Xcel Energy: Committed to Renewables, but Going Its Own Way

Powerful regional utility Xcel Energy, which owns electric and gas utilities in the middle of the U.S. featuring major wind and growing solar resources, is making a big commitment to renewable generation. But for Xcel, going green means choosing its path: the utility-controlled road to renewables.f

Utility holding company Xcel Energy, headquartered in Minneapolis and with large electric and gas operations in eight states in the upper Midwest, the Rocky Mountain West, and Texas, has ambitions to be the nation’s leader in renewable electricity generation. At the same time, as with many power generators, the company is moving away from coal, once a staple, and relying on natural gas as a transition and balancing fuel.

Reflecting the views of many electric generating utilities, Xcel’s model for renewables is utility-centric. The company believes that big utility-scale renewable facilities are the most economical approach overall for customers, and, of course, the most profitable for the company. For wind power, where small is not on the menu, that’s conventional wisdom. For solar, with enthusiastic rooftop troops, it’s controversial.

Green Goals

“We’ve been in the process of adding substantial wind for over a decade,” Kent Larson, Xcel’s executive vice president and group vice president for operations, told POWER. “We have 6,500 MW of wind, and we’d like to have more.” Larson noted that Xcel, with a service territory mostly in the upper Midwest, has “some of the best wind resources in the country.” The company is also looking to add substantial solar photovoltaic generation to its system and says it will add 1,800 MW of wind and 1,400 MW of solar by 2030.

Xcel CEO Ben Fowke at a Wall Street investment conference last December rolled out a $15.2 billion capital investment plan, which calls for a lot of wind and solar, along with transmission upgrades to get renewable generation to consumers. Fowke called the plan “steel for fuel,” where wind turbines, made with lots of steel, offset the need to pay fuel suppliers for coal and gas plants.

Not incidentally, the company’s carbon dioxide (CO2) reduction target is more ambitious than the one in the Obama administration’s Clean Power Plan. Xcel is aiming for a 60% cut in CO2 emissions by 2030—double the administration’s target.

When President Obama announced the details of his plan to cut CO2 emissions from coal-fired power plants, Xcel was largely supportive. The company was part of the White House ceremony unveiling the final Clean Power Plan last summer. Fowke said, “While we expect the Clean Power Plan does not provide everything we hoped for in terms of fully recognizing the early actions of proactive states and utilities, Xcel Energy is ready to move ahead.”

Larson said, “Ten years ago, we embraced the goal of being the environmental leader in our industry,” adopting plans to buy wind and build the necessary transmission to bring the power to customers. The utility is on a path to reduce its carbon emissions 30% by 2020, well ahead of the administration’s plan. Larson noted that there were advantages to moving out first in the renewables race. “We did the work way ahead of the rush” brought on by the impending governmental move away from fossil fuels, he said. “We were able to do it ahead of time, at our pace, and cost-effectively.” Larson added that Xcel also has developed “by far the best wind forecasting system” in the industry as a result of experience gained in its long embrace of wind power.

Wind Leader

The American Wind Energy Association (AWEA) ranks Xcel as the leading wind energy utility in the U.S. MidAmerican is second, followed by Southern California Edison, Pacific Gas & Electric, and American Electric Power. Xcel has been at the top of AWEA’s ranking for a decade.

The company is moving away from power purchase contracts for wind and toward direct ownership. The Minneapolis Star Tribune newspaper noted, “In its four most recent wind farm deals in Minnesota and North Dakota, Xcel purchased three of the projects from the developers and signed a power purchase deal on the fourth.” Larson acknowledged that utility-owned wind is the company’s preferred approach.

For the utility, buying the wind farms outright adds to the company’s rate base, on which it earns a regulated return. “If you do it right,” says Fowke, “you can grow the rate base and not increase customer cost because you just reduce your use of gas.” That means cash flowing to the company’s bottom line. Larson acknowledged that owning renewable generation also allows the utility to take advantage of subsidies.

