Minnesota’s energy transition threatened after Xcel’s reduced rate increase

Xcel Energy is reconsidering its future “clean energy” investments after the Minnesota Public Utilities Commission (PUC) approved a much smaller electricity rate increase than the utility company wanted, placing doubt on Minnesota’s energy transition.

Xcel originally requested a 21 percent rate increase of $677 million over 3 years in October 2021, before revising it to $498 million in November 2022, to fund its clean energy initiatives. The utility company said the rate increase was to expand its “renewable energy portfolio” and transform its “generation fleet as we [Xcel] lead the clean energy transition.”

[Emphasis added].

Xcel’s rate increase request met resistance from all sides, including the Department of Commerce and Citizens Utility Board (CUB), all citing concerns of rising costs and general unaffordability in the state.

In the end, the PUC approved a 9 percent increase of $306 million over three years, 55 percent less than Xcel’s original request and lower than what was recommended by the Department of Commerce and administrative law judge.

“I wasn’t convinced they needed as big an increase as they were proposing,” PUC Chair Katie Sieben said. “The commission struck a good balance.”

Xcel immediately voiced its frustration with the PUC’s decision and questioned its future investments in clean energy.

Xcel will also ask the PUC to reverse its decision, a request the PUC usually denies.

With the energy transition at least half underway in Minnesota, as coal plants continue to retire ahead of schedule, and Xcel admitting it will need to increase electricity rates to build new wind and solar plants, the question now becomes: how will Minnesota complete its expensive transition to wind and solar energy sources if it’s not willing to fund it?

If Minnesota wants 24/7 electricity without electricity rates continuing to increase at the 7th highest rate in the country, as shown in the graph below, it should reconsider the energy transition altogether.

Xcel Questions Future Renewable Investments

In light of the PUC’s decision, Xcel is rethinking its clean energy investments because it won’t earn enough from the investments to make them worthwhile.

“Yesterday’s decision will require us to evaluate our planned investments in a cleaner, more reliable system for our customers to determine which investments we are able to continue to make,” company representative Theo Keith stated.

Immediately after the PUC’s decision, Xcel filed a motion to withdraw its $330 million Clean Transportation Portfolio – Xcel’s proposal to build 730 electric vehicle fast-chargers throughout Minnesota.

In the motion, Xcel used the PUC’s decision for a lower rate increase as an excuse, saying it “will limit the Company’s ability to continue to lead the clean energy transition for our customers. The Company is evaluating its planned investments in light of the Commission’s decisions, including those proposed as part of the Clean Transportation Portfolio. As a result, the Company no longer requests approval of the Clean Transportation Portfolio as proposed in this docket.”

While this is a half-win for Minnesotans who care about energy affordability (with no rate increase being a full win), this episode between the Minnesota PUC and the state’s largest utility company brings into question how the energy transition in Minnesota will be financed by 2040, as required by Minnesota’s 100 percent clean energy by 2040 Blackout Bill, recently signed into law by Governor Walz.

It Takes Green to Go Green

Xcel’s reaction to the PUC’s decision is nothing short of an admission that the energy transition will be expensive and will come at the expense of Minnesota families and businesses.

It also showcases how influential profits are in Xcel’s push toward clean energy.

Even though Xcel is heavily regulated, profit incentives are behind most of Xcel’s decision-making – especially when it comes to clean energy initiatives.

Advocating in favor of renewable energy policies doesn’t spring from the company’s sincere care for the environment. It’s a business strategy.

There are two ways for a regulated utility company to earn more income, highlighted by the utility revenue requirement formula below.

Revenue Requirement = Operating Cost + Taxes + Depreciation + (Rate Base * Rate of Return)

The (Rate Base * Rate of Return) represents a utility company’s income.

The rate base is the sum of all undepreciated assets the company owns. The rate of return is the percent that the utility is allowed to earn from those investments. The larger the rate base or the rate of return or both, the larger the company’s income.

Therefore, the first way to increase profits is to increase the rate base by building more assets. This includes new buildings, power plants, transmission infrastructure, etc.

Most utility companies are in favor of renewable energy standards for this reason. Renewable energy mandates require utilities to build wind and solar plants to meet the state requirement, allowing utility companies to earn a return from these facilities for 20+ years at the expense of their customers.

The second way is to increase its guaranteed rate of return.

Xcel asked the PUC to increase its ROE from 9.06 percent to 10.2 percent, citing the need to remain competitive with other companies. The PUC denied this request, and commissioners instead sided with the Department of Commerce in a 3-2 vote, setting the ROE at 9.25 percent.

This decision will also impact future clean energy investments, as it directly impacts the dividends received by Xcel’s shareholders.

Two Xcel shareholders highlighted the relationship between clean energy and profits when they wrote to the PUC to ask it to reconsider its decision on Xcel’s ROE, saying that “without the stable investments of its shareholders, the ability of the Xcel Energy to offer consistently reliable service and make investments in ‘clean energy’ could be lost.”

Energy Transition in Doubt

Minnesota’s last coal plants are scheduled to retire by 2030, and new natural gas and nuclear plants are unwelcome by the state.

This means utilities must replace retiring capacity with mostly wind, solar, and battery storage in order to achieve 100 percent clean energy by 2040.

The ability to replace thermal capacity with wind and solar energy sources is questionable, given the low value wind and solar contribute to the grid compared to resources like coal, natural gas, and nuclear.

For example, Xcel’s Net Dependable Capacity (NDC) values show that coal and combined cycle (CC) natural gas are 3-6 times more reliable than wind and solar – meaning for every 1 MW of coal or gas replaced, 3-6 MW of wind or solar are needed to replace it.

Now, the feasibility of the energy transition is even more unclear because the largest utility company in the state is worried it won’t be able to earn enough from investments in wind, solar, and other initiatives, thus diminishing the company’s only incentive to pursue the energy transition in the first place.

The result is that Minnesota is being led headfirst into an energy transition that no one seems willing to fund, even as coal retirements are taking place ahead of schedule and new power plants aren’t coming online fast enough.

This should be a wake-up call for PUC commissioners and Minnesotans in general who are concerned about the rise in costs and reliability of the system.

Minnesota can have inexpensive, reliable electricity, or it can have expensive, unreliable electricity powered by wind and solar, but it can’t have both.