The Rural Utilities Service: How the USDA is building a clean energy future for rural America

A little-known federal program has billions to dole out for renewables and efficiency projects for underserved populations

From the best-kept secrets file: There is a little-known $6.25 billion federal fund offering low interest loans and guarantees to utilities looking to build rate-based infrastructure.

It gets better: Along with the funding, utilities can work cost-free with knowledgeable staff anxious to get applicants successfully through the process of building the kinds of renewable energy, smart grid, and efficiency projects utility customers are clamoring for.

“We have invested over $1.1 billion since 2009 in 26 renewable energy projects in rural America and we are now trying to drive more projects and energy efficiency,” said Brandon McBride, administrator of the U.S. Department of Agriculture’s (USDA) Rural Utilities Service (RUS).

There is a catch: While the funding opportunity is available to all types of power providers, the projects have to meet the needs of underserved communities with populations of 20,000 or less.

Power providers can leverage the funding with a variety of partners. RUS mondy can also go to “corporations, states, territories and subdivisions and agencies such as municipalities, people's utility districts, and nonprofit, limited-dividend, or mutual associations,” according to the program website.

The RUS mission is to “improve economic development and the quality of life in rural America,” a fact sheet explains. Funding also goes to water and telecommunications infrastructure.

The RUS Electric Program’s renewables projects are a small part of the agency’s overall loan portfolio, but they are growing in size and impact. In the last seven years, new renewables “have eliminated 1.8 million metric tons of CO2 which is equivalent to taking over 300,000 cars per year off the road,” McBride said.

“The loans and loan guarantees finance the construction of electric distribution, transmission, and generation facilities, including system improvements and replacement required to furnish and improve electric service in rural areas, as well as demand side management, energy efficiency and conservation programs, and on-grid and off-grid renewable energy systems,” the website explains.

Now may be the best time for power providers from around the nation to think about how they can use the RUS loans to finance projects for underserved populations, RUS Ohio Director J. Anthony Logan said during a recent presentation about the service.

“T-rates are low, RUS funds are available, and the recent five year extensions of the renewables tax credits are going to drive vigorous development,” he said, calling it a “historic” time for energy investments.

RUS origins and growth

The RUS originated from the Rural Electrification Administration, which was established in 1935, Logan said. The 1936 Rural Electrification Act created depression-era jobs by making federal loans available to build electric generation and distribution systems, “mainly to get the last mile of lines to rural users,” he said.

Member-owned electric utilities, often formed by communities in order to obtain the federally funded loans, evolved into today’s rural electric cooperatives. The Electrification Act was made permanent in 1944, and the RUS was put in place to extend the USDA’s Rural Development programs. Its impact on energy in rural America was immense.

“Over 40% of the electric infrastructure in the U.S. was built through REA programs and the RUS,” Logan said.

One of the biggest appeals of RUS funding is the low cost of capital. “Our interest is the Treasury bill rate plus one-eighth percent and has recently ranged between 2.5% and 3.0%,” McBride said. “It is an attractive option for utilities considering large infrastructure investments.”

Typical commercial 30-year fixed loan interest rates tend to be around 5.5%, making the RUS 35-year loan “at least 250 basis points lower,” McBride added.

Those loan terms have helped drive significant volume for RUS.

“We made $3.4 billion in committed loans and loan guarantees in 2015,” Logan said. “That is expected to be $6.25 billion this year, and the Obama administration's 2017 budget request is for $6.5 billion for generation, transmission, and distribution infrastructure.”

There is a strong possibility RUS funding can escape the fate of other Obama administration renewables initiatives delayed by political partisanship.

RUS-funded renewables projects seem to cross political party lines, Logan observed. “Projects are being built in deep red states like Texas and Kansas and bright blue states like California and Minnesota. It is one area of the energy economy that seems to bring everybody together.”

The RUS 80-year track record of successful investments may contribute to the bipartisan support.

Because of the population provision on agency projects, rural electric cooperatives have had “a long and mutually beneficial public-private partnership with the RUS,” National Rural Electric Cooperative Association (NRECA) Sr. Communications Manager Tracy Warren noted. “And those loans have also been profitable for the federal government because the loans get paid back.”

“The loan portfolio is $46 billion and the program’s total investment has been $120 billion,” Logan said. We have had a delinquency rate of 0.04%, which is why our lending capacity has been increased.”

Renewables investments fit the RUS target market, Logan added. Almost three-fourths of wind projects are located on rural lands, “resulting in over $200 million in annual lease payments to farmers and landowners,” he said. “The tax revenues provide vital benefits to local school districts.”

“We are fortunate to have bipartisan support,” McBride said. “Members of Congress recognize the importance of those investments to rural communities and to the national economy.”