Fowke said that the company’s plan “won’t see us getting overly dependent on natural gas in the future even as we transition away from coal. The reason is that we are replacing it with renewables, with gas backstopping growing generation from intermittent wind and solar.” The gas plants, he said, “are not going to be used as much.”

Recent deals demonstrate Xcel’s embrace of wind as an owned resource. In May 2015, Xcel agreed to acquire the incomplete Border Wind Farm in Rolette County, N.D., with 150 MW of capacity from 75 wind turbines, for $300 million (Figure 1). The project had been unable to line up a power purchase agreement, according to the Star Tribune. In November, Xcel bought the operating 200-MW Pleasant Valley Wind Farm near Austin, Minn., for an undisclosed amount. That plant had a power purchase agreement with Xcel. Both plants were developed by RES America Developments Inc.

1. Wind leader. Xcel is ranked as the leading wind energy utility in the U.S. Among its holdings is the 150-MW Border Wind Farm in North Dakota. Courtesy: Xcel Energy

The Star Tribune observed that “Xcel has more than 50 wind farm power-purchase agreements in Minnesota, according to state data.” It is unclear which of these Xcel may be looking to buy out and what the timing of deals might be. Any future acquisitions may require a green light from utility regulators.

Going Big (Only) on Solar

Xcel is also bullish on solar at large scale, although not at smaller installations outside of its control and balance sheet. Discussing the company’s second-quarter earnings during a July conference call with analysts and reporters last year, Fowke said Xcel views solar “as an important growing component of our resource mix. However, we want to make sure that it’s done at the most attractive price point for our customers.” That means, on Xcel’s books.

Last March, Minnesota regulators approved the company’s plan for three big solar installations, including a 100-MW project near North Branch, Minn. Fowke said that “Xcel Energy continues to be a major advocate of solar.” In Colorado, Xcel began taking power in late December under a contract from SunPower’s 50-MW Hooper photovoltaic project in the San Luis Valley. Xcel is already contracted to take power from two other SunPower plants in the valley, the 19-MW Greater Sandhill plant (Figure 2), completed in 2010 and the 30-MW San Luis Valley Solar Ranch, which reached commercial operation in 2012.

2. Sandhill solar. The 19-MW Greater Sandhill solar photovoltaic plant has been generating power in Alamosa County, Colorado, for Xcel since 2010. Courtesy: Xcel Energy

But the company remains careful about embracing customer-owned solar power and distributed generation. Xcel looks askance at distributed solar, either on customers’ rooftops or in community solar developments on economic grounds. (See “Solar Gardens: A Fast-Growing Approach to Photovoltaic Power” in the May 2015 issue for more on community solar, including an installation near Boulder, Colo. See also the sidebar “The Battle of Boulder.”)

The Battle of Boulder

Since 2005, Xcel Energy and the city of Boulder, Colo., home to the flagship campus of the University of Colorado, have been in a fight over the city’s wish to oust Xcel as the electricity provider and replace it with a new municipal utility. If past municipalization efforts are a guide, the dispute is likely to take many more years to conclude, perhaps decades; the city is likely to lose.

In 1999, Las Cruces, N.M., threw in the towel after a 30-year battle with investor-owned El Paso Electric over the city’s attempt to create a municipal utility. The move was driven by the high costs of El Paso’s share of the Palo Verde Nuclear Generating Station in Arizona. Similarly, the city of New Orleans in 1990 gave up a decades-long war with Entergy over municipalization, driven in part by Entergy’s high-cost nuclear program.

Boulder’s interest in forming a municipal utility is related to its view that Xcel isn’t sufficiently dedicated to renewables, particularly distributed solar, and to ending its use of fossil-fueled generation and reducing greenhouse gas emissions. The city gets about 70% of its power from Xcel’s largely coal-fired Colorado power generating fleet.

