Xcel Energy has a vision for Colorado’s clean energy future — one independent power producers, consumer advocates and regulators didn’t see coming — a vision that is both expensive, with a $15 billion price tag, and unparalleled in its sweep.
Xcel Energy’s preferred electric resource plan submitted to the Colorado Public Utilities Commission in September includes 7,100 megawatts of new generation and storage, mainly wind and solar and nearly $3 billion in new transmission lines.
“We believe the preferred plan is transformational: achieving increasingly clean energy service with high reliability and affordable cost,” Xcel Energy said in its filing to the commission.
This proposal, however, has 26% more generation and is almost twice as expensive as an earlier plan approved by the PUC and endorsed by consumer, environmental, labor and business groups.
“There was no contemplation of going this big or this expensive,” said Joseph Pereira, deputy director of the Colorado Office of the Utility Consumer Advocate, or UCA, which represents residential and small commercial customers.
“We’ve never seen anything of that size or scale,” Pereira said. The UCA had backed the earlier plan. “The company finds every opportunity to maximize its profits as it relates to decarbonization.”
The PUC begins deliberations on the plan Wednesday and is slated to make a decision before the end of the year.
Colorado utilities that are regulated by the PUC must submit a resource plan every four years showing how they will meet their customers’ electricity demand. This time Xcel Energy must also offer a clean energy plan to cut greenhouse gas emissions.
Under state law Xcel Energy must cut its greenhouse gas emissions 80% from 2005 levels by 2030. The proposed plan would cut them by 87%.
The proposal, the PUC staff said, “represents an inflection point — the point in time when the company moves from steady incremental progress towards decarbonization to an acceleration in fossil resource retirements (and) renewable acquisition.”
Still, the staff in its evaluation deemed the plan “too costly and not well supported,” adding that it includes “a surprise $2 billion in transmission upgrades not anticipated a year ago.”
Robert Kenney, CEO of Xcel Energy’s Colorado subsidiary, said the plan was revised so the company could capture $10 billion in tax credits under the federal Inflation Reduction Act, allowing the utility to add more renewables at a reduced cost.
“I think we’ve put together a good package and I hope the PUC will approve it,” Kenney said.
Xcel wants to own more generating capacity than envisioned by law
Under the proposed plan Xcel Energy would own two-thirds of the new capacity, exceeding the 50% target for utility ownership set in the same law, Senate Bill 236, requiring the 80% reduction.
“To be clear,” Xcel Energy said in response to a Sun query, “SB-236 did not set any ceiling or floor on ownership.”
The cost of those projects would go into customer bills. Xcel Energy estimates that the plan would raise bills 2.25% a year “in line with the rate of inflation.” But the PUC staff and the UCA said the company is low-balling the impact.
“The company’s statement was carefully worded to include only the incremental rate impact of the (clean energy plan), not the rate impact of the entirety of the company’s planned investments,” the PUC staff said.
The UCA estimates adding in all the planned investments could raise customer bills by more than 6% a year between 2023 and 2030.
These concerns are compounded by the fact this plan will not receive the same scrutiny as the earlier and less expensive clean energy plan. An independent evaluator also concluded that there had been inadequate time to evaluate bids and analyze transmission needs.
“In the absence of discovery, a record of tested evidence, and additional time to investigate the ballooning costs … there are too many red flags and unknowns,” Colorado Energy Consumers, or CEC, which represents Xcel Energy’s large industrial and commercial customers, said in a filing.
How the first plan was pitched
In February 2021, Xcel Energy unveiled an $8 billion clean energy plan that would have doubled the renewable generation on its grid and cut greenhouse gas emissions by 80%.
The plan proposed adding 5,600 megawatts of new wind, solar and storage. The company estimated it would need $500 million in new transmission lines.
Fifteen parties, including state energy officials, consumer advocates, local governments, labor unions, environment groups and renewable energy industry representatives, supported the proposal.
This came after the parties had the ability to request documents from Xcel Energy and cross-examine company witnesses.
After the approval, known as phase one, the utility issued a call for bids to fulfill the plan in phase two. However, to “maximize the opportunities” for federal tax credits, Xcel Energy overhauled the agreed upon plan.
And this is where things got complicated. Independent power producers and contractors submitted more than 1,000 bids for projects. That was far more than the computer model Xcel Energy was using to assess and rank proposals could handle.
Xcel Energy used a “economic and due diligence” screen to cut the number to 382, but that was still too many so a second “best-in-class” screen was used and eventually the company did a full assessment on 137 bids — about 12% of the total.
“The company often provided vague explanations as to why bids were eliminated,” the Colorado Solar and Storage Association, a trade group also known as COSSA, said in a PUC filing.
Accion Group, a utility industry consultant, was chosen by the commission to act as an independent evaluator of the bids and bidding process. Accion said the portfolio offered the “best options provided by the marketplace and the self-build options,” but added that the process had been flawed.
“Immediately after bids were received it was apparent that completing all evaluations within 120 days was an unrealistic goal,” the Accion report said. There was also inadequate time allotted for the transmission analysis.
“The rules for competitive solicitations were established some 20 years ago when the electric utility industry was far different than what is demanded of the industry today,” the evaluator’s report said. “The migration from coal-fired base load units and gas turbines to cleaner, renewable resources significantly changed the complexity of designing portfolios.”
Xcel Energy said, in a statement to the Sun, that it agreed with the evaluator that the “resource planning process needs to evolve to meet the current needs of the market.”
When the model was run to optimize the portfolio for projects it selected:
- 3,400 MW of wind generation
- 1,100 MW of solar
- 1,400 MW of solar with storage
- 600 MW of standalone storage
- 600 MW of gas-fired generation
All that was going to require more transmission capacity than was originally anticipated by the utility.