The newest reason RUS is expanding is a June 2015 FERC decision, Logan said. FERC ruled that because the Delta Montrose Electric Association was no longer borrowing from RUS, it had lost its rural electric cooperative status and become a public utility subject to federal oversight and regulation. The ruling is helping to stem a migration away from RUS funding among co-ops, he said.

RUS projects span a diverse set of states, helping to build bipartisan support for its funding. 

 

 

Utility renewables and the RUS

The RUS goal is productive investment in rural infrastructure. This matches with utilities’ ongoing need to improve their systems, McBride said. Demand for loans is increasing and RUS expects that to continue. The bigger 2016 and 2017 budgets provide resources to meet that new demand.

In the rural areas RUS targets, wind and biomass have been the best opportunities up to now, McBride said, but applications to build solar are on the rise.

“We are open to whatever energy source the utility wants to pursue,” he said. “We work with each applicant individually to make sure their project will be sustainable and their financial projections make sense.”

Projects range in size because utilities have different objectives.

“With the loan portfolio we have, we can definitely invest in larger projects,” he said. “But we don’t want to miss out on high-impact smaller projects.”

Direct loans and loan guarantees to spur investment in utility-scale renewables projects have ranged from $20 million to $200 million, Logan said. “There is no high or low cap. Community wind and solar projects may be financed for $5 million or less.”

Interest from rural electric cooperatives in community solar is rising especially rapidly, he added.

“This is because the leaders of the co-ops understand, just like the shareholders in the investor-owned utilities, that if they don’t do it, folks will go to rooftop solar or other customer-sited generation and the co-op would then lose business in net metering states,” Logan said. “That is a trend.”

NRECA’s Warren agreed. “Co-ops in the MidWest are investing in wind but co-op community solar programs are growing so fast we literally can’t keep track of them.”

North Carolina has been the hottest market for RUS community solar projects thus far, McBride said. Other facilities have been funded in Arkansas and Oklahoma, among others.

Along with the community solar trend, Logan highlighted several RUS-funded wind projects. One was Basin Electric’s 271 MW Prairie Wind II, which got a $204 million RUS loan guarantee to cover 60% of the project’s total cost because 60% of it was in an area with less than 20,000 people.

Another project showing promise is the $9.5 million RUS loan-funded Fox Islands Wind Cooperative three-turbine community wind project, he said. A third was Minnkota Power Cooperative’s 200 MW wind installation, one of six generation and transmission projects across Minnesota and North Dakota funded by a $512 million RUS loan.

While most of the capacity from RUS projects is currently in wind and biomass, interest in solar is increasing fast, especially among co-ops

 

 

RUS and energy efficiency

RUS-funded energy efficiency programs are growing in popularity, McBride said. Its Energy Efficiency and Conservation Loan Program (EECLP) provides low interest loans that utilities can relend to business and residential customers at a 1% premium. Loans can be used to reduce peak demand, modify load, or increase the use of renewables.

A just-launched Rural Energy Savings Program provides 20 year, 0% loans to utilities for relending at no higher than a 3% rate.

“The improvements can be any number of things, including renewables, weatherization, or H/VAC upgrades,” Logan said. “It also allows on-bill financing, which is beginning to show a lot of promise throughout the country, even in hard-hit poorer areas like Appalachia and the Delta.”

Energy efficiency programs are very popular among co-op members, Warren said.

“Roanoke Electric and North Arkansas Electric are already implementing programs so successfully that their CEOs are telling other cooperative leaders to get involved,” she said. “It is a way for consumer members to do things like insulation upgrades or geothermal heat pump installations without high upfront costs.”

Energy efficiency is “the low-hanging fruit and gives the biggest bang for the buck,” Logan said. “These loans are likely to become very popular very soon.”

What utilities should know

An important thing utilities need to understand about RUS loans is that the population eligibility test is flexible, Logan said. Most – but not all – of the program beneficiaries must be in areas of 20,000 people or less.

“If only 60% of the project is in a low population area, we might be able to finance 60% of it,” he said, “and the 2017 budget is seeking more flexibility.”

Interest rates can be fixed or variable and there is no pre-payment penalty, he added.

As with all federally funded development, environmental and financial standards must be met.

“A well-crafted power purchase agreement is the best evidence of security,” Logan said. But, based on the borrower’s financial history, a system-wide lien on assets, a third party guarantee, or letters of credit may be acceptable.

Because of its ready funds and low interest rates, RUS is a valuable financial partner, McBride said. But it also offers engineering and environmental experts and feasibility analysts in its D.C. headquarters and an extensive and experienced field team.

“Our field representatives know the states and the communities they work with and are able to address issues upfront, which helps us and the applicants,” he said. “These projects require a lot of upfront work on environmental and financial planning issues. Our focus is on making the process as easy as possible.”

The RUS can help utilities map their approach to development or program implementation, McBride added. “We have staff that can meet with people where they are, people who know the communities, and the history, and can help utilities work through the process.”

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