Boulder first demonstrated its interest in forming a city-owned utility, which would entail buying out Xcel’s distribution assets, in 2005, when it commissioned consultants R.W. Beck of Seattle to do a feasibility study. The Beck analysis suggested that forming a muni could achieve the city’s goals for greater renewable generation at lower cost. Negotiations between Boulder and Xcel began in 2006.

In 2010, Boulder refused to renew its 20-year franchise with Xcel. In 2011, city voters approved moving forward with a plan to buy out Xcel. Last summer, the city asked the Colorado Public Utilities Commission (PUC) to approve the transfer of Xcel assets to the city. The PUC denied the request last November as too broad. An Xcel spokeswoman said that the city “will now have the opportunity to supplement and correct their plan in this proceeding, but we hope the city leaders will instead be willing to work together with us to help develop a plan for Boulder to achieve the carbon-reduction it had set as its goal for municipalization.”

The utility has resisted losing a substantial part of the infrastructure upon which it earns a regulated return. The dollar impacts are large, so Xcel is willing to spend considerable amounts to defend its ownership of its assets in the city. The city is likewise willing to spend big money to try to expropriate Xcel’s distribution system.

Kent Larson, Xcel’s executive vice president and group vice president for operations, told POWER that the company “is taking the high road” in the Boulder dispute, continuing to serve its customers in the city while also developing more renewable generation in Colorado, including new wind resources. “We will continue doing a good job with our customers,” he said.

If history is a guide, the battle of Boulder, involving scores of millions of dollars on both sides, is likely to rage on for many years and end in some sort of compromise settlement. History also suggests that, regardless of the outcome, the lawyers and consultants representing the city and the utility will do very well indeed. Boulder’s Daily Camera reported on December 30 that the city had already spent “just under $7 million exploring and pursuing municipalization . . . with the majority of those funds coming from a voter-approved utility occupation tax.”

Here’s the economic issue as far as Xcel is concerned. Utility-owned solar has significant advantages of scale, as well as providing assets for the utility’s rate base. Customer-owned solar, by Xcel’s reckoning, imposes costs on the utility—and its non-solar customers—for grid support and ancillary services to keep the grid stabilized.

The company has been in a protracted dispute with solar advocates and regulators over Minnesota’s permissive approach to community solar and rooftop generation. According to Fowke, “While solar gardens and rooftop solar have a place in our portfolio as an option for consumers, because they require heavy, heavy subsidization on non-participants, you’ll see us advocate that the primary focus be utility-scale solar so that we can keep energy costs affordable for consumers.”

That puts Xcel squarely on the investor-owned utility side of a raging dispute in the industry over the way to value distributed solar photovoltaic power (see the October 23, 2015, post, “The Solar PV Economics Conundrum”).

Coal Remains Important

While Xcel moves toward its renewable energy goals, it faces continued controversy over the company’s coal legacy, as coal remains important to Xcel’s operations in Minnesota and elsewhere. Overall, Xcel has 25 coal-fired units at 12 locations (seven in Colorado), with a total of 7,409 MW in capacity. Gas capacity is 6,877 MW from 70 units at 25 stations. Xcel has three nuclear units totaling 1,594 MW, 377 MW of hydro, and 327 MW of company-owned wind (on top of over 6,000 MW of wind under contract).

Xcel’s largest generator is the coal-fired Sherburne County (Sherco) Generating Station (Figure 3) in Becker, Minn., a three-unit, 2,222-MW plant located on the Mississippi River near the Twin Cities. The plant burns Powder River Basin coal and sells some steam to a nearby paper mill.

