This research study aimed to evaluate how access to direct-pay tax incentives would impact levels of renewable generation in rural electric cooperatives. Cooperatives, unlike investor-owned utilities, have not previously been able to access the full value of renewable energy tax incentives due to their nonprofit status. Overall, the study found that access to direct-pay tax incentives would not increase the levels of renewable generation in electric cooperatives compared with already planned generation additions.
With President Biden’s ever-growing push for the retirement of fossil assets and increased renewable penetration in the US grid, the focus has mainly fallen upon investor-owned utilities (IOUs). Electric cooperatives, originating from the Rural Electrification Act of 1936, serve 42 million people (13% of U.S. electric customers) and power 56% of the United States landmass. Tax incentives aimed at increasing renewable generation in the country’s grid have only been aimed at investor-owned utilities, independent power producers, and individuals due to cooperatives’ lack of federal tax liability. Though investor-owned utilities serve the majority of US customers, attaining a renewable powered economy cannot happen without participation of cooperatives. An amendment for cooperative access for direct-pay tax incentives was included in the climate package passed by the House, but it stalled in the Senate.
There are several differentiating characteristics between cooperatives and investor-owned utilities, the most important being cooperatives’ nonprofit status, governing principles, and low-density service areas. Electric cooperatives are governed by the seven cooperatives principles: Open and Voluntary Membership, Democratic Member Control, Member’s Economic Participation, Autonomy and Independence, Education & Information, Cooperation Among Cooperatives, and Concern for Community. Cooperatives were created to bring electricity to areas of the country with low population density that were not cost-effective for investor-owned utilities to serve; cooperatives average 6.6 customers per mile of distribution line whereas other utilities average 32 customers per mile of distribution line. The nonprofit status of cooperatives presents a financial hurdle because they are not able to access the full value of renewable tax incentives, relying on partnerships with tax equity investors. Another significant financial hurdle to cooperatives is outstanding debt associated with coal plants. While investor-owned utilities also face the burden of coal debt, they have built-in charges to customer rates for investors to earn a return, allowing them to utilize customer rates to pay off debt. The non-profit structure of cooperatives means that all costs of new investments and debt associated with existing assets are placed upon customers, which coupled with the low customer density of cooperatives, would mean cooperative customers would face unbearable costs to retire coal assets early. Exacerbating the issue of asset retirement and rate affordability is the fact that cooperatives serve 92% of persistent poverty counties in the US.
Direct pay incentives were instituted under the Section 1603 Grant Program as part of the 2009 economic stimulus package and resulted in 34.6 gigawatts of renewable capacity. However, the impacts of these direct-pay incentives were limited to investor-owned utilities. Direct-pay renewable tax incentives are a policy proposition that has regained popularity amidst the COVID-19 pandemic and economic slowdown. Because electric cooperatives have never been granted access to direct pay tax incentives, research evaluating the efficacy of direct pay incentives within the cooperative arena is essentially non-existent.
The population of this research study is electric cooperatives in the United States, specifically generation and transmission (G&T) cooperatives. Because direct-pay incentives apply to renewable generation projects, G&T cooperatives are the appropriate population. The survey received ten responses, four of which were complete. Complete responses were received from Great River Energy, Arkansas Electric Cooperative, Sho-Me Power Cooperative, and South Texas Electric Cooperative. The data utilized in this study is from archival sources and surveys. The archival data is from the EIA-860 Form, which catalogs capacity data by source for every single utility in the country. The archival data is where the study gathers information regarding historical generation capacity for cooperatives by source.
The findings of this study indicate that access to direct-pay tax incentives would not increase the planned generation additions or incentivize a cooperative to add renewable generation. Though this survey aims to be exploratory and not infer causal relationships, there are implications of findings that warrant discussion. Because cooperative responses indicated direct-pay access would not incentivize them to significantly increase their renewable capacity, other policy options such as loan forgiveness, securitization, or changes to RPS requirements may be more viable alternatives to increase renewable generation levels in the United States.
Historical Renewable Generation Levels:
| 2012 | 2014 | 2016 | 2018 | 2020 | Average | |
| Great River Energy | 0.00% | 0.00% | 0.08% | 0.08% | 0.08% | 0.05% |
| Arkansas Electric Cooperative | 7.78% | 7.70% | 7.70% | 7.70% | 7.70% | 7.71% |
| South Texas Electric Cooperative | 0% | 0% | 0% | 0% | 0% | 0% |
| Sho-Me Power Electric Cooperative | 100% | 100% | 100% | 100% | 100% | 100% |
Survey Results:
| Great River Energy | Arkansas Electric Cooperative | Sho-Me Power Cooperative | South Texas Electric Cooperative | |
| Planned Fossil Retirements | No | No | No | No |
| Planned Retirements (MW) | 0 | 0 | 0 | 0 |
| Planned Capacity Additions | Yes | No | No | No |
| Capacity Additions (MW) | 800 | 0 | 0 | 0 |
| Renewable Additions (MW) | 800 | 0 | 0 | 0 |
| Would Direct-Pay Access Change Additions | No | No | No | No |
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