Selling Power

President Joe Biden began his term with Rooseveltian ambitions. Perhaps the most exemplary were those to remake the electric power industry. To this end, the Inflation Reduction Act (IRA), the United States’ first national climate law, could disburse as much as $800 billion over the next ten years for clean energy investment if it survives without amendment. As it currently stands, the law is projected to increase clean power generation capacity in the United States and substantially reduce national greenhouse gas emissions.

Among the IRA’s many features is the expansion of federal funding eligibility to include public and non-profit institutions, delivering the biggest national boost to the cooperative and public power sectors in several generations. Publicly and cooperatively owned utilities—including the Los Angeles Department of Water and Power, and Seattle City Light, and thousands of others—collectively serve more than one in four power customers in the United States. Most electric cooperatives in rural and now-suburban areas were formed under the New Deal’s Rural Electrification Administration (REA), which brought light and power to the countryside.

A comparison of the New Deal power program and the IRA exposes key design questions regarding the financing of power systems. Foremost among these are whether aid takes the form of grant or loan, the conditionalities imposed on that aid, and preferences given to public and non-profit institutions. By these standards of comparison, the IRA has made some improvements on the New Deal in the first two respects: it offers aid in de facto grants to publicly owned and cooperative utilities, rather than loans; and, as grants, they do not bind recipients into restrictive power-purchase agreements to ensure repayment of the debt. On the last criterion, however, the IRA’s neutrality with respect to ownership of the utilities it finances means it leaves the political-economic structure of the power industry intact. Whereas the REA promoted public and cooperative ownership as part of asserting greater democratic control over the electric power industry, the IRA maintains the current balance in the industrial structure between for-profit and non-profit utility companies and is not part of a larger reconstruction of the sector.

The New Deal brings the “next greatest thing” to rural America

In the 1930s, Congress undertook a systemic, though not necessarily systematic, restructuring of the power sector. Throughout the 1910s and 1920s, private utilities had mostly dismissed the rural market as costly to serve and unlikely to yield profits. As a consequence, in 1935 only about one in ten farmers had electricity service. Federal agencies such as the Bureau of Reclamation and the newly created Tennessee Valley Authority built large multipurpose dams that controlled floods, stored water for irrigation and domestic consumption, and generated power. Congress broke up and regulated the sprawling utility holding companies that then dominated the industry. The splintering of this power trust reduced its political economic might, including by transferring utility systems from financiers’ hands to public control in places like Omaha and San Antonio. In addition to regulation of private power companies through the Federal Power Commission and Securities and Exchange Commission, the federal government strengthened public control of the power sector through direct investment in new ownership models for the generation and distribution of power.

Most visibly for millions of Americans, the government helped electrify the countryside through the REA. A victory for the developmentally oriented Midwest and South, the program created by President Roosevelt’s executive order—and made permanent by Congress in 1936—extended low-cost loans for rural electrification projects such as line construction and the building of generation and transmission facilities. The loans initially had interest rates tied to yields on US Treasury bonds and terms of up to twenty-five years. Critically, the loans could cover up to 100 percent of the cost of line construction: these projects did not require upfront equity commitments from communities or sponsors. Congress directed the REA to give preference to non-profit and public agencies over for-profit utilities when deciding between competing projects to fund.

Much of this electrification was done by rural electric cooperatives—new consumer-owned institutions that hardly existed before the New Deal. The REA not only funded line constructions but also provided vital technical assistance, such as developing lower-cost designs for rural power lines and drafting model state laws to support the formation of electric cooperatives. The REA also demonstrated uses of electricity in country homes and farms and organized a “Big Tent” that traveled throughout the Midwest and South to showcase the assorted agrarian and domestic uses of power. “Selling power” in this fashion helped ensure rural electric cooperatives sold enough electricity to repay their REA loans.

With ample justification, the REA declared in its 1939 Annual Report that it served as “a partner, a friendly creditor, and a ready adviser” to borrowers—mostly locally owned distribution companies.

The result was transformative. By the mid-1950s, more than nine in ten farmers had electricity. Electricity meant light bulbs, indoor plumbing, and washing machines replaced kerosene lamps, outdoor privies, and the strenuous handwashing of clothes. Farmers and other rural residents held symbolic burials of kerosene lamps to commemorate the end of pre-modern living conditions. On one Sunday in 1940, a Tennessee farmer testified at his church, “The greatest thing on earth is to have the love of God in your heart, and the next greatest thing is to have electricity in your house.”

The IRA’s direct pay

Since the George W. Bush years, federal investment and production tax credits, rather than grants and loans, have been the major incentive for renewable development in the United States. Until the IRA’s passage, cooperative and publicly owned utilities could not claim these credits because they are tax-exempt institutions: no federal tax liability meant no federal tax credits.

