I. Overview

Funding for rural electrification by rural electric cooperatives in the amount of $10.7 billion has been announced under Sections 22001 and 22004 of the Inflation Reduction Act (the “IRA”).¹  Section 22004 of the IRA provides for loans and grants to rural electric cooperatives for the purchase of renewable energy systems, zero-emission systems and carbon capture systems, to make energy-efficiency improvements to generation and transmission systems, or to purchase renewable energy under a power purchase agreement.  The program under Section 22004 of the IRA is called the Empowering Rural America (New ERA) program and has received $9.7 billion of funding to transition rural electric generation sources to clean, affordable, and reliable energy. The application period to submit a letter of interest will open on July 31, 2023 and will close on August 31, 2023.Section 22001 of the IRA provides for partially forgivable loans for renewable energy projects that use wind, solar, hydropower, geothermal, or biomass, as well as for renewable energy storage projects.  This program is called the Powering Affordable Clean Energy (PACE) program and has $1 billion of funding.  The online portal for PACE applications will open on June 30, 2023. Both of these programs will be administered by the United States Department of Agriculture Rural Development’s Rural Utilities Service (“RUS”). 

To be considered for funding under New ERA, eligible entities must electronically submit a letter of interest.  As part of the online submittal, applicants will also be asked to fill out the linked Achievable Reduction Tool to estimate emission reductions.²  The application period to submit a letter of interest will open on July 31, 2023 and will close on August 31, 2023.  RUS will begin evaluating submitted letters of interest after August 31, 2023. 

Following the evaluation, invitations to submit an application will be sent to the top-ranking letters of interest.  Applicants must submit their full proposal within 60 days from the invitation to proceed, or a date to be mutually agreed between the applicant and RUS.  RUS will award funding from December 2023 to December 2026, with all funds to be fully disbursed by September 30, 2031.  If selected, applicants will be required to provide reasonable security for financed investments.

II. New ERA Program Benefits

Electric cooperatives, or wholly or jointly owned subsidiaries of electric cooperatives, are eligible to apply under the New ERA program.  This includes existing or former RUS borrowers, borrowers of the former Rural Electrification Administration, rural electric cooperatives that serve predominantly rural areas (service territory where at least 50% of consumers are rural) and wholly or jointly owned subsidiaries of rural electric cooperatives. 

Applicants under the New ERA can apply for loans, grants, a combination of loan and grant funding and loan refinancing or modification. No applicant can receive more than 10% of the available funding ($970 million).  The financial benefits available under the New ERA are described in more detail below:

Financial Benefit	Description
Loans	The interest rate will be set at either the U.S. Treasury rate at the time the funds are drawn or a fixed rate as low as 2% interest rate. A 0% interest rate will be available for the refinancing of stranded assets or projects that serve distressed, disadvantaged, or energy communities. For purposes of the New ERA, a “disadvantaged community” is determined using the Council on Environmental Quality’s Climate and Economic Justice Screening Tool. For purposes of the New ERA, a “distressed community” is determined using the Economic Innovation Group’s Distressed Communities Index. “Energy communities” will be defined by Internal Revenue Service (“IRS”) guidance on the IRA. The rules that the IRS intends to use in such definition are available at the linked IRS notice.
Grants	A grant under the New ERA can equal no more than 25% of the total project cost. The applicant must cover the remaining 75% of the project cost. Assets financed with a grant must be secured by a first lien in favor of RUS (or comparable credit support).
Loan Refinancing/Modification	Applicants may propose to refinance debt related to a stranded asset if the refinancing savings will go to fund an eligible project under the New ERA.

RUS generally has a 25% equity requirement for project financing (which cannot be from a loan).  RUS has indicated that the required equity for New ERA financings can come from a grant, an IRA tax credit or a direct payment in lieu of the tax credit under the IRA.³  Under the IRA, electric cooperatives are “applicable entities” entitled to claim direct payment from the IRS in an amount equal to the tax credits that would be earned by the cooperative.⁴  

III. Application Evaluation

An applicant for New ERA funding must demonstrate that the proposed project is eligible for New ERA funding, the project is financially and technically feasible, affordable, and reliable and will be completed by September 30, 2031.  An applicant for New ERA funding may be a single entity or a consolidated group of entities.

Based on an applicant’s 2022 total utility plant value, an applicant’s application for New ERA funding will be placed in three possible categories (described below).  In the case of a group of entities, such group will be categorized based on the combined value of the group’s total utility plants.

 

Category	Description	% of Funding
Category 1	Applicants with a total utility plant value equal to or over $500 million	At least 60%
Category 2	Applicants with a total utility plant value less than $500 million but greater than $200 million	Up to 20%
Category 3	Applicants with a total utility plant value less than $200 million	Up to 20%

 

Applications will be scored and ranked relative to other applications in the same category based on the greatest reduction in cost-per-unit for greenhouse gases, with a maximum score of 60 points.  The following table sets forth the amount of points that can be awarded to an application based on its greenhouse gas reduction:

 

Metric	Points
Annual tons of CO2 equivalent reduced (self-generated or purchased)	Up to 30 points
Annual tons of CO2 equivalent avoided	Up to 10 points
Percentage increase in renewable or zero-emission energy in the energy mix (owned & purchased)	Up to 10 points
Percentage decrease in carbon intensity of the energy mix (owned & purchased)	Up to 10 points

In addition to considering the greenhouse gas reduction scoring, applications will be assessed based on:

• Consumer benefits for affordability (rate & bills reduced from efficiency)
• Project cost per unit of greenhouse gas reduction
• Project costs relative to program funding
• Geographic distribution of projects
• Efficient use of program funds

Baker Botts is a full-service law firm with a diverse team of lawyers assisting companies as they navigate the risks and opportunities arising from the energy transition.  To discuss these RUS funding opportunities, please contact the lawyers listed below or your Baker Botts relationship lawyer.

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