Repowering Rural America with Clean Energy | Article

On May 16, the U.S. Department of Agriculture (USDA) opened two new programs to advance clean energy generation in rural areas using about $11 billion in funds allocated by the 2022 Inflation Reduction Act. The two new programs, Powering Affordable Clean Energy (PACE) and Empowering Rural America (New ERA), will be administered by USDA’s Rural Utilities Service (RUS) and will support energy reliability and the resilience of rural energy systems in the face of increased wildfires and extreme weather events due to climate change. Combined with the $2 billion allocated to the Rural Energy for America Program (REAP), these programs represent the largest federal investment in rural areas since the Rural Electrification Act of 1936.

USDA has set a single funding window for both programs with a two-stage process. Eligible applicants can send Letters of Interest (LOIs) for the PACE program between July 10 and September 29. If their letters are approved, applicants will have 60 days to complete a full application, and awards will be announced through the end of 2025. Awardees will have until September 30, 2031, to deploy the funds awarded to zero-emission projects in rural areas.

The New ERA program LOI window runs from July 31 through August 29. As in the PACE program, eligible applicants must first send an LOI, which will be evaluated on a competitive basis using point-based selection criteria. Once selected, applicants will have 90 days to submit a full application for the funds sought. Awardees will have until September 30, 2031, to deploy the funds awarded to zero-emission projects in rural areas.

Established by the Franklin D. Roosevelt Administration through the Rural Electrification Act, rural electric cooperatives are the main beneficiaries of these programs. In the United States, 900 co-ops serve about 60 percent of the country’s landmass and power more than 40 million homes and businesses. As nonprofits and member-owned entities, co-ops are able to be creative in their funding and deployment mechanisms to best meet the needs of their customers.

Since the Rural Electrification Act was enacted, the Rural Utilities Service has been offering loans and grants to co-ops to electrify rural areas. These long-term and affordable loans helped co-ops develop power plants and transmission lines to bring power to rural households and businesses. The PACE and New ERA programs continue this tradition of supporting the electrification of rural areas, but with an emphasis on clean energy projects that reduce greenhouse gas emissions.

Rural electric cooperatives have made investments in renewable energy over the past decade, but about 28 percent of their electricity still came from coal in 2020—compared to 19 percent nationally—and one-third came from natural gas. Only 22 percent of co-op electricity came from renewable energy, including hydropower. Because cooperatives operate as nonprofit entities, many can’t make hefty upfront investments in new renewable infrastructure or offload expensive fossil fuel plants that are no longer economical. PACE and New ERA can help rural utilities make those upfront payments for clean energy projects and refinance the debt they hold on stranded fossil fuel power plants. These investments can help rural communities advance towards a net-zero future.

Both programs seek to increase clean energy adoption and resilience in disadvantaged rural communities previously left out of the clean energy economy. Potential applicants must explain how their projects would meet the goals of the Biden-Harris Administration's Justice40 Initiative, which seeks to ensure that 40 percent of the benefits from federal investments reach disadvantaged communities. Applicants can use the Council on Environmental Quality’s Climate and Economic Justice Screening Tool to determine if their project is located in a disadvantaged or distressed community. A disadvantaged community is one that has historically suffered from a combination of economic, health, and environmental burdens. These burdens include poverty, high unemployment, air and water pollution, presence of hazardous wastes, and a high incidence of asthma and heart disease

In addition to helping implement Justice40, applicants are expected to engage with their communities, invest in their local workforces; and advance diversity, equity, inclusion, and accessibility.

Both programs allow applicants to submit joint applications, which can help smaller organizations collaborate on putting together applications. Eligible applicants can apply for funding under PACE and New ERA, but not for the same project.

Powering Affordable Clean Energy (PACE)

The Powering Affordable Clean Energy (PACE) program offers forgivable loans for up to 60 percent of renewable energy project costs depending on project location. Eligible entities include nonprofits, electric service providers, state or local governments, utility districts, rural electric cooperatives, investor-owned utilities, and Tribal entities. USDA expects projects to cost between $1 million to $100 million, including the forgiveness portion. The project must produce renewable energy for resale and though it can be located in and serve both rural and nonrural areas, at least half of the electricity generated or stored by the financed facility must benefit a rural area. Clean energy projects like solar, wind, hydropower, geothermal, biomass, or renewable-based energy storage all qualify.