Under the IRA as written, these entities can obtain tax credits as direct disbursements from the federal government, acting as a kind of quasi-cash subsidy popularly called “direct pay.” If a for-profit power developer receives a $200 million investment tax credit for building a 500-megawatt solar field (enough power for 300,000 to 400,000 homes), a public agency developing the same plant can now receive a check for $200 million from the Internal Revenue Service on completion of the project. With the creation of direct pay, the IRA established parity between for-profit and non-profit institutions.

The potential fiscal support is huge. Congress did not cap the total funds available through the tax credits and direct pay, inspiring one commentator to liken them to “bottomless mimosas.”

Through direct pay, the IRA could help public and cooperative power play catch-up in clean energy investment. Their power supply is more fossil fuel–intensive than those of investor-owned utilities and merchant generators, with their prior ineligibility for federal tax credits contributing to the disparity.

Direct pay is already paying off. In 2023, New York State, as part of its annual budget, enacted the Build Public Renewables Act (BPRA). The law grants the publicly-owned New York Power Authority (NYPA), formed during Governor Franklin Delano Roosevelt’s tenure in 1931, the ability to build and operate utility-scale renewable energy plants. Legislative supporters of BPRA had failed to secure passage on two previous occasions. Thanks to the new pot of federal money available to public agencies under the IRA, some previous skeptics recognized a major opportunity and supported BPRA on its third introduction.

Exercising its new authority, NYPA has proposed to build 3.5 gigawatts of renewable energy by 2030 on its own and through joint ventures with private actors. To be sure, NYPA should do more and lead the state’s energy transition instead of merely filling anticipated gaps in New York’s climate goals. In other words, it should be a vigorous public competitor, not merely a clean energy supplier of last resort. But regardless of which role NYPA adopts, the IRA has already expanded political possibilities.

IRA vs. REA

The decades-long struggle over electrification in the first half of the twentieth century revealed a handful of key design problems in the financing of power systems. Among the most fundamental was whether public support would take the form of grants or loans, what conditions would accompany the fiscal aid, and whether certain institutional classes would receive funding preference.

Direct pay functions more like grant financing than debt. This is an important policy advance over the New Deal approach to rural electrification. Under its statutory mandate, the REA could only extend loans to “self-liquidating” distribution and generation projects, or those expected to generate enough revenue to repay federal loans on their original terms. Accordingly, the REA evaluated rural electrification projects with a banker’s scrutiny, assessing factors like the cost of line construction and probable uses of power for domestic and farm purposes. As a result, poor areas with low population densities were less likely to receive REA funding for electrification than denser and more affluent areas.

Congress set up the REA to function as a conservative lender. Channeling the banker mandate that the law imposed on the agency, the REA’s 1937 Annual Report stated that the administrator “must assure himself by reasonable means before a loan is made that the project is sound and that it will be managed prudently. He must follow through to assure repayment.” This was a policy choice of the monetarily sovereign federal government, which creates dollars, rather than a legal necessity.

Congressional insistence on debt financing triggered some opposition in the 1930s. After all, the federal government, at the same time, was offering both loans and grants to public agencies in towns and cities to build infrastructure and put people back to work. At a House hearing, Morris Cooke, the REA’s first administrator, pointedly noted the federal Public Works Administration had awarded “30 to 45 percent grants to urban communities for sewer systems, schools, and dog pounds.” In contrast to this largesse for urban areas, he lamented the fiscal conservatism practiced toward the rest of the country, asking, “When you come into the rural districts you insist on the thing being made self-liquidating, with no grants or subsidies?”

Although cooperatives and other REA borrowers generally paid off their initial loans with ease—indeed, often repaying them in advance of due dates—debt and its accompanying restrictions have impeded cooperatives’ autonomy and kept them tied to fossil fuels in more recent times. Starting in the 1960s, the REA provided loans to federations of distribution cooperatives, called generation and transmission cooperatives or G&Ts, to build coal and nuclear power plants to secure their own wholesale power and end their dependence on often unreliable private suppliers.

To guarantee that the G&Ts sold enough power and repaid their loans, the REA offered financing on the condition they sold power to their distribution members on an all-requirements basis. Under these contracts, distribution co-ops had to obtain most or all their wholesale power from G&Ts. The REA obtained strong security from the transmission cooperatives as their lender, but at the expense of distribution cooperatives’ freedom of action and democratic control. Many distributors remain locked into contracts with often-expensive and polluting coal-fired power G&Ts, despite the availability of cheaper, cleaner alternatives. These federal financing terms inhibit distributors’ ability, and their community members’ desire, to decarbonize their power supply.

