Rural utilities turn ‘disruptive’ as they embrace renewables

By Jason Plautz | 03/23/2023 07:01 AM EDT

The nation’s small, nonprofit electric cooperatives are grappling with how to transition to clean energy. For some, the answer is ditching traditional power providers and deploying their own renewable projects.

Steam billows from a coal-fired power plant.

Steam billows from a coal-fired power plant in Craig, Colo., in 2021. Rick Bowmer, File/AP Photo

This story was updated at 11:50 a.m. EDT.

Last year, Kit Carson Electric Cooperative Inc. hit a long-awaited milestone: It met 100 percent of its daytime energy demand with solar power.

The New Mexico utility’s achievement was the result of years of new solar construction and power purchase agreements — steps that the small, rural cooperative was only able to take after making a radical change to its management structure.


In 2016, Kit Carson left the Tri-State Generation and Transmission Association Inc.

At the time, such moves were rare. G&Ts, as they’re known, combine cooperatives into a larger pool, providing electricity generation and transmission services that members may not be able to build on their own. Such associations often require cooperatives to sign long-term contracts that may also limit how much power they can generate independently; for Tri-State, that was 5 percent of a co-op’s consumption.

That made it hard for Kit Carson to switch to renewables in the way it wanted. So the nonprofit’s board voted to leave Tri-State.

Since then, four more of Tri-State’s original 44 utility members either have left or plan to leave.

The turbulence at Tri-State may be isolated to the West, but it foreshadows a national quandary. Each of the nation’s 900 or so co-ops faces a rapid energy transition that could upend traditional business models.

“We’re seeing some really ambitious co-ops start pushing their decarbonization goals further,” said Sam Mardell, senior associate on RMI’s carbon-free electricity team. “That’s making these organizations really rethink the way they provide energy.”

Kit Carson CEO Luis Reyes said the trend reflects changing priorities for rural co-ops during the nation’s energy transition.

“One of the benefits of our board voting for energy independence is the opportunity to be innovative and find out what works for our community,” Reyes said. “If we were stuck at 5 percent, think of all the opportunities we would have lost out on.”

Co-ops distribute electricity to about 1 in 8 Americans, largely in rural or hard-to-reach areas. While their relatively small size in some ways makes them more nimble, their energy transition has come at a slower pace compared to the rest of the country.

In 2020, 28 percent of co-ops’ electricity came from coal, compared to 19 percent nationally, according to the U.S. Energy Information Administration. Because cooperatives have to operate as nonprofit entities, many can’t make hefty upfront investments in new renewable infrastructure or offload expensive fossil fuel plants.

That, however, is about to change. The Inflation Reduction Act, signed into law last year, created a $9.7 billion fund for co-ops to reduce greenhouse gas emissions. While the Department of Agriculture — which oversees co-ops — is still creating the rules for the program, the terms so far are broad and will allow co-ops to apply for grants and loans to build clean energy or phase out fossil fuel infrastructure.

The Inflation Reduction Act also transferred production tax credits for clean energy projects into a direct-pay mechanism, meaning co-ops will be able to get discounts for expensive infrastructure upfront. Co-ops’ nonprofit status meant the credit was previously unattainable.

In all, there is a “remarkable, generational opportunity for co-ops,” said Jim Matheson, CEO of the National Rural Electric Cooperative Association.

But that opportunity also means shifts in decades-old business models. Faced with more flexibility to generate power themselves, some co-ops are forcing their G&Ts to give them more generous contracts — or are bolting entirely.

Take Indiana’s Tipmont Rural Electric Membership Corp., which announced it will exit the Wabash Valley Power Alliance in part to obtain “the flexibility necessary to take advantage of current energy market opportunities.” Co-ops in Minnesota, North Dakota, South Carolina and Texas have all sought ways out of their G&Ts, with some going to court to break their contracts.

In 2021, several co-op executives — including Kit Carson’s Reyes — founded the NextGen Co-op Alliance, an organization that says it wants to “bring power to the people” by restoring more independence to G&T members looking to generate their own electricity. Other groups like the Rural Power Coalition are similarly looking to shake up G&T structures, while G&Ts themselves are engaged in internal discussions about how to handle a shifting electricity landscape.

Matheson said it is a “dynamic and disruptive time” in the industry, but added that co-ops are all working to do what’s best for themselves and their members.

“I like to say it all comes back to serving the customers and that’s what’s driving the governance decisions everywhere,” he said.

‘A thousand points of light’

The nearly 80-year-old Tri-State G&T serves 1 million customers stretching from the suburbs of Denver to ranches in Wyoming.

It was built on a model that’s well-established across the country. Co-ops focused on distributing power band together under a G&T that can use its economy of scale to invest in power generation and transmission.

