🌿 Friday's Climate Infra Brief: Small Batteries On Old Co-ops

The problem: AI data centers are pushing peak power demand past what the grid can handle. PJM’s last capacity auction missed its reliability target for the first time in the operator’s history, and the 3rd consecutive year of price-cap clearing pushed wholesale costs to roughly $16.4 billion. About 40% of that traces directly to data centers. The bill flows through to households. The average PJM ratepayer is looking at something like a $70/month increase by 2028!

So how do we solve this? The simple and conventional answer is that hyperscalers pay a premium to utilities, and utilities credit it back to affected households. Maybe call it AI energy credits. It’s clean, it’s politically intuitive, and it’s pure redistribution — the kwh don’t move, only the dollars. Physically nothing changes. The grid still cracks when a training run hits at 6pm on a 100-degree day.

Or, creatively, hyperscalers buy four-hours of battery for every household affected. Think about what that does. The homeowner gets a battery they didn’t (directly) pay for. They get backup power during the next brownout. Their bill goes down because the battery clips their on-peak draw. The grid gets dispatchable capacity sitting at the edge of the distribution system, exactly where the new load is landing. And the hyperscaler instead of writing a guilt check to subsidize someone else’s gas bill gets accredited capacity that PJM can count toward reliability. Same dollar, 4x of value.

But hyperscaler CFOs will struggle to explain a multi-billion-dollar residential-battery line item on the next earnings call, and most homeowners aren’t going to take a free Powerwall from Amazon. The structure needs an intermediary — somebody to procure the assets, hold them on a balance sheet, operate the fleet, and stand between Big Tech and the homeowner. Who’s actually built for this job?

Ouachita Electric Cooperative in southern Arkansas has 13,000 members and a service territory that overlaps with some of the poorest counties in America. Since 2016, it’s been paying upfront for heat pumps, insulation, and weatherization in member homes, recovering costs through a small tariff on the monthly bill that’s guaranteed to be less than the energy savings. No credit check. No lien. No debt. The customer saves money from Day 1. 700 homes later, Ouachita has cut summer peak demand by 30%, reduced average household energy use by 18%, and contributed to a 4.5% rate decrease for ALL members, including those who didn’t participate. The program’s loan loss reserve, backstopped by the Arkansas Energy Office, has never been touched.

Lightshift Energy and the Blue Ridge Power Agency announced 25 MW of distribution-connected batteries across three Virginia co-ops three weeks ago, expected to save those utilities $100 million over project life. Lightshift owns the batteries, operates them, and shares peak-shaving savings through a 20-year service agreement.

There are roughly 2,800 electric cooperatives and municipal utilities serve 24% of U.S. electricity customers, manage critical last-mile infrastructure across 48 states, and have essentially zero battery storage and minimal home electrification programs. They can sign 20-year contracts. And they have a level of customer trust that an investor-owned utility going through a rate case will simply never have. Some of the co-ops are already the counterparty to the hyperscalers. In Virginia (aka the center of AI DC universe), Northern Virginia Electric Cooperative — NOVEC — has 180,000 members. Data centers now account for more than 65% of NOVEC’s energy sales, projected to reach 95% by 2032. Rappahannock Electric Cooperative, the largest in Virginia, expects 17 GW of data center demand by 2040, up from roughly 0 in 2023. The contractual relationship between Amazon and the homeowner across the street already runs through these co-ops. Nobody else in the country has both ends of the wire on their balance sheet.

The capital stack works because of an often overlooked provision in the IRA: Section 6417 — elective pay — allows tax-exempt entities like co-ops and municipal utilities to claim the 30% ITC as a direct cash payment from the Treasury. Before this, co-ops couldn’t access the ITC at all because they have no federal tax liability. That one provision unlocked the entire market. The counterparty is a municipal utility or cooperative with a regulated revenue stream and essential-service billing priority. At 5 MW per installation, a $200-300M fund targeting 40-60 systems could generate 8-12% levered returns with investment-grade-equivalent credit risk. The return could get better if hyperscalers bid higher for capacity.

Now extend it one step. The co-op puts a 4-hour battery in the member’s home. Instead of recovering the cost through the member’s bill, it recovers it through a 10- or 15-year capacity PPA with the hyperscaler down the road. The co-op operates the fleet; the co-op bonds against the capacity contracts. The bonds finance the battery deployment. The hyperscaler books a regulated-utility capacity contract on its balance sheet — much easier to explain to investors. They also get accredited capacity that PJM will count; the member gets backup power and lower peak charges. The unit economics are dramatically better than what Sunrun runs on a single-family basis. The co-op’s cost of capital is closer to 5% than 10%. The contracts aggregate at scale. There’s no customer acquisition cost because these are existing members. NOVEC and REC could each deploy 100,000 home batteries inside their existing service territory and not come close to saturation.

The boring solution to the sexiest infrastructure problem of the decade might just be small batteries on old co-op meters.

P.S. Real thanks to everyone who's been reading and writing back. Half-baked Friday-morning theses/research have turned into actual conversations with old colleagues, new friends, and people across the industry I'd never have met otherwise. It really keeps me going. :)