With $1 billion in allocated IRA funds through 2031, USDA expects up to $2.7 billion available for PACE program funding based on projected subsidy rates. Under PACE, the Rural Utilities Service will offer two types of partially forgivable loans: project loans and system loans.

For project loans, applicants must have a bankable or financeable power purchase agreement with a utility company to offtake the energy produced by the clean energy project. Awards will finance up to 75 percent of the project’s costs with the rest up to the applicant. Awardees can use federal clean energy tax credits to help cover what PACE loans do not pay for. Loan terms will be determined based on the project's characteristics but may extend up to 35 years, and interest rates will be equal to the municipal rate when the loan is awarded.

System loans are only available to operating electric utilities, such as rural electric cooperatives, and may cover up to 100 percent of the project’s total costs. System loans can be secured by the awardee’s assets.

To increase the affordability and accessibility of clean energy upgrades in rural areas, USDA is making the PACE program a partial loan forgivable program. There are three categories for partial loan forgiveness, and RUS will set aside at least $300 million for each category. Applicants that meet the minimum eligibility criteria can expect to receive up to 20 percent total loan forgiveness. Applicants who develop eligible projects in an area with at least 50 percent of the population determined to form an energy community or a disadvantaged community may qualify for up to 40 percent loan forgiveness. Finally, projects located in Puerto Rico, a U.S. territory (e.g., the U.S. Virgin Islands), a Tribal area, or a Substantially Underserved Trust Area (SUTA) may seek up to 60 percent loan forgiveness of total project costs.

PACE loans are stackable with the federal clean energy tax credits created by the Inflation Reduction Act to spur even more affordable renewable energy projects in rural areas. The 30 percent tax credits for renewable energy projects, including solar, battery storage, and geothermal, are convertible to refundable upfront payments for tax-exempt entities such as nonprofits, tribal nations, and rural electric cooperatives. This direct pay or elective pay option allows these entities to tap into the tax benefits for clean energy projects that have been previously available only to for-profit organizations.

Because community solar with battery storage in a microgrid setting is an eligible project under PACE, a rural electric cooperative could request PACE loans for a microgrid project located in a rural disadvantaged community. If that community had recently seen its coal power plant—a source of employment and community wealth—close down, it would be deemed an energy community and the project would be eligible for up to a 40 percent forgivable loan. The same project would be eligible for an up to 40 percent direct pay tax credit because it is located in an energy community. As a result, the clean energy project could see up to 80 percent in cost reductions, depending on how the project financing is structured.

Empowering Rural Energy (New ERA) Program

Established as Section 22004 in the IRA, the New ERA program is a $9.7 billion fund for the Rural Utilities Service to offer loans, grants, and loan modifications to support the purchase of renewable energy systems, zero-emission systems, microgrids, and carbon capture systems. Funding may also be used to deploy these systems or to make energy-efficiency improvements to the generation and transmission systems of eligible entities.

The New ERA program is particularly targeted at helping rural electric cooperatives seeking to decarbonize their electric systems by offering them financial assistance for projects that achieve the greatest reduction in carbon emissions. Wholly or jointly owned subsidiaries of such electric cooperatives and generation and transmission cooperatives (G&Ts) are also eligible to apply. Rural electric cooperatives must be current or past RUS borrowers to be eligible.

Because the New ERA program prioritizes reducing greenhouse gas emissions, projects will be scored and ranked using a point system evaluating greenhouse gas emission reductions on a cost-per-unit basis. Additional evaluation criteria include the geographic distribution of projects, consumer benefits, increased energy affordability because of the project, and efficient use of program funds.

Submitted projects must be reliable, resilient, financially sound, and technically feasible to be selected. Applicants may seek loans or grants for new zero-emission projects or to refinance the debt of existing facilities to support cleaner portfolios and boost the transition to a clean energy economy.

Under IRA, only up to 10 percent of the total funds allocated to the New ERA program (i.e., $970 million) may be used on a single project. In addition, grants can only cover up to 25 percent of an eligible energy project’s costs. Applicants may use federal clean energy tax credits to cover a portion of the project’s costs.