There are currently 62 G&Ts in the United States, but some question whether the model still works.

Mark Gabriel, the CEO of Colorado-based United Power, is one of those skeptics. Gabriel’s 100,000-member organization covers a diverse mix of customers in the suburbs north of Denver, from ranchers to industrial factories to oil and gas wells. Those members, Gabriel said, are increasingly talking about the same priorities: energy independence, lowering costs and reducing emissions.

“Our members have more choice and are looking more at alternatives,” he said. “We used to talk about moving the grid from a one-way system where we send power from one place to the end of the grid to a two-way system. Now I realize I was wrong: We’re moving from a one-way system to one with a thousand points of light.”

That can take many forms, from an industrial customer looking for on-site storage generation or a far-flung rural community seeking a microgrid. At the same time, the co-op must balance those desires with homeowners who just want to keep their lights on with low rates.

But Gabriel said that wouldn’t be possible under Tri-State, with its caps on generation.

“The exact thing people would like to do, which is to add more renewables, is throttled by a restriction from our power supplier,” Gabriel said.

So at the end of 2021, United notified Tri-State that it would leave the group, setting off a yearslong legal battle.

Another member — Delta-Montrose Electric Association — departed in 2020, and Northwest Public Power Association plans to leave in 2024. And in January, Colorado’s Mountain Parks Electric Inc. announced it would be the fifth to depart, citing the need to keep rates cost-effective in a “constantly evolving wholesale electricity market.” In total, those five members represent roughly 25 percent of Tri-State’s customer base.

In an interview, Tri-State CEO Duane Highley said those exits are less about a national trend and more about the economics and priorities of individual co-ops. As Tri-State’s members — who constitute its board — began agitating over the last decade to move away from coal and toward renewables, Highley said the G&T developed more flexible contracts and stepped up its climate commitments.

Tri-State announced a plan in 2020 to retire its Colorado and New Mexico coal plants and achieve 50 percent clean power by 2025 and 70 percent by 2030. Under a Colorado law, Tri-State has also submitted plans to reduce greenhouse gas emissions 80 percent from 2005 levels by the end of the decade.

“The fastest way to get to renewables reliably is to be a part of Tri-State’s portfolio,” Highley said. “It’s hard to get the economies of scale when you’re on your own in a business that is ultimately an economy-scale business. There’s no quicker way to do it than by staying in the family.”

For some members, it’s enough to continue to reap the benefits of the long-standing cooperative while also moving ahead on an energy transition. Tri-State developed a new, flexible contract option that would allow members to obtain up to 50 percent of their power from other sources, like an outside wholesaler or an on-site project. Six members said they would take advantage of that option, allowing them to stay with Tri-State’s transmission services.

One of them — the La Plata Electric Association Inc. — saw it as an opportunity to strike a balance between renewables and reliability.

“Tri-State would have been there to manage our peaks and valleys, they would have been our resource adequacy entity,” said La Plata CEO Jessica Matlock. “We know them, we’ve worked with them for a long time on transmission and distribution, and it would have just made sense.”

Those contracts, however, are on hold — because of United Power.

When Tri-State and five members submitted the new agreement to the Federal Energy Regulatory Commission, United objected. The co-op — the only party to object — said that the partial contracts would unfairly shift costs to other members and could harm its own exit fee negotiations.

That’s left the agreement pending before the federal board — and has left members in a state of limbo.

“How many more years are we going to want to wait?” Matlock said.

With a dispute over United’s exit fee also before FERC, Highley said that the co-op’s remaining 39 utility members are still working to plan for the future with question marks hanging over the board. Still, he said, those members remain committed to a clean energy future even if it means disrupting decades-old contracts and practices.

“Our members are people like farmers and ranchers, those are the original ESG people,” he said, using the acronym for the environmental, social and governance investing strategy. “They know what it means to be good stewards of the environment, and they ask us to be good stewards of the communities we serve.”

Matheson with the National Rural Electric Cooperative Association said the benefits of the G&T model are especially significant given new federal funding.

“One of the benefits that you’re seeing with these infrastructure and USDA funding opportunities is that the G&T is the aggregator for all those distribution co-ops, and it has the capacity to do major projects,” Matheson said. “They’re going to benefit all those distribution members.”

‘The Tri-State of tomorrow’

The disruptions at Tri-State are creating ripples. In January, Moody’s Investors Service lowered the association’s credit outlook to negative. Tri-State may need to add debt to cover near-term costs, Moody’s warned, especially with fuel and power purchase costs rising.

“As a not-for-profit cooperative, Tri-State continues to use deferred revenue to stabilize and reduce our members’ wholesale rates, delivering immediate cost savings at a time when inflation, supply chain pressures and rising energy costs are affecting rural communities,” Highley said in a press release responding to the downgrade.

