Green Energy for Rural Electric Coops

Scott Daniels, CPA is an Aldrich partner with over 20 years of experience as a business advisor for strategic planning, financial analysis, and system assessments. He also consults on a variety of regulatory matters and provides oversight of assurance services. Scott offers the following insights based on his read of today’s market conditions.

Despite the relatively high cost of providing service to rural America, coops continue to enjoy a hospitable regulatory climate that supports rate structures to recover costs. This treatment equips them to maintain a robust and reliable power grid to meet their customer demands. However, public utility commissions (PUCs) around the country are exerting pressure to increase use of renewable energy sources by making green power alternatives available to ratepayers at all income levels.

Coops are also starting to experience competitive threats via independent solar projects, battery pack technology, and other forms of self-generation. These offerings affect their top-line revenue but do not provide a corresponding reduction in the cost structure. So it’s a market dynamic to which management must clearly be attuned.

As power distributors, one rather straight-forward response involves working with new and/or existing power generation companies to get the right mix of energy resources to satisfy regulatory requirements and/or consumer demand. They might consider a direct investment in community solar projects. Or they may choose to partner with green energy companies to help implement self-generation capability. Each course of action needs to pass muster on a cash flow and rate of return basis as well as account for the impact on the electric grid. This last point merits special attention.

When customers choose to take power generation into their own hands – whether through individual or communal efforts – they still expect their utility company to be there for them in case their systems fail to produce sufficient energy. So utilities continue to bear substantial cost serving these customers but receive a fraction of the revenue to support it. Clearly, usage-based pricing doesn’t make a lot of sense in these instances. Some form of flat-rate fee needs to be added to the equation to account for the role coops will play as an auxiliary or backup provider.

Some are very concerned about their carbon footprints and take renewable energy sources seriously. Others are either unaware of the alternatives or don’t care to pursue them. But it’s safe to say that we can expect increased interest as a function of growing environmental consciousness. As coops move to satisfy customer demand, they’ll need to put some effort into educating the public on the underlying cost structures for energy alternatives – and the associated rate adjustments – as well as differences in reliability. Green energy is a noble – if not essential – offering, but it comes at a cost.

I feel a great deal of optimism for rural coops in this environment. They have a long and distinguished history of providing highly reliable service to their customers. And they are trusted members of their communities. They can leverage these “assets” and take a leadership role in introducing new power generation technology and pricing structures to their base. They can promise that any new initiative will be delivered as cost effectively as possible. And they can ensure customers that they’ll be there for them when things go awry – e.g., “when the sun don’t shine.”

As with any significant adjustment to strategy, senior level management needs to make intelligent business decisions on future investments. That means having a really good sense of the needs of each of their customer segments as well as a keen understanding of the costs to serve them. It means taking a close look at investment opportunities to understand the impact on revenue, costs, and cash flow. And it may mean exploring new operating models – partnerships, joint ventures – to stay on the forefront of industry developments without stretching the company resources too thin.