Tuesday, January 20, 2015

Xcel’s Upper Midwest Resource Plan Illustrates the Difficulties of Creating a Long-term Energy Plan for Multiple States with Divergent Energy Policies

by Amelia Schlusser, Staff Attorney

Last week, my blog post discussed Xcel’s Upper Midwest Resource Plan and the utility’s proposed renewable energy additions over the 2016–2030 planning period. As that post explained, Xcel’s Plan takes a proactive approach to long-term resource planning during a time of significant change in the energy sector. The utility’s Plan deserves recognition for its proposals to dramatically increase the utility’s renewable energy mix and reduce its greenhouse gas emissions. However, it also sheds light onto a considerable, and growing, challenge that utilities face in adapting to the evolving needs and circumstances of the 21st Century electricity industry: How can a multi-jurisdictional utility create a long-term energy plan that complies with the energy policies of each state it serves? More importantly, how should such a utility respond if one state’s policies directly conflict with another state’s policies?

Divergent Policies

Xcel had to confront this issue when it developed its 2016–2030 Upper Midwest Preferred Resource Plan. Xcel’s integrated Northern States Power (NSP) System serves more than 1.8 million electricity customers in Michigan, Minnesota, North Dakota, South Dakota, and Wisconsin. These five states have adopted very different energy policies and goals that influence or guide the utility resource planning process. For example, Michigan, Minnesota, and Wisconsin have all enacted Renewable Portfolio Standards (RPSs) or Renewable Energy Standards (RESs) requiring that utilities operating in these states procure a percentage of their electricity from renewable sources by a certain date. While these three RESs all impose mandatory compliance obligations, they vary in scope. For example, both Michigan’s RES and Wisconsin’s RPS direct the states’ utilities to provide 10% renewable energy by 2015, while Minnesota’s RES mandates that 30% of Xcel’s retail electricity sales come from renewable sources by 2020. North Dakota and South Dakota, on the other hand, have only adopted voluntary objectives that 10% of electricity sales come from either renewable sources or “recycled energy” (i.e. combined heat and power) by 2015. In addition to these renewable energy standards and objectives, Minnesota’s Next Generation Energy Act includes a statewide goal to reduce greenhouse gas (GHG) emissions by at least 80% below 2005 levels by 2050, and utility resource plans must describe the company’s progress in meeting this goal.

In creating its 2016–2030 resource plan, Xcel followed a logical approach to confronting these diverging policy requirements and goals. The utility recognized that Minnesota’s policies were more stringent than those in its neighboring states, so Xcel’s Plan focused on achieving compliance with Minnesota’s RES requirements and GHG reduction goals. In Xcel’s view, this approach would allow all of its customers to benefit from a more diverse, sustainable energy mix in a cost-effective manner. However, the utility also acknowledged that some of the states it serves do not share Minnesota’s energy and environmental priorities, and that it must balance the needs and goals of all the states within its operating area. Xcel realized that it would be increasingly difficult to achieve this balance in the face of “irreconcilable differences” between state policy objectives, as is currently the case between Minnesota and North Dakota.

North Dakota’s Conservative Policy Objectives
According to Xcel’s resource plan, North Dakota adheres to a very conservative, least-cost approach to utility resource planning and procurement. As the largest electric utility operating in North Dakota, Xcel is obligated to comply with the state’s energy policies. In recent years, however, this obligation has become increasingly burdensome for the utility. The North Dakota Public Service Commission (PSC) only permits a utility to recover the value of prudent, cost-effective resource investments that are consistent with the state’s energy policies. And in Xcel’s recent North Dakota rate cases, the PSC has repeatedly indicated that renewable energy investments are potentially inconsistent with North Dakota’s policies.

In 2012, the North Dakota PSC denied Xcel cost recovery for the utility’s Power Purchase Agreement (PPA) in the Prairie Rose Wind Project. According to Xcel’s 2016–2030 resource plan, the PSC had determined that the primary purpose of Xcel’s investment in the wind farm was to comply with Minnesota’s RES, and concluded that Xcel had not demonstrated a need for the farm within North Dakota. In 2013, the PSC determined that Xcel’s investments in the Odell Wind and Pleasant Valley Wind projects—both located in Minnesota—were imprudent and inconsistent with North Dakota’s energy policies. However, the PSC found that Xcel’s investments in the Courtenay Wind and Border Winds projects, which are both located in North Dakota, were prudent.

Xcel’s Attempt to Reconcile Conflicting Policy Directives

When Xcel invests in generating resources and supporting infrastructure, it allocates the costs of these investments between all of its customers. If North Dakota denies Xcel cost recovery for investments in renewable resources, the utility would be forced to disproportionately allocate these costs between its remaining customers. Xcel’s resource plan must therefore consider and attempt to mitigate potential cost allocation conflicts that may emerge during the planning period. In an attempt to comply with North Dakota and Minnesota’s conflicting energy policies, Xcel agreed to a series of procedural changes requested by the North Dakota PSC. Xcel agreed to seek an Advanced Determination of Prudence for investments in resources larger than 50 megawatts. The utility also agreed to undergo a “System Restack,” in which resources determined to be imprudent by the PSC would be replaced with an alternative financial “proxy resource” that meets North Dakota’s policy goals. Finally, Xcel agreed to create a resource plan that would be consistent with North Dakota’s energy policies.

In accordance with this agreement, Xcel’s Upper Midwest Resource Plan includes a North Dakota Plan (NDP), which is designed to identify a resource portfolio that would be compatible with the state’s policies. The NDP assessed portfolio performance under a North Dakota-specific scenario in which carbon emissions were not valuated or constrained, coal was an available resource option, no renewable energy standards or goals were imposed, and it was assumed that small-scale solar development would not increase during the planning period. The resulting resource mix relied predominantly on natural gas generation and did not include future renewable energy additions.

A Sustainable Compromise?

Xcel’s compromises with the North Dakota PSC have enabled the utility to achieve a tentative balance between Minnesota’s and North Dakota’s divergent policy objectives. However, the utility acknowledges that these procedural changes will likely not remain sustainable over the long term. While the procedural changes address the impacts of out-of-state policies on North Dakota energy consumers, they do not address the impact that North Dakota’s policies may have on Xcel’s customers in Minnesota, Wisconsin, and Michigan. “Nor does it address,” according to Xcel’s resource plan, “how the integrated NSP System can develop under fundamentally different policy views.”

Xcel is currently exploring potential long-term solutions to these challenges, including the feasibility of splitting its North Dakota operations off from the remaining NSP System. Under this approach, Xcel would effectively operate as two distinct utilities, one focused on developing and maintaining a more sustainable, diverse energy supply, and the other devoted to conventional, fossil fuel-based generating resources. The problem with this approach is that it would force a portion of the utility’s operations to remain mired in the past, and prevent the utility from swiftly responding to changing circumstances. On the other hand, Xcel’s remaining operations would be free to adapt and respond to the realities of today’s energy landscape.

This proposed approach exposes an additional dilemma for vertically integrated investor-owned utilities in today’s market. Utilities that are best able to adapt and respond to fundamental changes in the energy sector are more likely to remain profitable over the long-term than their static counterparts. However, how should a forward-looking utility respond when their customer base is reluctant to respond to change? Xcel appears poised to evolve into the utility of the future, yet North Dakota seems to believe that it can effectively insulate itself from the shifting conditions of the 21st Century. Xcel is essentially being forced to choose between sustainable and non-sustainable business models, and the choice it makes today will impact its investors and ratepayers for years to come.  

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