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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