The following is an article by Gabriel Chan, associate professor at the Humphrey School of Public Affairs at the University of Minnesota and co-director of the Electric Cooperative Innovation Centerand Matthew Grimley, research director at the University of Minnesota’s Humphrey School of Public Affairs and principal investigator at the Electric Cooperative Innovation Center.
Recent media coverage of cooperative electric utilities has highlighted emotionally accused tensions between cooperatives. Yet these tensions are anything but a sign of a crisis. The cooperatives continue to demonstrate higher levels of consumer satisfaction than other public services, they are advancing beneficial electrification and they offer some of the most enduring examples of “energy democracy” in the area. And, perhaps most important for the network of the future, cooperatives are evolving investment in clean energy in rural communities that harbor some of the greatest clean energy potential in the country.
Last month, Minnesota’s largest generation and transmission (G&T) cooperative, Great River Energy (GRE), and its largest distribution cooperative member, Connexus Energy, averted a crisis. Together they announcement that Connexus will move from a GRE member-owner to a GRE customer. This agreement represents the result of the voices of the members of the cooperative being heard. And uniquely, the deal avoided emotionally charged public disputes that would have redirected capital from co-op members to pay legal fees. Instead, they relied on years of collective groundwork to prepare for the future.
Changing Landscape
There is a context in this agreement. Many local cooperatives banded together with their peers in regional G&T networks from the 1940s, enabling them to provide affordable electricity to their member-consumers. But since the G&T’s inception, rural America has experienced wildly uneven growth in electricity demand. Today, many G&T cooperatives find themselves providing services to members with differing internal needs and capacities.
Add to that the rapidly changing landscape of distributed energy resources (DER), and it’s no surprise that co-ops are entering a period of unprecedented innovation and experimentation. The agreement between the GRE and Connexus represents a new way for G&Ts and local cooperatives to develop new relationships.
Connexus becomes a GRE customer
With their new deal, Connexus will cease to be a member of GRE and become a customer of GRE in January 2023 through a “portfolio power purchase agreement” in which Connexus will participate in a fixed share of GRE’s currently operated and committed resources and GRE will continue to provide transmission service to Connexus. Additionally, GRE will provide market-oriented services in the Midcontinent Independent System Operator market on behalf of Connexus for at least 10 years. With the new agreement, Connexus will have greater flexibility to source and build its own DERs to provide local green power that supports beneficial electrification, while having minimal impact on rates for other members. of the GRE in order to “keep them whole”.
The Connexus Agreement is based on three key factors that we use to explain how it honors ‘co-operative cooperation’.
Factor 1: GRE’s long-term planning allows for a flexible contract
The key instrument of the new agreement is that Connexus will receive a fixed share of the costs and benefits of GRE’s existing power resources, with Connexus’ obligation to purchase power from GRE diminishing as the resources current GREs are withdrawing. The new agreement gives Connexus the flexibility to source additional resources on its own and makes Connexus responsible for planning and delivering sufficient capacity to meet its MISO reliability requirements.
This arrangement benefits both parties. GRE, having planned to do without the 1.1 GW power plant at Coal Creek Station, will be free to get extra capacity in the coming years, including the clean energy capacity of the DERs of its own members. Since GRE now has a lower own capacity surplus than in the past, it is more concerned with planning for future capacity costs than reallocating its historical fixed costs (a challenge of past cases to renegotiate supply relationships).
Factor 2: GRE and Connexus recognize the transition from economies of scale to economies of scope
The rationale for forming the G&Ts was economies of scale. This is disputed by the DERs. Rather than providing economies of scale, DERs demonstrate economies of scope: the more diverse and orchestrated a set (or portfolio) of DERs is, the higher the value.
GRE and its members have over 40 years of experience with DERs through their robust load management program that monitors over 350,000 distributed devices to reduce peak loads each month.
The GRE-Connexus agreement recognizes that innovation in the creation of DER portfolios will be a cost-effective way to meet members’ long-term resource needs through economies of scope. By working with the GRE on market-facing wholesale services, Connexus will see the value of capacity for the portfolios of DERs it will build. In turn, the GRE can gain experience by leveraging DERs in wholesale markets. This agreement recognizes that economies of scope, more than economies of scale, create many opportunities for learning by doing.
Factor 3: GRE and Connexus are building forward-looking leadership
The agreement between GRE and Connexus would not have been possible without the right leadership in place. Greg Ridderbusch, President and CEO of Connexus, helped inaugurate one of the largest solar + storage projects in the Midwest and supported innovative DER programs for customers while keeping rates stable.
With President and CEO David Saggau, GRE has built a sophisticated technical staff that embraces a culture of capacity building to support innovation in load management, transmission and power supply. Since the announcement of the agreement, Login and GRE both made public statements showing mutual respect.
Implications for the future: building a vertical alignment
The energy transition will force electrical cooperatives, with the member-consumers who own them, to move quickly. From wholesale market nodes to home water heaters, co-ops will need to build a host of additional capacity to support DER deployment and operation. We describe this type of coordination as “vertical alignment”.
The cooperation between cooperatives demonstrated by GRE and Connexus shows one of the many avenues cooperatives can take to support, not undermine, vertical alignment. If DER are to be fully utilized and member-consumers are to be empowered in the energy transition, distribution systems will increasingly be the sites where resource needs will be met and where staff capacity will need to be strengthened. This agreement is possible because Connexus has the scale to develop its own expertise and capabilities. Many other cooperatives operate with very small staff and, if they are to benefit from a transition to a more distributed network, they will need to work in even closer partnerships with the G&Ts they created decades ago.
The cooperatives are utility innovation labs. And we are fortunate to teach in a graduate program and research Center at the University of Minnesota studying energy transition strategies for co-ops while preparing future employees. How cooperatives cooperate at all levels of the electricity network support for clean energy owned by cooperatives develops, will be one of the most important developments to follow in the energy transition.