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The Bad: Senate’s Clean Energy First Bill Would Probably Be A Blank Check to Xcel Energy

Yesterday, I wrote about The Good aspects of the Minnesota State Senate’s Clean Energy First bill. Today I’ll talk about The Bad aspects, and tomorrow I’ll suggest ways to amend the legislation to make sure Minnesota families and businesses are not paying higher costs as a result of the bill.

The Bad

As a result of legalizing new nuclear, large hydro, and carbon capture and sequestration technology, the Clean Energy First bill could reduce more emissions for less cost than wind, solar, and battery storage. While this sounds great in theory, the legislation also contains problematic provisions that will essentially be a blank check to Xcel Energy at the expense of the families and businesses who are forced to buy their power from them.

Apologies in advance that this post gets wonkier than I’d like.

Two Problematic Provisions

The first problematic provision reads:

“If the commission orders a generating facility to terminate its operations before the end of the facility’s physical life in order to comply with a specific state or federal energy statute or policy, or as part of a resource planning order under section 216B.2422, the commission may allow the public utility to recover any positive net book value of the facility as determined by the commission.”

This provision would give the Minnesota Public Utilities Commission (PUC) new powers that will allow it to force ratepayers, rather than utility company shareholders, to pay the costs associated with shutting down a power plant before the end of its useful lifetime, if the company decides to retire the plant as part of its resource planning process.

The second problematic provision reads:

“If the commission approves a resource plan that includes the retirement of a carbon-emitting resource owned by a public utility, the public utility shall be entitled to own the generation, transmission, and other facilities necessary to replace the accredited capacity and energy of the retiring facility provided:

(1) the resource plan of the public utility with more than 200,000 retail electric customers in Minnesota results in an 80 percent or greater reduction in carbon emissions from 2005 levels by the year 2030 and thereafter;”

(2) the resource plan of the public utility with between 50,000 and 200,000 retail electric customers in Minnesota results in a 65 percent reduction in carbon emissions from 2005 levels by the year 2030 and thereafter; and

(3) each public utility demonstrates its ownership of replacement resources is reasonably in the public interest, considering customer impacts and benefits.”

This section will increase costs for Minnesota families and businesses because it guarantees that utilities like Xcel would be able to own all replacement generation, transmission, and other facilities needed to replace the accredited capacity of a carbon-emitting resources, as long as the new generation results in an 80 percent or greater reduction in carbon dioxide emissions from 2005 levels by 2030.

Utility ownership of replacement generation is an important aspect to understand, because the utility only makes it’s government-guaranteed profit by building power plants if the utility owns the asset.

What this Means in the Real World

Together, these provisions take the worst incentives utilities currently have and make them even worse.

For example, the provisions will encourage companies like Xcel Energy to close down their existing coal plants before the end of their useful lifetimes so the company can run up their government guaranteed profits by spending tens of billions of dollars on wind turbines, solar panels, and transmission lines, which will cause their already above average electricity rates to skyrocket further.

I single out Xcel Energy because Minnesota’s other investor-owned utilities, Otter Tail Power (OTP) and Minnesota Power (MP), have done a good job of keeping their rates low, as you can see in the graph below, which uses U.S. Energy Information Administration data.

The most expensive electricity rates in Minnesota

Unfortunately, the chasm between Xcel’s rates and the rates of OTP and MP will continue to grow if the two bad provisions above remain in the bill as it is currently written. Here’s why.

Xcel’s coal plants provide some of the most reliable and affordable electricity in the state. According to 2018 data from the Federal Energy Regulatory Commission (FERC), Sherco produced electricity for $33.43 per megawatt hour (MWh), and A.S. King generated electricity for $41.22 MWh, which is higher than 2017, when it generated electricity for $36.83 per MWh.

At these prices, the cost of generating electricity at Sherco is well below the cost of unsubsidized wind, even if you use the numbers generated by Bloomberg New Energy Finance, which I have argued are almost certainly too low, and the cost of power at A.S. King is lower than the values we estimated in our award-wining study Doubling Down on Failure.

It’s also important to remember that these levelized cost of energy estimates (LCOEs) don’t convey the true cost of intermittent renewables because they don’t account for the massive amount of money that needs to be spent on transmission for wind and solar, or the need for natural gas “backup generators” for when the sun isn’t shining or the wind isn’t blowing. It is necessary to account for all of these hidden costs if we are to fully understand how Clean Energy First will negatively impact electricity consumers.

