropriate pathway for introduction of this idea. Further, since the farm bill draws the attention of many national groups focused on rural policy, it could be an opportunity to build a coalition in support. Rural electric cooperatives themselves would be foolish to not support a piece of policy that would relieve them of their uneconomic assets while offering a bold revisioning of what a rural cooperative could be in the 21st century.
However, such a programmatic shift in Rural Utility Service policy that would drive rural electric cooperative decision making may require a more visionary and sweeping piece of policy to accomplish. Enter the Green New Deal.
In late 2018, new progressive members of the House of Representatives began pushing the Green New Deal as a concept. Their call for a select committee on the Green New Deal reflected a long-standing conversation, considering what a massive reinvestment program would look like that could deliver a just transition to a clean energy economy. The proposal calls for the transition to a “clean, renewable, and zero-emission energy sources” through a “10-year national mobilization.”62 It also calls for a federal green job guarantee and the creation of a national fund for urban and rural resilience to pay for infrastructure upgrades.
Inspired by the New Deal Programs of the 1930s that delivered the Rural Electrification Act and rural electric cooperatives, the Green New Deal would be a major step in curbing greenhouse gas emissions and transforming the U.S. and global economy.
Due to the historic challenges of rural electrification with limited federal support as well as the clear challenges to transitioning to a clean energy economy, the country’s electric cooperative leadership could help shape how a Green New Deal will work best for rural America and lead in Green New Deal implementation.
The Green New Deal would offer a comprehensive vehicle to deliver any one or multiple strategies the authors of this report have suggested. Likely through a robust conversation during the formation and throughout the process by a select committee, other potential solutions to relieve rural electric cooperatives of their coal and fossil fuel infrastructure may be uncovered. Further, this plan could offer adjacent economic strategies for transitioning communities that have been economically dependent on coal and other fossil fuels. Concerns around hardships in rural coal communities and rural communities in general resulting from a clean energy transition can fully be addressed through incorporation of a just transition framework in the Green New Deal.
Rural communities and the electric cooperatives that serve them are at risk from both the consequences of climate change and a rapidly changing energy economy. For rural places to simultaneously mitigate the impacts of climate change, keep utility rates low, and transform their economic future, electric cooperatives must transition to clean energy. Restructuring of electric cooperative debt can help remove barriers and expedite this transition.
With the clock ticking on climate change, rural electric cooperative leadership, clean energy advocates, and rural communities can build a coalition to address multiple concerns that impact every corner of rural, suburban, and urban America. We hope this report is the beginning of a robust conversation around electric cooperative reform and the transition to a clean energy economy for rural communities.
We hope more advanced, technical research can be done in the interest of clarifying or identifying new coal debt restructuring mechanisms. We hope for the future of rural America.