Rural Electric Cooperatives Background

Rural electric cooperatives appear to offer a natural home for renewable energy development. They are frequently located in areas rich in renewable resources and often serve geographically dispersed populations that are well matched to small-scale or distributed power systems. Moreover, they are member-owned and operate for the good of the local community. For these reasons, and because local renewable energy development and distributed resources could bring economic and environmental benefits to such communities, the connection between RECs and renewables seems obvious. Yet many RECs are located in areas equally rich in fossil resources, where avoided power costs are comparatively low. In addition, with relatively modest regulatory oversight and a comparatively conservative organizational culture, most RECs have been unwilling to move beyond a conventional resource mix.

The organizational structure of RECs is an important determinant of the opportunities they offer for renewable energy. First and foremost, RECs are owned and governed by the farms, homes, and businesses that pay the electric bills. Co-op "members" also receive "patronage rebates" if the revenues raised exceed the costs of operation.¹

RECs are usually set up in two functional groups: distribution cooperatives and generation and transmission (G&T) cooperatives (henceforth "co-ops"). Distribution co-ops own and operate the distribution system and customer meters and are directly responsible for serving and billing members. They generally buy the energy and capacity that they need, often under exclusive or "all-requirements" contracts with a G&T co-op. Distribution co-ops are run by professional managers and governed by a Board of Directors consisting of co-op members.

G&T co-ops are owned by the distribution co-ops and serve to aggregate rural customer loads in order to take advantage of economies of scale. They own and operate transmission lines and generators or enter into wholesale power purchase contracts with other generators. G&T co-ops are staffed by utility professionals with expertise in transmission, generation, contracting, and regulatory affairs. They are governed by a Board that contains the managers and directors from the distribution co-ops of the system.

For the most part, this structure theoretically means that co-ops have the incentive, the power, and the mechanisms to make decisions to invest in options that would benefit their members, including renewable energy and distributed resources. Other factors, however, serve to inhibit them. Unlike investor-owned utilities, which raise money by selling stock and taking out loans, co-ops raise capital strictly by taking out loans. In the early years of the Rural Electrification Administration (now the Rural Utility Service), co-ops received low-cost loans at rates guaranteed by the Federal government.² Over the past decade or so, however, co-ops have received fewer such loans and now obtain most of their capital from conventional private sources. Since private sources generally consider renewable energy projects riskier than conventional alternatives, the cost of capital for such projects is higher, and may increase with the advent of competition.

In addition, only 28% of the distribution co-ops in 16 states are subject to some form of rate regulation by state Public Utilities Commissions (PUCs). Nor are power plant choices made by G&T co-ops regulated in most states. The lack of regulatory oversight, combined with an intrinsically conservative management culture, has generally led co-ops to exclude renewable energy from their resource portfolios. This has been reinforced by the ready availability of cheap fossil fuels from local sources, by a legacy of overcapacity from the 1970s and 1980s, and by the low avoided cost of power that results.

Minnesota Co-ops

In Minnesota, G&T co-ops are required to prepare integrated resource plans for review and approval by the Minnesota Public Utilities Commission. Due to their participation in the regulatory process in Minnesota, G&T co-ops play a more active role in shaping state laws and policies governing the electric utility industry than their counterparts in other states.

Renewable energy has a relatively high political profile in Minnesota. In 1994, the legislature mandated a large, investor-owned utility -- Northern States Power (NSP) -- to install 425 megawatts (MW) of wind capacity and 125 MW of biomass capacity by 2002. In exchange, NSP was allowed to store nuclear waste above ground temporarily at the Prairie Island nuclear power plant. Since then, legislators have encouraged other utilities in the state, including co-ops, to support renewable energy actively. Through their regulatory and legislative involvement, Minnesota co-ops also have more contact with stakeholders such as environmental and consumer groups. All these factors tend to improve prospects for renewable energy development in Minnesota co-ops.

