Written Testimony of

Associate Professor Gabriel Chan

Charles M. Denny Jr. Chair in Science, Technology, and Environmental Policy

Hubert H. Humphrey School of Public Affairs

University of Minnesota

 and

 Co-Director, Electric Cooperative Innovation Center

 gabechan@umn.edu

Congressional Briefing: Local Impacts of Rural Energy Programs

November 9th, 2023

Dear Members of this Congressional Briefing,

Thank you for offering me the opportunity to provide comments during this briefing. It is an honor to be able to offer my perspective on a topic that is of great importance to the national interest.

My name is Gabriel Chan. I am currently the Charles M. Denny Jr. Chair in Science, Technology, and Environmental Policy at the University of Minnesota. And I am the Co-Director of the Electric Cooperative Innovation Center, an inter-university research center that builds university partnerships with electric cooperatives. Our center has published nearly two dozen peer-reviewed publications and white papers on the electric cooperative sector in collaboration with co-op systems across the country and other university and National Lab researchers.

Summary

Electric cooperatives are the backbone of rural economies throughout most of the United States, providing critical infrastructure in rural communities while demonstrating the capacity of rural communities to self-determine their own future.

Today, 832 distribution (or “retail”) electric co-ops provide approximately 14% of all electricity sold to serve over 40 million people across 56% of the nation’s land mass.[1] Because they serve predominantly rural areas, co-ops have built and maintain an electric distribution network that has less than one-third of the density of other utilities. Yet despite needing more infrastructure to serve their member-consumers, in most states, electric co-ops provide more affordable or comparably affordable electricity service to for-profit utilities.[2]

How did we get here? The story of rural electrification has been told countless numbers of times. Dozens of rural communities began forming their own utilities from the bottom up in the 1910s, just a few decades after Thomas Edison invented the lightbulb. By the time of the start of the Great Depression at the end of the 1920s, for-profit utilities had built up infrastructure to provide near-universal electricity access to urban centers. But there was also growing suspicion of their abuse of power as “natural” monopolies.

The fact remained that at this point in the 1930s, nearly 90% of farms lacked access to electricity where a lack of density created a sense that there was limited profit to be had extending lines to rural communities. When it came time to envision how rural electrification could close the urban-rural infrastructure divide and reinvigorate rural economies, the Franklin Delano Roosevelt Administration wrestled with different approaches, considering incentivizing for-profit utilities, expanding federally owned utilities, and creating new supports for rural communities themselves to provide their own power. Ultimately, the FDR Administration pursued all three approaches. And the rural co-ops that we know today grew from the programs of federal support directly to rural communities that were created under the umbrella of the Rural Electrification Administration.

Over time, the REA, now the Rural Utility Service, or “RUS,” successfully enabled rural communities to finance, build, and maintain the vast network of electric distribution networks across rural America. And by the 1950s, electric co-ops became the primary means by which over 90% of rural Americans accessed electricity. The REA was so successful in closing the infrastructure gap between urban and rural communities, that electric co-ops soon began to outgrow their existing sources of power.

And at the same time, large-scale generation, particularly in the form of coal plants but also nuclear plants, began to crowd out alternatives. In order to take advantage of lower-cost, economies-of-scale power from central station plants, while working with federal power agencies like TVA and WAPA, electric co-ops across the country began to work together to form generation and transmission, or “G&T,” cooperatives.

G&Ts provided the structure for small distribution utilities to work collectively to finance and govern large-scale generation infrastructure and the high-voltage transmission infrastructure needed to deliver power over long distances. As G&Ts were building out their capacity, admittedly a few years behind the for-profit utilities serving mostly urban areas, the nation found itself in an energy crisis. From 1978-1987, Congress required that all new “baseload” power plants have the capability to use coal rather than natural gas and petroleum through the Powerplant and Industrial Fuel Use Act. Over the ten years that this act was in law, two-thirds of the coal generation owned by co-ops today was built. To support the financing of large collective investments, local distribution cooperatives accepted the REA’s mandate that they enter into long-term contracts for energy services, thereby binding themselves together with their G&T cooperative “families” for multiple decades, consistent with the expected lifetime of their co-invested assets.

Now, as we look to the next generation of cost-effective energy technologies, new programs targeting electric cooperatives need to take into account the economics of technologies today and the commitments co-ops have made to each other to work collaboratively.[3]

The co-ops are now navigating a period of profound and rapid change across a growing urban-rural divide. The way we make decisions about energy investments in urban vs. rural communities is still fundamentally shaped by the different ways in which we govern the for-profit utilities that largely serve urban areas, and the not-for-profit cooperatives that largely serve rural areas. As the costs of new energy sources have come down dramatically over the past decade, for-profit utilities have gone to their state regulators and proposed plans by which they can move to retire their legacy assets early, replace them with new renewable sources, and shift the costs of stranded asset debt onto ratepayers, while also driving returns to their shareholders. In some cases, this swap of “steel for fuel” can improve outcomes for customers too because the cost of renewables has come down so much that the savings can help cover the cost of legacy-asset debt. But this kind of energy transition “maneuver” is more difficult for co-ops to navigate because their legacy assets tend to have more meaningful life remaining and they tend to be more risk averse because they do not have the cover of state regulators to protect their business interests.

As Congress has taken up the question of how to enable an energy transition that is beneficial to all Americans, two new programs under USDA in the Inflation Reduction Act stand out as critical policies to enable rural communities to thrive in a new energy economy, the Empowering Rural America, or “New ERA,” Program, and the Powering Affordable Clean Energy, or “PACE” Program. Additionally, the IRA also expanded the USDA’s Rural Energy for American, or “REAP” program. These programs develop targeted grant and financial assistance to rural communities to invest in new clean energy projects that reduce carbon emissions and refinance the debt associated with legacy fossil fuel assets that are no longer economic.

As you will hear later in this briefing, electric co-ops leaped at the opportunity to engage with these new IRA programs. The USDA reports that it received over $47 billion in requested funding through the New ERA program, over $12 billion in requested funding in the PACE program, and $840 million in requested funding through the REAP program. USDA has described this as an “overwhelming response” from rural cooperatives and rural communities.

These projects have the potential to be transformative for rural communities by providing a pathway to build new clean energy projects at scale while managing the debt associated with their legacy assets. This ensures that the energy transition can move at a rapid pace while ensuring that the transition happens on an affordable and reliable path while also enabling beneficial electrification and creating more economically resilient economies. It is also a sign of continuous support and partnership from the federal government that began in the 1930s.

Important to the design of these new IRA programs is the requirement to maximize other opportunities from the IRA, including the Investment Tax Credit, and the requirement that co-ops and other entities that receive funds to have skin in the game. For example, under the New ERA program, USDA reports that individual proposals from co-ops would, on average, leverage over one billion dollars in investments in rural communities, and over $100 billion nationally. In many cases, we’ve seen leverage ratios above 3-to-1, meaning more than $3 invested in clean energy for every $1 invested by the RUS.

As we look to the future, I believe that the IRA programs directed to rural communities to drive an energy transition will be transformative and ensure that rural communities can be at the forefront of benefitting from clean energy. Rural communities are already hosting the vast majority of new solar, wind, and transmission projects. The legacy of the federal government’s support for rural communities to self-determine their own energy future with supports through the RUS is no better exemplified than by these IRA programs. These programs provide pathways for co-ops to continue on their paths of enabling rural communities to self-determine their energy futures and directly benefit from the energy transition.

Thank you and I would welcome your questions at the end of this briefing.