New ERA Project Loans and Debt Refinancing

As previously mentioned, New ERA seeks to be a flexible program, offering loans, grants, and loan debt refinancing to fund zero-emission technologies. Applicants may request a single option or a combination of them. Loans to finance the cost of new clean energy projects will have interest rates set at the Treasury rate in effect when the loan is finalized, or as low as zero percent, depending on the project’s location.

Rural electric cooperatives can use New ERA funds to refinance debt from stranded fossil-fuel infrastructure, such as a coal power plants that are no longer economically viable. While co-ops have increased their renewable energy generation capacity in past years, they still hold nearly 90 coal plants capable of generating 23 gigawatts (GW) of power. This is an obstacle for rural communities seeking to move to a clean energy economy.

Because building large power plants is capital intensive, smaller distribution co-ops structured themselves in the 1970s into generation and transmission co-op entities that could pool their purchasing power and investments. These entities took out large loans, generally with the Rural Utilities Service, to fund the coal power plants powering their communities. Over time, the debt held by G&Ts on these plants has become a burden for co-ops, preventing their transition to clean energy. Without federal financing assistance, G&Ts have been unable to unload or close their remaining coal power plants because they would be on the hook for the remaining debt.

New ERA is a once-in-a-generation opportunity to help G&Ts and distribution co-ops modify their RUS power plant debt or refinance their debts with third parties. Applicants can ask to refinance their stranded asset debt at zero interest if they commit to reinvesting the cash savings to purchase or deploy renewable energy systems or carbon capture and storage systems.

For example, a rural electric cooperative could ask to refinance their stranded asset debt for a coal plant by applying for a New ERA loan for up to $950 million. The new 35-year loan would have a longer repayment period than the previous one and have a zero-percent interest rate. The co-op could bank the cash savings and use them to invest in a renewable energy project, resulting in avoided greenhouse gas emissions, which is one of the application criteria for New ERA loans. As a nonprofit entity, the co-op would be eligible to receive elective or direct pay on 30 percent of the project costs. And if the renewable energy project were to use domestically-sourced materials and be located in an energy community, then it might be eligible for up to 50 percent of its costs in direct payments.

	Powering Affordable Clean Energy (PACE)	Empowering Rural America (New ERA)
Goal	To increase reliable, affordable, and accessible clean energy in rural America	To achieve the greatest reduction in greenhouse gas emissions while advancing the long-term resiliency, reliability, and affordability of rural electric systems
Total funds available	Up to $2.7 billion	$9.7 billion
Types of financial assistance	Loans (for projects and systems), up to 60 percent refundable	Loans (for projects and systems), grants, and debt refinance
Eligible measures	Renewable-based microgrids, solar, hydropower, biomass, and geothermal	Purchase or build renewable energy systems, energy efficiency improvements to generation and transmission systems, and carbon capture systems
Eligible entities	Private entities, governmental entities, nonprofits, Indian Tribes, distributed electric cooperatives, institutions of higher education	Rural electric cooperatives
LOI submission process	On a rolling basis. Applicants whose LOIs are approved will have 60 days to complete a full application	Applicants whose LOIs are approved will have 90 days to complete a full application; approval subject to a competitive process based on greenhouse gas emission reductions and avoidance
LOI submission window	June 30 – September 29, 2023	July 31 – September 15, 2023
Award range	$1 – $ 100 million	Up to $970 million for grants and loans; 100% loan financing (up to $970 million)
Collateral Requirements	Projects must be based on bankable power purchase agreements	Utility assets, like poles and wires
Loan terms	35 years, the term of the power purchase agreement, or the useful life of the equipment financed	Up to 35 years
Loan interest rates	Municipal rates	As low as zero percent, and at most Treasury rate
Rural area definition	At least 50 percent of the population served by the project must live in communities of 20,000 or fewer; service territory of current or former RUS borrowers	Rural electric cooperatives which are past or current RUS borrowers
Program categories	Category 1: Up to 20 percent loan forgiveness if the applicant meets minimum eligibility criteria Category 2: Up to 40 percent loan forgiveness if 50 percent of the project's benefits go to a disadvantaged or energy community Category 3: Up to 60 percent loan forgiveness if the project is located in Puerto Rico, a U.S. territory, a tribal area, or a Substantially Underserved Trust Area	Category 1: Total utility plant value equal to or more than $500 million Category 2: Total utility plant value more than $200 million and less than $500 million Category 3: Total utility plant value equal to or less than $200 million