Christmas In August: Electric Utilities Hit Renewable Pay Dirt With IRA Passage

Source: By Llewellyn King, Forbes • Posted: Monday, August 22, 2022

Christmas came early in the electric utility industry this year. To be precise, it arrived on the afternoon of Aug. 16, when President Biden signed the Inflation Reduction Act into law. It is not only a bonanza for all three types of electric utilities – investor-owned, public power, and rural cooperatives — but also a much needed one if the pace of the nation’s electrification is to continue.

For several years, electric co-ops and other stakeholders have been working on legislative priorities to support energy investment in rural communities, and fortuitously for them, these provisions were incorporated into the IRA.

The big winners are public power utilities and rural co-ops — the latter getting slightly more than the not-for-profit companies in the public power segment.

Two Big Wins

The great prizes are the extension to not-for-profit utilities of the investment tax credits and production tax credits normally associated with tax-paying entities. These will be recovered by the not-for-profit utilities through “direct pay,” which means just that: a check.

As not-for-profit utilities don’t have an income tax liability, they have had in the past to collaborate with for-profit companies to reap any of the tax credit benefits. Now they will get a direct payment from the Treasury Department.

As Louis Finkel, senior vice president of government relations at the National Rural Electric Cooperative Association, explained in a telephone interview, under the IRA bill, what would have been investment tax credits are refunded directly by the government. This has been something that the electric cooperative movement and the public power segment have been seeking for a long time.

In the West, Duane Highley, president and CEO of Tri-State Generation and Transmission Association, has been a ceaseless campaigner for direct- pay provisions that create a more level playing field for solar and wind development between not-for-profit electric co-ops and for-profit, investor-owned utilities. He said, “Because the hard work of many policymakers and stakeholders, the co-op provisions signed into law will drive investment, bolster jobs and preserve the reliable, affordable power that drives rural prosperity.”

David Naylor, president of Rayburn Country Electric Cooperative Association in Rockwall, Texas, echoed Highley in an email, “Rayburn appreciates the flexibility the IRA provides. Namely, as a tax-exempt entity, ownership of renewable projects has effectively been a non-starter. The direct pay puts that option back on the table and increases the value to our members and the consumers on the end of the line.”

One of the co-op plums is $9.7 billion allocated to the Agriculture Department specifically for energy transition “through grants, loans, and loan modifications.” An additional $1 billion is available in a loan program for the deployment of new renewables and storage, with up to 50 percent of those special loans forgivable, according to Tri-State.

The many provisions are directed heavily toward new carbon-free generation and storage systems. Edge technologies, like hydrogen and small modular reactors, are favored as is carbon capture, sequestration and storage.

NRECA’s Finkel, gave this example of how the carbon capture provision might work, “For the past 10 years, one of our big generation and transmission members in North Dakota has been working towards commercial-scale carbon capture and sequestration. [It’s] a project that’s going to cost a couple of billion dollars to remove 90 percent of the carbon from the plant.”

Finkel said the utility would probably have gone ahead without the direct-pay provisions in the IRA bill, but now it will create an economic equalizer for them. Of special interest is that this is a coal-fired plant and success could be significant.

Innovative New Generation

Finkel believes that the new financial order in the rural co-op space will stimulate innovation and lead to some dramatic changes in the business. For one, he said, some rural co-ops are now looking at small modular nuclear reactors and he wouldn’t be surprised to see them added to the generation mix.

Also, Finkel said, some traditional transmission-only co-ops are likely to start thinking about adding their own generation.

My thought is that there will be a great surge in new generation across the utility space, particularly in the co-op segment. However, there are serious impediments, including:

· The new money will be a little while in coming. The Treasury Department has 180 days under the statute to issue its “guidance” on how the law will be implemented.

· There are the problems that utilities are already facing with materials and equipment supply chain delays.

· There is a plethora of licensing delays, and, in some cases, permission will have to be sought from state regulators.

The overriding concern about the future of the renewables is transmission. Already, there are many bottlenecks and utilities can’t get their power to market because there isn’t enough transmission.

Transmission, particularly west-to-east, is quite possibly the largest quandary for the future of reliable supply to the grid.

While Tri-State’s Highley is a notable crusader for better transmission, he concedes that transmission for the foreseeable future will have to be through established corridors.

Lack of transmission is felt everywhere, even within states. For example, wind resources around Abilene, Texas, are being abandoned, according to local media, because there is inadequate transmission to the ERCOT grid.

Highley told me during a recent conversation that eventually there may have to be preemptive federal legislation to bring sunshine from Colorado and wind from Nebraska to the energy starved parts in the Midwest and East.

One way or another, huge generation and transmission additions will be needed if the nation is going to electrify its surface transportation. The accepted projection is that generation will have to double by 2050. It will have to increase by 170 percent, Finkel said, citing the National Academy of Sciences, and that is without retiring any fossil generation.

There are challenges ahead, but for now there is euphoria throughout the electric utility industry.