The “How Do We Make This Bill Less Ugly?” – Proposed Changes to Improve Clean Energy First
The last two days I’ve reviewed The Good and The Bad parts of the proposed Clean Energy First legislation currently circulating in the Minnesota States Senate. Today, in sticking with our Sergio Leone theme, I’ll talk about a few ways to make the bill less Ugly.
1. Instead of Granting Cost Recovery for Prematurely Retired Assets, Require Utilities to Sell the Plants on the Open Market to the Highest Bidder
Why should Minnesota families and businesses be forced to continue to pay for a coal plant that is going to be destroyed before the end of its useful lifetime? This should be top of mind in the forthcoming discussions about The Bad provisions of Clean Energy First.
Instead of granting the Public Utilities Commission the power to rubber stand the premature closure of these affordable, reliable sources of electricity, utilities who want to divest themselves of their coal plants through the resource planning process should instead be required sell these plants to the highest bidder on the open market.
The new owners of the power plant, in this case let’s say it’s the Sherco plant, would be able to sell power to customers in the original utility’s service territory, in this case, Xcel’s, through power purchase agreements, while also making market-value payments to Xcel for the use of the distribution network that already exists to deliver the electricity from the plant to the homes and businesses of electricity customers.
This is a win-win situation because it would allow low-cost power plants to remain in operation until the end of their useful lifetime, which is a big win for consumers who wish to purchase this power and reap the benefits of lower electricity costs, and a win for Xcel because it allows the company to reach their own company-wide goals of divesting of carbon dioxide emitting resources by 2050.
2. Change the Rate Base Formulate to Reflect the Accredited Capacity Value to the Grid, Rather than the Cost of the Resource
This one is wonky, but it is also important because it introduces a price signal that currently doesn’t exist in utility resource planning. It also fixes some of the worst incentives utilities currently have by making the interests of ratepayers and utilities more closely aligned.
The current utility business model operates under a “spend more money, make more money” paradigm. In Minnesota, utilities make a 7.5 percent government guaranteed profit on the cost of capital they spend. This includes power plants, transmission lines, and even updating their corporate offices. As you can imagine, this gives the utilities a powerful incentive to build as many new things as possible to maximize their profits for shareholders.
This perverse incentive structure is why I have serious doubts that Xcel Energy would build any new nuclear power plants or hydroelectric dams in the future, even if Clean Energy First becomes the law of the land.
Think of it this way, why would the utility build a nuclear power plant that would generate carbon dioxide-free power around the clock for 60 to 80 years with minimal need for transmission upgrades when they could spend much more on solar, wind, natural gas “backup” generators and transmission lines, instead?
Let’s look at how this would play out in a practical sense.
According to the U.S. Energy Information Administrations Electricity Market Module for 2019 (2020 should be out any day now), it costs approximately $6 million to build one megawatt of nuclear power, $1.5 million to build one megawatt of wind, and Lawrence Berkeley Labs states unsubsidized solar costs about $1.6 million per megawatt AC.
These costs give the appearance that nuclear is by far the most expensive source of electricity on the market, but when you consider the productivity, or capacity factor, of each source, it becomes apparent one megawatt of installed nuclear capacity will generate much more power than one megawatt of wind or solar.
This has major implications for the cost of generating electricity because we would need to build 3 MW of wind and 5.4 MW of solar to equal the electricity output of 1 MW of nuclear power. This brings the capital cost of generating 1 MW of power to $6 million for nuclear, $8.6 million for solar (5.4 MW x $1.6 million), and $4.5 million for wind (3 MW x $1.5 million).
In the long run, the superior productivity of nuclear power, and it’s ability to generate electricity for 60 to 80 years, makes it much lower cost than wind turbines, which only last 20 years, and solar panels that last about 30 years, according to the National Renewable Energy Laboratory. Factoring these costs over a 60 year time frame shows it costs three times as much, in terms of capital expenditures, to use solar, and twice as much to use wind, as it does to build a nuclear power plant.
Again, it is also important to remember this doesn’t include the cost build building “backup plants” or transmission lines, so this estimate still significantly underrepresents the superior economics of dispatchable nuclear power relative to wind and solar.
That was a long setup for the punchline: In order to ensure that utilities are decarbonizing in the most cost effective way possible, we must change the rate base formula (which is the formula used to determine utility profits) to reflect the accredited capacity value (which I talked about yesterday), rather than the cost of the power plant.
This change in the utility profit equation would mean that the utility would benefit most from building the most reliable sources of electricity, and profit least from building the least reliable sources. As a result, the interests of the utilities and the ratepayers would be much better aligned than they are currently.
If we take the capacity values in the chart above for nuclear, solar, and wind, and multiply it by the cost of building 1 MW of nuclear, 5.4 MW of solar, and 3 MW of wind, we would get the new rate base values, or the amount of capital expenditures the utility would be allowed to profit on, for each generation resource to produce 1 MW of electricity. Now, nuclear power is the most profitable for the utility to build, instead of wind and solar.
As you can see, reforming the rate base calculus to reflect the value of a power plant, rather than its cost, results in the utility benefiting more from spending less in the long run. Until this is changed, there will be little incentive for utilities like Xcel to build the least-cost sources of energy, which means Minnesota families and businesses will be exposed to greater risk of electricity prices rising in the future.
This is something lawmakers should consider when debating how to protect ratepayers under the Clean Energy First bill.
3. Base Affordability Criteria on Competitiveness
At the Senate’s Clean Energy First hearing in Mound last week, Senator Simonson posed the question, “What does the word ‘affordable’ mean?” The following discussion talked about ways the legislature can try to make sure electricity remains affordable for all Minnesotans.
My answer to the question “What should the price of electricity be?” will always be “as low as possible,” but it helps to examine Minnesota’s electricity rates in a national and global context to help determine if the policies being enacted by the legislature are harming our state.
Minnesota’s electricity prices used to be 20 percent below the national average, giving the state a competitive advantage when it comes to energy intensive industries like agriculture, manufacturing, and mining. However, this advantage has evaporated, and Minnesota’s electricity prices could surpass the national average in the next few years.
Minnesotans often consider themselves to be “a little better than average,” so it would make sense to apply this logic to electricity prices. Therefore, Clean Energy Fist could take a firm stand to protect ratepayers by establishing criteria in statute requiring Investor Owned Utilities to deliver electricity at a cost that is ten to fifteen percent below the national average. If utilities do not meet this standard, customers in their service area would be free to contract with other utilities that are successful in keeping costs low.
A requirement like this would provide a much-needed, free-market signal to an industry that is woefully lacking in them.
4. Give Consumers the Power of Choice
Another possible solution to the problematic question of how to best determine what “affordable” means is to take this responsibility away from lawmakers and bureaucrats, entirely. Instead, Minnesota families and businesses would be free to choose which electricity providers they prefer. This would give eco-minded people the ability to buy their electricity from utilities that have lower carbon dioxide emissions, and economically-minded people would have the option to prioritize cost.
Xcel often claims they are responding to strong customer demand for “cleaner” energy, so they shouldn’t be too worried about losing customers should more consumer freedom be allowed.
5. Renewable Energy Opt-Outs
If full-scale consumer choice is off the table, we should at least give people the option to opt-out of paying extra for electrons generated by wind turbines or solar panels, as opposed to coal, gas, or nuclear plants. Again, some people would happy to pay a premium for renewable energy, others would prioritize lower costs. In the end, both sides would be able to be more satisfied knowing they are getting a product that more closely reflects their needs and values.
I do have more ideas on how to improve the bill, but I’ll save those for later articles.