Electric cooperatives are starting to receive the value of federal tax credits for innovative energy projects, helping them provide affordable, reliable power to their members and leveling the playing field with other utilities that already had access to such incentives.
With input from NRECA and after years of advocacy, Congress in 2022 passed legislation enabling co-ops and other tax-exempt entities to access federal tax credits for certain energy projects through an elective-pay option. The incentives can sharply reduce costs for co-ops to build, own and operate eligible generation and energy storage projects.
The credits also put co-ops on more even footing with energy developers that have long been able to tap federal tax credits for many of those resources.
“Having access to these incentives levels the playing field so cooperatives can meet the evolving needs of our members, just like investor-owned utilities have been able to do for their customers,” said Doug Browne, chief financial officer for North Carolina’s Electric Cooperatives. “Co-op members deserve innovation that strengthens the grid and provides benefits to rural communities, and these incentives allow us to do that while protecting affordability.”
The Treasury Department issued a final rule on elective pay in 2024. Raleigh-based NCEMC then applied for and received a direct payment of $10.4 million to support the costs of the first tranche of battery energy storage systems that NCEMC and 10 of its distribution co-ops are building at substations.
The battery storage systems total 40 megawatt/80 megawatt-hours and will enhance grid resilience in rural communities.
The elective-pay credits reduced total project costs by more than 20%, “a benefit shared by all NCEMC members and their consumers,” Browne said. “Investment tax credits like these provide significant value to the 2.8 million North Carolinians served by the state’s electric cooperatives.”
Co-ops can also use elective pay to access nuclear power production tax credits through 2032. NCEMC is a co-owner of the Catawba nuclear plant in South Carolina and expects to claim about $18 million for its share of the facility with this year’s filing of its 2024 Form 990, Browne explained.
Although future tax credit amounts may vary, “we will continue to apply for these credits through 2032 to manage costs to our members and their consumers,” he said.
‘An important thing’
Before Congress authorized elective pay, co-ops often turned to third-party energy developers with tax liabilities to build wind and solar power and other innovative resources. Co-ops would then contract for that electricity through power purchase agreements.
Having access to federal tax credits not only enables co-ops to build and own more of that capacity, it will allow them to negotiate better rates on PPAs, said Chris Jimenez, chief development officer at Arizona G&T Cooperatives.
“In the past as a co-op, we didn’t have that mechanism… so the developer didn’t really have an incentive to pass on that benefit to [us],” Jimenez said. “Now they do.”
Sierra Southwest Cooperative Services Inc., a subsidiary of the Benson, Arizona-based G&T, recently completed battery storage projects on behalf of three members that are estimated to be eligible for 40% investment tax credits through elective pay. The projects will help the co-ops rely more on solar power as Arizona grapples with limited natural gas import capacity.
Arizona G&T will file for the tax credits as part of its 2024 tax filing and expects to get those benefits in 2026, CFO Pete Scott said.
“The credits really help bring the levelized costs of energy for these resources down to an area where we can actually include them in the portfolio,” Jimenez said.
The tax credits, which can be stacked with federal grants and loans, “really provide for an environment where our members and we as a G&T can really develop competitive resources,” Jimenez said.
“Without those two things in place, it becomes a difficult situation for folks to finance these types of projects,” he said, adding that elective pay is “an important thing to keep in place.”
Lowering costs, improving reliability
The state of Colorado is working to transition to 100% clean electricity by 2040. For Delta-Montrose Electric Association, access to elective-pay credits is crucial to reaching that goal affordably and reliably.
“These tax credits are really meaningful and absolutely necessary for us to make this happen in that kind of timeframe,” said Kent Blackwell, chief administrative officer of the Montrose, Colorado-based co-op.
DMEA is planning to use elective-pay investment tax credits to help fund a $96 million project that includes a 20-MW solar photovoltaic array with an additional 80 MWh of battery storage.
Without the tax credits, “there’s just no way this project would be financially viable for an entity like us,” Blackwell said.
Reliability and cost are also behind two projects that Pahrump, Nevada-based Valley Electric Association is pursuing with help from federal tax incentives.
VEA is planning to build a 35-MW energy storage system in Pahrump to hedge its power market exposure by allowing the co-op to procure power when prices are low and discharge power at higher-priced times.
The second project is a 1-MW solar power/1-MW, four-hour battery storage project that will improve reliability in VEA’s remote Fish Lake Valley region. The area is currently served by a 55-kilovolt radial line that crosses an area of extreme wildfire risk, raising the potential for blackouts.
The co-op is looking to start commercial operations on the projects near the end of 2026, after which it can file for elective-pay credits.
“For a rural cooperative, we typically don’t have access to this kind of technology, whether it’s due to cost [or] other factors,” said Gabe De Guzman, VEA’s director of transmission services and load management. “Having this elective-pay tax credit essentially will pay off this project much sooner, and it will impact members less from that perspective.”
Molly Christian is a staff writer for NRECA.