3. Coal king. At 2,222 MW, the Sherburne County (Sherco) Generating Station is the largest of Xcel’s plants. Courtesy: Xcel Energy

Environmental activists have been pushing Xcel to shut down Sherco. The company initially resisted, saying it wanted to keep the first two 750-MW units, built in the 1970s, running until 2030. Xcel did not propose closing the third Sherco unit, vintage 1980s. Last October, following the unveiling of the Clean Power Plan, Xcel filed a plan with Minnesota regulators to shut Sherco 2 in 2023 and Sherco 1 in 2026 and replace them with gas-fired combined cycle generation. It intends to continue running Sherco 3, a 860-MW unit; Xcel owns 60% of that unit while Southern Minnesota Municipal Power Agency owns the balance.

A History of Mergers

Xcel Energy is the product of a series of mergers from 1995 to 2005. The parent company was Northern States Power (NSP), headquartered in Minneapolis, the dominant utility in the state. NSP began life in 1909 as a result of moves by engineer and entrepreneur Henry Marison Byllesby, whose mentors were Thomas Edison and Samuel Insull. During the early 20th century, Byllesby acquired utilities in Illinois, Oklahoma, and Ohio and formed a company in Minnesota, which became Northern States Power in 1916. The utility grew to become the major investor-owned utility in the state, before it went on the buying spree of the late 20th century, transforming itself into a regional utility superpower.

NSP in the mid-1990s tried a $6 billion merger with Milwaukee-based Wisconsin Energy Corp., which would have created a company to be known as “Primergy.” That deal fell apart after Federal Energy Regulatory Commission (FERC) staff raised serious objections.

Xcel was born in 2000 as NSP gobbled up a conglomerate known as New Century Energies. New Century was the product of a 1995 merger of Denver-based Public Service of Colorado and Southwestern Public Service Co. of Amarillo, Texas.

During the 1990s, NSP created a successful non-utility generating company, NRG Energy. In 2000, Xcel spun off NRG in a public stock offering. Xcel ended up owning about 80% of NRG shares. NRG went into Chapter 11 bankruptcy reorganization in 2003, emerging clear of much of the debt it carried after the spin-off from Xcel.

Today, Xcel Energy is a large, multi-state utility electric-and-gas holding company with a diverse electric generating profile and operations in many different markets. The company operates in Minnesota, Colorado, Michigan, New Mexico, North Dakota, South Dakota, Texas, and Wisconsin.

With $11.7 billion in revenues in 2014, the company saw $1 billion in profits. Electricity revenues in 2014 totaled $9.5 billion. The Xcel utilities had 3.5 million electricity customers, 17,019 MW in nameplate generating capacity, 93,100 miles of transmission, and 196,899 miles of electric distribution infrastructure. Natural gas distribution revenues totaled $2.1 billion for 2014, with 2 million customers, 2,405 miles of transmission pipelines, and 34,091 miles of distribution pipelines.

Taking the Long View

What’s ahead for Xcel Energy? As with many electric generators in transition, the future is far from clear, although the general direction might be discernible through the fog of politics, regulation, and economics. The company’s focus on moving from coal to renewables, particularly wind, appears likely to continue.

In Minnesota, the company got 14% of its electricity from wind in 2014. Xcel says it hopes to see that grow to 25% by 2030, the target date for achieving the goals of the federal government’s Clean Power Plan—assuming the regulatory regime survives court scrutiny and, perhaps, a new administration in Washington less focused on reducing CO2. Even if the federal plan collapses, Xcel will continue its transition to renewables.

Look for Xcel to continue converting power purchase agreements with non-utility wind generators into utility-owned projects. It’s also likely that large-scale solar investments will be high on the company’s capital agenda.

“It’s been a journey for us,” said Larson. “We started down this path more than a decade ago, and we have plans to continue for the next decade, in a great partnership with our policy makers.” Xcel believes it is on the leading edge of an industry-wide transition that will play out over several years.

How will investors view that green-oriented strategy? The Motley Fool investment website, which collects a number of analysts’ recommendations, says the best strategy for investors is largely a wait-and-see play on Xcel. Four analysts who follow the company rate it a strong buy, and eight call Xcel a “hold.” ■

Kennedy Maize is a long-time energy journalist and frequent contributor to POWER.

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