Debt concerns loom over many co-ops, given the high costs they have paid to create generation. That, in turn, complicates decisions to shutter existing infrastructure and invest in new renewables, even as the costly upkeep and reduced use of coal plants diminishes their value. According to 2019 estimates by the Sierra Club, coal plants owned by G&Ts represented around $15 billion in stranded market value, although some of the plants in that calculation have since been sold.

The shifting membership also comes as Tri-State is required under Colorado law to file resource plans showing how it will achieve emission cuts. While the first plan, submitted in 2020, is still being debated by state regulators, some environmentalists have raised concerns that it doesn’t reflect the realities of Tri-State’s situation.

For example, only one of the five scenarios modeled in the plan account for the membership exits. Critics say that means Tri-State is overaccounting for its load, which in turn could justify keeping coal plants open longer than necessary. That could mean higher rates for remaining customers for power they may not need.

Tri-State will file a new resource plan before the end of the year, one that will incorporate both the impact of member exits and the opportunities from federal laws. Highley said there is “no question” that Tri-State will meet its emission reduction goals even without revenue from the departing members and emphasized that the entity is making a “lightspeed” transition.

Tri-State was also involved in negotiations over the Inflation Reduction Act provisions that allow co-ops to access grants and loans to reduce greenhouse gas emissions.

“We’ve got a serious responsibility to balance how fast we can move with reliability. There’s a danger that moving too fast can put the grid in jeopardy,” Highley said.

Environmentalists say Tri-State’s new plan — with models that reflect a smaller membership, investments aided by the federal bills and new member priorities — will indicate the direction of the region’s electricity mix.

Eric Frankowski, executive director of the Western Clean Energy Campaign, said that despite its smaller membership, Tri-State can still chart out an ambitious plan that would hasten its transition away from coal. But he said it remains to be seen if the organization will embrace a quicker transition given the “question marks” surrounding its future.

“One thing I can say with certainty is that the Tri-State of tomorrow will look a lot different than the Tri-State of today,” Frankowski said.

Fighting the future?

While every co-op and G&T is different, reflecting their own communities and history, they are all facing degrees of change as the United States transitions to renewable energy. That change can make a significant dent in the country’s emissions, despite co-ops’ limited reach, said RMI’s Mardell.

“Even though these co-ops aren’t as big as the investor-owned utilities, they’re still big, they own a lot of assets, and they’re a huge part of the puzzle,” he said.

Reyes of Kit Carson Electric said that since paying its exit fee, the cooperative members’ electricity rates have dropped more than a third and could continue to drop, even as new technology comes online. By working directly with individual members, he said, Kit Carson has been able to craft bottom-up solutions, like battery storage for its mountain-bound customers and investments in novel green hydrogen and compressed air storage projects.

While investor-owned utilities are defined by a top-down structure that has been criticized for being too reliant on shareholders, advocates say cooperatives have a unique chance to represent customers’ priorities with no middle man.

The Rural Power Coalition, which includes cooperatives and environmental groups, has campaigned for co-ops not just to phase out fossil fuels, but also elevate members’ voices and be more transparent about clean energy opportunities. The coalition’s co-founder, James Owen, said the time was right for a “dogmatic approach that changes the way we’ve done things for 50 or 60 years,” especially with the new opportunities granted in the Inflation Reduction Act.

As executive director of the renewable energy advocacy group Renew Missouri, Owen said he works with co-ops that are heavily reliant on aging coal plants. But he is hopeful that the Inflation Reduction Act’s new funding will not just help them transition, but show how clean energy can attract new business to rural areas that aren’t traditionally seen as energy hubs.

“I think of this $9.7 billion as a good start,” Owen said. “My hope is that we’ll see a lot of projects and infrastructure that is easy to deploy. We can show it’s successful and hopefully build upon that.”

Matheson, of the National Rural Electric Cooperative Association, said that it’s not just about bringing existing technology to co-ops, but showing the unique opportunities that far-flung distribution systems have.

For example, he said, co-ops were among the first to adopt automatic meter infrastructure, an early 2000s version of smart meters that made sense in areas where manually reading meters is a challenge. Now co-ops could be on the leading edge of tools like microgrids, battery storage systems or the use of electric appliances as dispatchable resources.

“It’s true that our size makes economies of scale limiting, but on the other hand we have the ability to be more agile and nimble,” Matheson said.

United Power’s Gabriel said that it is incumbent on co-op leaders to take advantage of every opportunity, even if it means shaking up traditional business models. Moving away from G&Ts, he said, “can be painful, but it’s the nature of the world.”

“At the end of the day, it comes down to our business model, which is to do what supports our members,” Gabriel said. “Fighting the future is not good odds.”