Should Utilities Be Buying New Gas Plants?

Date: 25 Feb 2019 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

In a report entitled Reverse Power Flow released last year, ILSR warned that the widespread availability of affordable energy storage would have major implications for the electricity market, upending traditional planning. In particular, it suggested that new investments in fossil fuel power plants were likely bad bet for electricity customers.

So when a monopoly electric company in Minnesota recently went shopping to buy a new gas plant, we offered our candid assessment to the state’s regulators:

Resource Plans Belong in Resource Plans

The comments start with a reference to a December meeting of Public Utilities Commission in which the utility now wanting to buy a gas plant won a delay in filing their next resource plan. This process is supposed to incorporate all of the utility’s resource acquisitions over the next 15 years. Commission staff, already concerned by this utility’s use of the legislature to end-around the process in 2017, had this to say in their briefing papers to the decision makers:

“One of staff’s hopes for the next IRP is that Xcel will not bypass the Commission’s resource acquisition process.” –– Briefing papers, Xcel IRP extension

The utility, Xcel Energy, already has contracts to buy the electricity from this power plant through 2026, and a reduced amount through 2039. However, owning the power plant changes the calculus.  As explained in greater detail below, the acquisition of a power plant carries significant financial and environmental risks that are only fairly evaluated when measured against alternatives. Presumably, the existing power purchase contracts have been vetted in such a manner. The ownership of the power plant has not.

The coincidence in timing of this proposed acquisition and the recently approved delay in resource planning should be noted.

Short-Term Benefits for Shareholders, Long-Term Risks for Customers

Xcel shareholders will see immediate benefits from the gas plant acquisition, as the Company can begin collecting a rate of return on expended capital immediately.

In contrast, customers will be liable for many costs (some already committed and others newly acquired). Customers already bear the risk that fuel cost estimates are unrealistically low against a history of gas price volatility, as illustrated in the following chart (in eight other states, shareholders would be required to risk-share with customers).

With Company ownership in the years beyond 2026, customers also assume new and significant risks. In its initial petition, Xcel Energy states that, “Company ownership will mitigate the risk associated with the termination of the MEC I [power purchase agreement] in 2026.” Even setting aside the fuel price risk that customers, not shareholders currently bear, data from the Company’s Colorado subsidiary contradicts the Company’s assertion of customer risk.

In January 2018, responses to a request for proposal issued by Xcel Energy’s Colorado subsidiary show that projects with a go-live date in 2023––three years prior to the power purchase agreement’s expiration––would undercut the combined cycle plant’s costs by a significant margin. The following chart provides a simple comparison based on the tendered bids and Lazard’s estimate of the levelized cost of energy from a combined cycle gas plant.

In other words, the utility purchase of the facility and the commitment to operating the plant far beyond the expiration date of its existing power purchase obligations extends customer exposure to fuel price risk into a period in which options that are even cheaper than current gas plant costs are almost certain to be available. If the utility thinks that an extended commitment to natural gas is a wise investment, then it should––like utilities in eight other states––share in the risk that natural gas prices will sharply rise. The tenuous financial performance of most major domestic natural gas producers, at a minimum, should give Commissioners pause in allowing long-term commitments to natural gas.

Finally, Company ownership also confers operations and maintenance risks currently held by the plant owner onto customers.

An Economic Investment in Tension with Company Commitments

With ownership of the Mankato Energy Center, the Company commits to earning a return on its investment for shareholders beyond its power purchase obligations that could be in tension with its commitment to the City of Minneapolis climate action goals through the Clean Energy Partnership and the utility’s own public carbon reduction goals, which include a commitment to carbon-free electricity by 2050 – within the life of the second of the two Mankato Energy Center units. In other words, Xcel Energy would likely have to close at least one of the two units before the end of its useful life in order to make its own carbon commitments. Even if there is a potential to operate these units until the end of their economic life that doesn’t violate these commitments, it creates undue tension between the utility’s shareholders and its customers.

A Worrying Double Precedent

The recent approval of the Nemadji Trail Energy Center (another gas power plant for neighboring utility Minnesota Power) raises questions about whether the Commission has created two potential precedents:

1) that regulated utilities can make resource decisions outside of the resource planning process, and

2) that such decisions will not respect the evidentiary requirements of need and cost-effectiveness.

Approval of the Mankato Energy Center acquisition will send a clear message to Minnesota’s utilities: the regulatory compact to do resource planning within the approved integrated resource plan is more a goal than a requirement. And, shareholders need not wait for strong proof of need to bring big ticket proposals before the Commission.

ILSR’s Recommendation: No New Gas

The Commission should reject the Company’s proposed acquisition of Mankato Energy Center because it would violate the resource planning process, saddle customers with many additional risks (that shareholders do not share), likely increase customer costs, likely violate the utility’s existing carbon commitments, and create poor precedents for utility resource planning. Should the Commission decide otherwise, it should––at a minimum––require utility shareholders to share fuel price risk and provide other financial safeguards for customers.

Thank you for the opportunity to comment; we appreciate that there has not been any legislative preemption of this regulatory process.

This article originally posted at For timely updates, follow John Farrell or Marie Donahue on Twitter, our energy work on Facebook, or sign up to get the Energy Democracy weekly update.

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John Farrell

John Farrell directs the Energy Democracy initiative at the Institute for Local Self-Reliance and he develops tools that allow communities to take charge of their energy future, and pursue the maximum economic benefits of the transition to 100% renewable power.