Under bad provision one of Clean Energy First, the PUC would be able to rubber stamp the closure of Sherco 3 and A.S. King years before the end of their useful operating life and make Xcel’s customers, rather than their shareholders, foot the bill. This will likely result in ratepayers being saddled with millions of dollars in stranded asset costs that will cause their bills to increase. This is problematic considering Xcel Energy consumers have already seen their bills increase substantially over the last 15 years, despite their success in reducing electricity consumption.

Bad provision number two adds insult to injury by stating “the public utility shall be entitled to own the generation, transmission, and other facilities necessary to replace the accredited capacity and energy of the retiring facility,” provided the resource plan “results in an 80 percent or greater reduction in carbon emissions from 2005 levels by the year 2030 and thereafter.”

The problem with this language is that the phrase “accredited capacity and energy” could easily be exploited as a license for Xcel to spend tens of billions of dollars on wind, solar, and transmission lines at great cost to the Minnesota families and businesses who are forced to buy their electricity from them. Here’s how it this provision could, and probably will, be abused.

To fully understand how this works, we’ll need to examine what the phrase “accredited capacity” means.

Accredited Capacity

Accredited capacity is a metric used by the regional grid operator, the Midcontinent Independent Systems Operator (MISO), to determine how much electricity a given power plant can generate when the electricity is needed most. These values are important for letting the grid operator know if there are enough power plants online to meet regional electricity demand during these times. Each plant is assigned a value, expressed as a percentage of electricity than can be reliably delivered, compared to the power plant’s total capacity, to determine how reliable it is.

In Minnesota, coal plants like Sherco and A.S. King, nuclear plants like Prairie Island, and natural gas plants like High Bridge are incredibly reliable, and able to produce between 84 and 95 percent of their nameplate capacity, as determined by this equation (Net Dependable Capacity/Nameplate Capacity*100 = Capacity Value).

In contrast, Xcel states the Nobles Wind facility will only be able to generate about 17 percent of its total capacity when there is peak electricity demand, and MISO gives other wind projects in this region of the country a capacity accreditation of 18.3 percent. For the time being, MISO is giving solar a capacity accreditation of 50 percent, but Xcel acknowledges this will fall as more solar is installed on the grid over time.

This means each megawatt of installed wind or solar capacity on the grid is expected to deliver far less value to the grid than each megawatt of coal, natural gas, or nuclear power.

This graph may not be perfect because it doesn’t account for unforced outage rates, but because unforced outage rates are trade secret protected, this is the best approximation we can make with publicly available data.

How Much to Replace AS King with Wind?

Now that we’ve established what accredited capacity is, let’s examine why the inclusion of this language in the Clean Energy First bill probably means electricity costs will continue to increase in Xcel’s service territory by examining how much it would cost to replace the A.S. King coal plant with wind, using MISO’s accreditation value for wind.

According to Xcel filings, A.S. King has a net dependable capacity of 511 megawatts (MW). If we wanted to replace this capacity with only wind, with an 18.3 percent capacity accreditation, we would need to build 2,792 MW of wind to get the same amount accredited capacity.

EIA’s electricity market module from 2019 shows it costs about $1.5 million per MW to build wind in this region of the country, which means it would cost more than $4.1 billion to build enough wind turbines to get the same amount of accredited capacity as A.S. King, and this doesn’t include the cost of all the transmission lines that would need to be built to accommodate all of these new wind turbines.

This this an extreme (and probably unworkable) example, and in reality AS King would probably be replaced with a combination of wind, solar, and natural gas. However, Xcel’s preferred plan for it’s Integrated Resource Plan shows that the utility wants to shut down all of its coal (about 2,300 MW) by 2030 and replace it with 9,806 MW of replacement generation, as you can see in the graphic below, which means for every megawatt of coal retired, Xcel plans to build (or eliminate the need for) 4.26 MW of new capacity.

Due to it’s early coal closures and heavy reliance on wind and solar, Xcel’s preferred plan will cost billions of dollars for ratepayers, but under the Clean Energy First bill as it is currently written, it could easily be approved by the PUC.

While Clean Energy First, in theory, has off ramps to protect consumers, consumers are unlikely to be protected if Minnesota has a PUC has a that is more concerned about reducing carbon dioxide emissions than protecting ratepayers. American Experiment is currently modelling the cost of Xcel’s “preferred plan” if it is allowed to be implemented as a result of the passage of the Clean Energy First bill currently under consideration.

Tomorrow, I’ll offer some amendments to the legislation that can improve it to make sure ratepayers are protected from rising costs.

 

 

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