While Nevada’s Largest Utility Aims to Replace Coal with Natural Gas, its Customers Seek Other Options

By Amelia Schlusser, Staff Attorney

Next month, the Nevada Public Utilities Commission (PUC) will issue a decision on NV Energy’s long-term plan for supplying electricity to Nevada ratepayers. NV Energy’s most recent integrated resource plan (IRP) is nearly 5,000 pages, and includes a number of proposals that will impact the type and cost of electricity in Nevada for many years. The PUC’s decision may ultimately lay the foundation for the state’s energy future by indicating whether the largest utility in Nevada should continue to invest millions of dollars in fossil fuel resources, or should instead develop a plan for investing in new renewable energy.

Over the next four years, NV Energy plans to retire 512 megawatts of coal-fired capacity. However, the utility proposes to replace much of this coal-fired capacity with natural gas-fired power. According to the utility’s 2016 IRP, NV Energy is considering constructing a billion dollar natural gas-fired power plant to replace its coal-fired generation and expiring power purchase agreements. The utility recently asked the Nevada PUC to approve spending $2.4 million to “maintain optionality and flexibility” to construct the plant in 2020, if the new plant is “needed.”

This billion-dollar plant would provide significant profits for NV Energy’s shareholders, who stand to earn a 9.8% rate of return on the investment—roughly $100 million—from the utility’s ratepayers. NV Energy’s investments in natural gas will also expose Nevada ratepayers to significant risk and uncertainty related to future natural gas price volatility and carbon regulations. According to the Las Vegas Sun, NV Energy may invest in an additional 2,253 megawatts of natural gas capacity over the next fifteen years, which would provide nearly 80% of the utility’s power in 2030. (Renewable energy, meanwhile, would represent a mere 16% of NV Energy’s resource capacity in 2030.) The company’s ratepayers already pay the highest electricity rates in the Mountain West, and NV Energy’s preference for natural gas over renewable energy may expose the utility’s ratepayers to additional and disproportionate risks over the coming decades.

Jumping Ship

Some of NV Energy’s largest customers, including Wynn Resorts, Las Vegas Sands, MGM Resorts, and Switch (a large data storage company), oppose the utility’s investment strategies. The companies all filed applications with the PUC seeking authorization to generate and purchase power from sources other than NV Energy. These applications were motivated by concerns over the utility’s meager renewable energy offerings and NV Energy’s tendency to make large capital investments that earn substantial profits for shareholders at ratepayers’ expense. For example, MGM’s application to leave the utility stated that between 2012 and 2015, NV Energy earned at least $84 million over its allowable rate of return, which it is not required to reimburse to ratepayers.

Changing Tides?

According to the Las Vegas Sun, Switch’s attempt to leave NV Energy was motivated by the utility’s refusal to provide it with electricity entirely from renewable sources. In November 2014, Switch filed an application to leave NV Energy. In May of this year, the PUC determined that Switch would need to pay NV Energy $27 million to cancel service from the utility. (This “exit fee” would purportedly help protect ratepayers from cost increases resulting from the industrial customer’s departure.) Switch and NV Energy then started developing a compromise solution that would enable the company to purchase renewable energy directly from the utility. In July, Switch announced that it would stay with NV Energy. Under the companies’ new agreement, NV Energy will serve 100% of Switch’s load with renewable energy from a new 100-megawatt solar array constructed by First Solar.

The new Switch–NV Energy agreement may be a sign of changing tides in the energy world. Large industrial customers—and tech companies in particular—are becoming increasingly attracted to renewable energy. Companies like Facebook and Amazon Web Services have made commitments to use 100% renewable energy (for example, Facebook’s new data center in Forth Worth, Texas, will be entirely powered from a nearby wind farm). 

Rather than fight consumer desire for renewable energy, utilities like NV Energy should work with regulators and industrial customers to develop alternative tariff or service structures that enable large customers to purchase renewable energy. As more and more customers choose renewable power, investments in new natural gas plants and related infrastructure will become increasingly unnecessary.  

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 21^st 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 21^st 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.  