“Field of Dreams” forecasting
In 2022, the PUC approved Xcel Energy’s $1.7 billion Power Pathway project, which will create a 560-mile high-voltage transmission belt to link wind and solar from the Eastern Plains to Front Range cities and suburbs.
Xcel Energy is building the line in the hopes that it will spur independent development of new projects on the plains. The company has called it a “Field of Dreams” strategy.
Many of the new projects in the portfolio, however, are to be located closer to the Denver metro area and as a result need additional transmission — nearly $3 billion in new lines or six times more than the original phase one plan’s estimate.
“The company has this circular, self-justifying approach,” UCA’s Pereira said. “They seek approval for projects that need transmission and once you have transmission that’s where you can put projects.”
A prime example, Pereira said, is the $250 million May Valley-Longhorn extension, a 90-mile transmission line into Baca County. Xcel Energy proposed the extension as part of Power Pathway, but the PUC, uncertain whether there was any interest among developers in that area, set it aside.
The company is now seeking to build the line to serve two company-proposed wind farms in the county.
“These projects are the sole justification for construction of this line,” the UCA said in a filing, noting that when the cost of the line is added to the overall cost of the wind farms, they are no longer price competitive.
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While two company-owned projects were selected, Xcel Energy said there were 27 bids from seven developers along the extension.
The model evaluation also gave 66% of the capacity and 72% of the investment to company-proposed projects leaving independent power producers and contractors frustrated.
The Colorado Independent Energy Association, a trade group for merchant power producers who build their own plants and sell electricity to utilities, told the PUC that Xcel Energy’s “feet must be held to the fire given its unprecedented utility-owned generation.”
The plan, CIEA said, would turn Xcel Energy into a commercial generation and transmission development company to construct 13 generation facilities and as many as 28 transmission projects, within four years.
“The ownership percentage is purely a reflection of the competitiveness of the company’s bids relative to Independent Power Producer (IPP) projects,” Xcel Energy said, adding that the federal tax credits had made company projects more competitive.
Xcel Energy makes most of its money by building new infrastructure and recovering the money spent, plus a return on the investment, which is set by the PUC.
That collection of investments — the rate base — is used to calculate customer charges. The plan proposed by Xcel Energy would add $10 billion to the rate base, essentially doubling it, according to the PUC staff.
The plan serves Xcel Energy’s “financial interest of expanding its rate base to the detriment of customers,” the group of large customers known as CEC, said.
“Used and useful” can be a temporary state
Once the projects are built and in service — the PUC phrase is “used and useful” — a utility can start collecting customer dollars on it, but once it is rate base it doesn’t matter whether it stays used and useful.
The $1 billion Comanche 3 coal-fired power plant, in Pueblo, has been shut down for the equivalent of almost two years during its 13-year life, but remained in rate base during that time.
The Cabin Creek hydro-storage facility, near Georgetown was out of service for years but customers still paid for it and the company-owned Rush Creek and Cheyenne Ridge wind farms have also been underperforming, according to the PUC staff.
“Xcel makes money when it builds stuff whether it works or not,” said Mike Kruger, the solar and storage association’s president and CEO. “It doesn’t matter, they get paid. For an independent power producer, if it doesn’t work if they don’t get paid.”
The independent power producers sell Xcel Energy electricity at a fixed price in long-term contracts and assume the costs and risks of building and operating a generating facility.
The risks of heavy company ownership include cost overruns, poor performance, unexpected capital costs and delays in getting online, COSSA and the Solar Energy Industries Association said in a PUC filing.
“We recognize the significance of our ask and have proposed two performance incentive mechanisms designed to hold the company accountable for the construction and ongoing operations of its projects,” Xcel Energy said. “These mechanisms impose penalties on the company for underperformance.”
The proposed performance incentive mechanisms, however, also provide bonuses for meeting goals and the consumer advocate’s Pereira said the incentives are a new and largely untested cost-control mechanism.
The PUC staff, with the support of the consumer advocate and the large-customer group, proposed an alternative which was to treat Xcel Energy like an independent power producer, holding the company to its initial bid project costs and keeping the projects out of rate base.
The proposal, the staff said, is focused “on shifting the current risk structure from being 100% on ratepayers, to a structure where the utility shares in the risk.”
As expensive as the Xcel Energy plan is, it is likely to end up even more costly, according to the PUC staff, Accion, the consumer advocate’s office and the large-customer group.
“The company has been notoriously bad on its estimates and consistently overruns project costs by 30%, 50%, 100%,” UCA’s Pereira said. “It will never be as low as they project.”
In Xcel Energy’s last electricity rate case, the advocate’s office documented eight projects — including substations, transmission lines and converting a coal-fired plant to natural gas — that were projected to cost $265 million but ended up costing $544 million and going into rate base.
Xcel Energy also required all developers to use the company’s standard contract for the purposes of comparing projects, but Accion, the consultant hired by the PUC, warned that those contract prices may not hold.
“Accion believes there is a strong likelihood that the developers of selected projects will seek contract changes and price adjustments before the development process is completed,” the consultant said. “The commission should anticipate some bidders will be unable to meet commitments unless their bid prices are increased.”
In 2022, Xcel Energy had to scramble to fill a gap in energy generation when some solar developers scrapped or delayed projects.
To safeguard against a similar problem, Xcel Energy has included a “backup bid portfolio,” but Accion said “the backup bids come with higher costs than the preferred portfolio.”
Accion urged the PUC and staff to monitor the final contracts to “be aware of any changes that would impact cost to ratepayers.”
Xcel Energy calls its combination of proactive company investments and laissez-faire “Field of Dreams” development “an approach that can be an example for the West and the country. To which the PUC staff responded, “Cost estimates that are off by almost an order of magnitude seem more like a nightmare than a dream.”