In this project, Dakota Electric Association (DEA) is the lead distribution co-op interested in offering green power to its customers.³ With more than 75,500 members, DEA is the second largest distribution co-op in Minnesota and about eight times the size of the median distribution cooperative in the United States. DEA is also unusual among distribution co-ops because it serves a county that is largely a suburb of a major city (Minneapolis and Saint Paul, to the north). Its 507-square-mile service territory borders that of Northern States Power. DEA believes that its members are environmentally conscious, and it has succeeded with a number of environmental initiatives in the past, including a fluorescent light recycling program conducted with the Dakota County government. This perception and experience created a context in which a renewable development project was a possibility. At the same time, DEA's electricity rates are essentially equal to NSP's on average. The co-op believes this rate parity is very important to maintain.

Cooperative Power (CP) is the generation and transmission co-op that acquires and delivers power to Dakota Electric and 16 other distribution co-ops serving 500,000 customers in Minnesota (see Figure 1). This power travels over 2,000 miles of high-voltage transmission lines to 261 substations monitored by the distribution co-ops. CP receives 85% of the capacity it needs from two coal-fired power plants. Its "flagship" resource is Coal Creek, a 1,100-MW coal-fired power plant in North Dakota that it co-owns with United Power Association, another G&T co-op serving rural Minnesota. This baseload plant was built in the 1970s and burns low-sulfur lignite coal from an adjacent strip mine. CP also receives coal-fired electricity from a plant located just across the Minnesota border near La Crosse, Wisconsin, which is operated by Dairyland Power Cooperative, another G&T cooperative.

The other generating resources providing peaking capability and statistical reliability to the CP mix include an oil-fired combustion turbine generator and hydropower from the Western Area Power Administration. Like other utilities in the upper Midwest, CP has been growing into the excess baseload capacity that it owns. As a result, the value of new power resources added to the CP system -- the avoided costs -- are low, in essence determined by the cost of marginal operation of the Coal Creek plant. Between 1991 and 1995, this plant had an average operating cost of 1.79˘ per kilowatt-hour, making it the ninth lowest-cost plant out of 700 steam electric plants in the country.

Costs this low present a formidable obstacle for renewable energy to overcome. Although the Cooperative Power system is growing relatively slowly, it is currently adding some peak load capacity.

The Minnesota Advocacy Community

Advocates of renewable energy and environmental protection in Minnesota are well organized under the Minnesota Sustainable Energy for Economic Development (MN SEED) Campaign and have been effectively advocating for renewables in the Minnesota legislature for a number of years. In cooperation with local advocates, the Union of Concerned Scientists (UCS) helped launch SEED Campaigns in Minnesota, Iowa, and Nebraska following the release by UCS of Powering the Midwest in 1993.⁴ That report documented the potential economic and environmental benefits of renewable energy development in 12 Midwestern states. It also recommended policies for achieving this potential. The goal in forming the SEED Campaigns was to mobilize grassroots support to advocate for renewable energy at the state and local levels.

The MN SEED Campaign consists of UCS and many of the prominent environmental and advocacy groups in Minnesota, including Minnesotans for an Energy Efficient Economy (ME3), The Minnesota Project, Clean Water Action, the Izaak Walton League, and the Sustainable Resources Center. The primary motivations behind MN SEED support for renewables are the potential environmental quality improvements and rural economic development that large-scale development of these natural resources would bring to the state.

Although the Minnesota energy advocacy community considers Northern States Power's legislated renewables mandate one of its major successes, advocates are also looking for opportunities to support significant new efforts by other utilities and businesses in the state. MN SEED works closely with agencies like the Minnesota Agricultural Extension Service and the county or regional economic development agencies as well as with groups of farmers and citizens. With a stated goal of creating a sustainable energy supply for the state, MN SEED is ultimately seeking a fundamental shift in the state's energy resource mix toward in-state renewable resources. When presented with a renewables initiative from a co-op in Minnesota, therefore, UCS and the rest of the MN SEED Campaign were anxious to consider supporting the effort, albeit with some reservations.

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