But the comparison isn’t entirely in the IRA’s favor. Unlike direct pay, which awards, for instance, an investment tax credit equal to 30 percent of a project’s construction costs, the REA provided 100 percent upfront federal financing for its projects. Farmers and other rural residents did not need to contribute any capital to an electrification project. They could obtain the entire funds needed to build a power system, at a low cost and on a long repayment term, from the federal government. Even with a conservative lending authority, these were real advantages and allowed wealthy and poor rural communities alike to escape the strictures of private finance.

Direct pay involves upon-completion, partial federal support for clean energy, which has material shortcomings. For example, a rural electric cooperative building a solar farm would recover a portion of its construction costs from the IRS only after a project is built. It would need to figure out financing to cover the full upfront cost of project development.

Ironically, the IRA itself shows a different and superior funding option is available. In one provision of the law, Congress set up an approximately $10 billion fund for the USDA to award front-end grants and low-cost loans to electric cooperatives for clean energy investment. Unsurprisingly, this program drew vigorous interest from cooperatives, which “flooded” the USDA with applications.

As a revenue agency, the IRS has important institutional limits. It won’t be able to provide much practical assistance to co-ops and public agencies venturing into clean energy development for the first time, whereas the REA, set up expressly for the purpose of rural electrification, extended such essential support. Rather, co-ops, public agencies, and other direct pay-eligible developers need to rely on non-profit technical assistance hubs and hope that they can access bridge financing from state green banks. The administrative capacity they require is immense.

In attempting to advance social policy through tax credits, Biden’s post-neoliberalism looks a lot like neoliberalism. Congress stuck with the multidecade model of using the IRS to disburse fiscal support to private and public institutions, instead of federal agencies investing directly for public ends.

The IRA also perpetuates what Suzanne Mettler calls the submerged state, which asserts public authority in ways largely invisible to most people. Many Americans may not even draw a connection between increased investment and new jobs in clean energy as a function of federal action, although President-elect Donald Trump, as is his wont, may loudly take credit for the “steel in the ground” and jobs created. By contrast to this passive back-end support, REA staff was on the ground from day one to stand up rural electrification. Roosevelt touted the achievements of the REA, but the agency’s prominence in the countryside made such promotion supplementary rather than integral. The association with the federal government was so strong that, for many years, rural electric cooperatives were commonly called REA cooperatives.

Unlike the REA’s clear preference for cooperative and public ownership, the IRA establishes, at most, parity between for-profit on one hand and non-profit and public institutions on the other. It makes available to co-ops and public agencies tax benefits that federal law long denied them. This statutory parity is a deviation from national policy that has encoded preference clauses in US power laws for more than a century. Federal law requires agencies like the Federal Energy Regulatory Commission and TVA to favor cooperative and public applicants for hydroelectric dam licenses and wholesale electricity generated by federal dams. This preference is rooted in the idea that public resources, whether credit, navigable waterways, or power, should be shared with the public directly, instead of through for-profit intermediaries. If the IRA had a preference clause, a public agency eying the same site for energy development as a private firm could pursue the project more confidently, knowing it would receive priority on federal fiscal support.

Practically, most IRA funds will flow to for-profit institutions equipped to take advantage of tax benefits, not publicly owned or non-profit entities. The mimosas may be bottomless but whether cooperative and public power will liberally imbibe is far from certain. So formal parity hides what will likely be an effective preference for the private sector.

Conclusion

In both the REA and the IRA, the federal government increased spending to advance important public ends. In the former, Congress spent money to deliver light and power to the countryside. With the latter, it has disbursed substantial funds to accelerate investment in solar, wind, and other clean energy. While the IRA’s direct pay is an improvement over the debt financing that Congress in 1936 gave rural communities seeking electric service, it falls short of the REA’s no money down, upfront financing, and technical assistance for rural electrification projects and preference for supporting cooperatives and public agencies. Further, rural electrification was part of a broader federal effort to exercise stronger public control over the generation, transmission, and distribution of electricity, through both investment and regulation. The federal government asserted muscular authority over the power industry. The IRA is plainly not that, nor embedded in such a project. For that reason, it is not likely to be anywhere as transformative as what the New Deal state did.

Biden’s signature climate law, however, could be a steppingstone toward sectoral reconstruction. By offering major fiscal support for cooperative and public power, the IRA could help these institutions build clean energy on a large scale. New York will be ground zero for the proof of concept of public power building renewable energy efficiently and rapidly. Successful development of wind, solar, and energy storage infrastructure by NYPA could help the Empire State meet its climate goals and change the standing of public power across the country. If it brings a long-term, social orientation and delivers abundant clean energy, NYPA could convince other states and eventually Congress, out of sheer pragmatism, that public agencies should not only be partners in national decarbonization of the power sector, but the lead actors in this undertaking. The IRA is not the Green New Deal, but it could be a bridge to one.