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Clean Energy Investments for Rural America Are Booming

The IRA-backed New ERA program advances a more reliable, affordable, and clean electricity system for rural America.

The Empowering Rural America (New ERA) program, which was established by the Inflation Reduction Act (IRA), is the federal government’s largest investment in rural electric systems since the New Deal. In 1936, the New Deal’s Rural Electrification Act funded the creation of rural electric cooperatives (co-ops), and expanded access to electricity for rural America. Fast forward to the present day, and the $9.7 billion New ERA program aims to improve access to clean energy for rural America in order to reduce electricity rates for co-op members, improve health outcomes, reduce greenhouse gas emissions, and promote reliability by modernizing the grid.

Interest from rural America and co-ops for the New ERA program has been overwhelming, with 157 proposals from nearly every state and Puerto Rico, Guam, and the US Virgin Islands. If every proposed project were to be built, they would represent $93 billion in combined public and private investments in rural America. More than 50 percent of projects intend to benefit distressed, disadvantaged, energy, or Tribal communities. One applicant estimated their project, if funded, would create potential annual savings of $700 per household through clean energy investments.

While New ERA is an unprecedented opportunity to reshape the energy landscape of rural America, the demand from co-ops exceeds the size of the program. $9.7 billion can likely fund half of the projects included in initial applications. The strong demand from co-ops illustrates the value of federal funding that is designed to meet the energy needs of rural America. Before the IRA, co-ops were largely unable to access clean energy incentives. New ERA, in contrast, is structured to ensure that co-ops can use the funding to benefit their members.

Demand for the program also illustrates that rural communities are long overdue for support to strengthen their electric systems. Over the coming months and years, the federal government and co-ops will use the program to fund clean energy systems. These stakeholders must ensure the program funds are maximized to serve rural communities across the country.

How we got here: Before the IRA, co-ops faced barriers to access clean energy incentives for rural Americans

In the mid-1930s, only 10 percent of rural households were connected to the electric grid. Building a grid to connect low-density areas is more difficult and expensive than in cities, and investor-owned utilities provided only limited service. Today, co-ops provide electric service, and in some cases broadband access, to 42 million Americans within nearly every state. Co-ops still serve primarily rural areas, and while fewer than 15 percent of Americans are co-op members, 56 percent of the nation’s landmass is served by co-ops. And of the counties that co-op’s serve, 92 percent of them experience persistent poverty.

Exhibit 1. Area of the United States served by co-ops.

Co-ops are non-profits, and the households and businesses within their service territories are members. This means that they own the utility and participate in governance decisions including board member elections. These characteristics — non-profit status, member ownership, and a rural and relatively low-income membership — are important context for understanding the benefits that rural America can unlock with New ERA.

Over the past decade, many energy companies have used clean energy tax credits and other financial incentives to invest in wind, solar, and battery storage — technologies that are now the some of the most cost-effective ways to generate electricity. Before the IRA, co-ops were not able to directly take advantage of these incentives to finance and own clean energy themselves. Instead, they had to rely on buying clean energy from other energy companies — and sharing the benefits of federal tax incentives with investors in those companies. As a result, while many Americans are enjoying the benefits of inexpensive wind and solar, members of rural electric co-ops had only limited access.

Exhibit 2. Comparing renewables uptake from selected power providers.

The challenges that co-ops have faced in making use of federal incentives for clean energy are related to their non-profit status and member ownership structure. Most co-ops do not have a federal tax liability that they can offset with a clean energy tax credit and thereby lower the cost of clean energy relative to continued operation of their fossil plants. And unlike their investor-owned counterparts, co-ops are unable to rely on capital markets to raise equity for capital intensive wind, solar, or battery projects. These characteristics made clean energy investments more expensive for co-op members. New ERA is structured with these challenges in mind.

How New ERA resolves key financial challenges

New ERA and direct pay tax credits empower co-ops to invest in commercially proven technologies, ensuring a healthy balance sheet for future investments in a reliable and affordable electric system for members. Eligible investments include projects that immediately reduce or avoid greenhouse gas (GHG) emissions, such as constructing new renewable systems, procuring clean power, upgrading transmission and energy storage systems, and implementing carbon capture systems.

The New ERA program provides grants and/or loans with a maximum individual award of $970 million. The financing structure of these projects will look different depending on the type of award (i.e. grant or loan). Grants have the unique characteristic that they can be booked as an equity infusion but are limited in that they can only account for up to 25 percent of the total project costs.

In addition to New ERA awards, co-ops can use an important change to clean energy tax credits from the IRA to maximize support for clean energy acquisitions. Prior to the IRA, non-profits and other tax-exempt entities were unable to directly use tax credits for clean energy projects. The “direct pay” provisions in the IRA means these entities can now receive the full value of the Production Tax Credit and the Investment Tax Credit. Co-ops can maximize the use of these direct pay tax credits to pay for new investments in wind, solar, and storage, considering bonus adders for projects in energy communities and that use domestic content that can further boost tax credits.

New ERA, along with other IRA programs, addresses key challenges that previously impeded the transition to clean energy for co-ops:

Exhibit 3. Key challenges for co-ops to join the energy transition.

New ERA funding unlocks substantial economic benefits for rural America

New ERA paves the way for investments in renewable energy that can bring significant economic advantages to co-ops and their members in rural communities across the country.

Co-ops have an important economic role in rural communities. An analysis from the National Rural Electric Cooperative Association (NRECA) found that co-ops currently support nearly 623,000 jobs with $51 billion in pay and benefits each year, generating approximately $135 billion in federal, state, and local tax revenue in the period between 2018 and 2022. And with the injection of new federal funds into clean energy deployment, they are poised to deliver even greater benefits.

A recent RMI analysis found that IRA programs have the potential to unlock more than $1 billion in investments in every state by 2030, if consumers and businesses adopt clean technologies at the pace and scale needed to meet national climate targets. The two states with the largest distribution co-ops, Texas and Georgia, could see $131 billion and $16 billion of investments respectively.

According to another RMI analysis, a $10 billion investment in wind and solar projects for co-ops can yield just over $50 billion in wind and solar-induced economic development revenues and position co-ops to be renewable energy leaders. By 2030, a primarily carbon-free grid could deliver nearly $11 billion per year in direct benefits to rural communities where these projects are sited, which includes $2.7 billion in annual local taxes, $2.2 billion in annual lease payments to rural landowners, $2.3 billion in construction job wages, and $3.7 billion in wages for operation and maintenance workers.

Exhibit 4. Economic benefits of clean energy development in rural America.

A third RMI analysis found that clean electricity tax credits will create meaningful economic benefits, saving American households more than $5 billion annually by 2024, leading to immediate benefits for co-ops and their members.

Co-ops and their members have shown a strong demand for the New ERA program. By maximizing the use of the New ERA funds, the federal government can demonstrate its commitment to strong, reliable, and affordable rural electricity systems by empowering co-ops to invest in and foster the long-term sustainability and prosperity of rural America.