Xcel’s Proactive Resource Plan: Moving Towards a Clean Energy Future

By Amelia Schlusser, Staff Attorney

On January 2, 2015, Xcel Energy submitted its 2016–2030 Upper Midwest Resource Plan to the Minnesota PUC. Xcel’s Preferred Plan aims to reduce the utility’s carbon emissions 40% below 2005 levels by 2030, primarily through increased deployment of renewable energy resources. The utility’s proposed renewable additions are impressive: the Preferred Plan would add approximately 1,800 MW of new wind resources by 2027, nearly 1,900 MW of utility-scale solar by 2030, and approximately 500 MW of distributed solar power by 2030. These additions would more than double the company’s current renewable energy portfolio.

Responding to a Changing Energy Landscape

Xcel’s Resource Plan represents a forward-looking response to fundamental changes in the electricity sector. The utility recognized that technological advancements, evolving public policies, and shifting customer preferences created both challenges and opportunities for utility resource planning. In response, Xcel chose to take a proactive approach and adapt to the evolving electricity sector of the 21^st Century.

While the utility acknowledged that the form of future federal environmental regulations, most notably EPA’s proposed Clean Power Plan, were highly uncertain, the utility’s planning process followed a balanced approach to manage this uncertainty. Under this approach, Xcel’s Plan focused on investing in clean energy sources while maintaining the utility’s ability to comply with a range of potential environmental regulations.

Xcel also recognized that the needs and preferences of their customer base had shifted in recent years. Consumers expressed growing interest in managing and customizing their energy mixes, and increases in distributed generation forced the utility industry to adapt its business model. In response to these considerations and to existing federal and state energy policies, Xcel chose to dramatically expand its distributed solar program. The utility also predicted that energy technologies would continue to advance over the planning horizon, and that these advancements would create new opportunities for modernizing the electricity grid.

Finally, Xcel determined that due to planned retirements and contract expirations, it would lose significant baseload capacity over the planning horizon. The utility concluded that its Preferred Plan must include sufficient resource additions to meet consumer demand, reduce carbon emissions, and maintain flexibility and fuel diversity. Xcel determined that a mix of renewables and natural gas combined cycle units was the best option for replacing its retiring baseload energy and capacity.

Shifting Objectives Promote Renewable Energy

Xcel’s proactive planning approach was motivated in large part by the utility’s shifting planning objectives. According to Xcel’s Resource Plan, the utility’s traditional planning objective was “to identify the least-cost approach to provide reliable service and meet growing demand.” In the 2016–2030 Plan, however, Xcel began to move beyond this narrow focus and incorporate additional considerations into the planning process. To better position the company to respond to evolving future conditions, Xcel developed its Plan around a series of key considerations. These considerations included increasing the utility’s deployment of renewable resources to reduce emissions, maintain flexibility, and achieve policy objectives. While Xcel was already on track to meet its Renewable Energy Standard (RES) obligations, it concluded that additional renewable resources would help it minimize its reliance on natural gas and position itself to meet future greenhouse gas requirements.

Xcel’s Preferred Plan proposes to add approximately 4,200 MW of new renewable resources by 2030, while maintaining a reliable, flexible energy system. These resource additions would enable the utility to reduce its carbon dioxide emissions by 40% below 2005 levels. Furthermore, these renewable additions would reduce the utility’s need to invest in additional fossil fuel resources, and thus mitigate ratepayer exposure to risks associated with fuel price volatility and emissions regulations. And perhaps most significantly, Xcel estimated that it could implement the Preferred Plan at a reasonable cost to its customers.

Xcel’s Resource Plan is indicative of changing tides within the electric utility sector. Advancements in renewable energy technologies and increased demand for clean, sustainable energy supplies are driving public policy shifts around the country. Minnesota is at the forefront of these regulatory advancements; the state’s RPS mandates that utilities procure a minimum of 25% of their electricity from renewable sources by 2025, and Xcel is required to procure 31.5% of its electricity from renewables by 2020. In addition, Minnesota has set a goal of reducing carbon emissions 80% below 2005 levels by 2050. Rather than reject or challenge these policies, Xcel’s Preferred Plan meets these goals head-on. In doing so, the utility appears prepared to adapt to a wide variety of future scenarios, and the company’s customers will be the ultimate beneficiaries of Xcel’s proactive planning.