Attitude is everything. In business, when confronted with a new proposal, you essentially have two options, look at the issue and say—`No, we can’t do that, because….’—or—`That’s an interesting idea, let’s take a look.’ In the utility industry, far too often and for far too long, the prevailing attitude has been to just say no. However, if the industry is to survive in something like its current form, that attitude simply has to change—every new idea isn’t by default a good idea, but dismissing all new ideas out of hand is a recipe for disaster.
One utility that has gotten this message is Xcel Energy, the Minneapolis-based company that serves 3.5 million electric customers through four operating companies in eight states, including Minnesota. Long a proponent of renewable energy—Frank Prager, then the company’s vice president of environmental affairs told me in an interview in 2007 that the company’s wind resources were “a beautiful thing”—the company last month outlined a progressive approach to dealing with changing customer expectations, new technologies and tightening environmental standards in a filing with the Minnesota Public Utilities Commission. The filing—titled Upper Midwest Resource Plan, 2016-2030—should be required reading for executives across the industry (a copy can be found here).
In the plan, Xcel highlighted changes that have been obvious to outside observers (if not always acknowledge by utility insiders):
- Customers “have a growing interest in increasing their energy management capabilities and desire a more customized energy mix than has been traditionally available.”
- Customers “are interested in various types of self-generation. This includes increased small-scale solar penetration through behind the meter installations or community solar gardens.”
- Customers “value choice and clean, affordable, and reliable energy.”
Given that, Xcel said, the utility had to change its approach to long-term planning. “Traditionally a primary focus of resource planning has been to identify the least-cost approach to provide reliable service and meet growing demand. While this is still a part of our foundation, this plan begins to move away from a more concentrated view of traditional thermal generation to incorporating new generation technologies, increasing carbon-free energy, reducing emission profiles, and thereby positioning the NSP system for the future.”
In other words, stop trying to smash that square peg through a round hole.
While certainly not planned, the time horizon of Xcel’s newest long-term plan coincides with the deadline in the Environmental Protection Agency’s pending Clean Power Plan, which as proposed would require the nation’s utilities to cut their carbon dioxide emissions by 30 percent by 2030 using 2005 as a baseline. It is worth noting that Xcel’s previous long-term plan, developed in 2010 long before the EPA proposal was released, also had set 30 percent as its goal for CO2 reductions. Xcel’s early embrace of renewable energy and planning for future CO2 controls is clearly paying off: In its latest plan the company notes that it will be able “to achieve a 30 percent CO2 reduction in 2020 [emphasis added] merely by the addition of approximately 400 MW of wind to our system in 2020.”
But the company isn’t planning to stop there. Its new plan indicates that it will be able to cut its CO2 emissions (using 2005 as a baseline) by 40 percent by 2030. That is the definition of a forward-looking attitude.
Under the terms of the plan, which admittedly is still far from final, the company would:
- Build 1,800 MW of new wind capacity by 2030, 600 MW by 2020 and an additional 1,200 MW by 2027;
- Add roughly 2,400 MW of new solar capacity, including 500 MW of small-scale or customer-driven solar, by 2030;
- Continue to operate its emissions-free nuclear plants through 2030
- Add 1,750 MW of natural gas peaking facilities by 2030; and
- Continue to operate its baseload coal plants, Sherco Units 1 and 2 through 2030.
And the plan won’t break the bank, far from it. According to the company’s estimates this environmentally and customer friendly proposal comes in at 2 percent more costly than its reference case, which relies heavily on natural gas at the expense of solar and wind, on an annual basis. “We estimate that our preferred plan can be implemented at reasonable cost to our customers,” Xcel wrote. “More specifically, our preferred plan achieves environmental outcomes and preserves strategic flexibility at an average of cost of 2 percent on an annual basis above the reference case.”
While clearly willing to take steps to embrace the transition under way in the utility industry, it is important to remember that publicly traded utilities are in the business of making money (while providing reliable, cost-conscious service, of course)—and Xcel is good at making money as well. In a late January conference call to discuss the company’s 2014 results, Ben Fowke, Xcel’s chairman, president and CEO, was quick to point out that Xcel has met or exceeded its earnings guidance for 10 consecutive years, and been at the upper end of that guidance for the past five years. In addition, he noted, the company has now raised its dividend for 11 years in a row.
Put bluntly, Fowke was saying that you can be environmentally responsible and forward looking, and make money too.
Xcel’s plan shows that it is more than willing to do its share of the heavy lifting, but the company went one step further, suggesting to the PUC that changes are needed in the regulatory oversight arena as well. The changes buffeting the industry, Xcel said, require changes by the regulated as well as the regulators. Moving to a more collaborative decision-making on resource planning needs and getting longer-term okays from regulators are of particular interest, the company said.
As Fowke told analysts in January, the environmental reductions are based on a long-term plan, and the regulation needs to follow suit. “Let’s make sure that our regulatory compact reflects that longer-term view…. But generally what we’re looking for is longer-term regulatory compacts. We [would] like to see compacts three, four, maybe even up to five years long.
“The electric utility industry is in the midst of a major transition, and we are committed to being on the front end of this change,” Fowke concluded. “We will be a leader in the same way we proactively implemented our environmental strategy over a decade ago. To this end we are pursuing regulatory changes to better align with the clear direction that customer preferences, federal policies, and state initiatives are moving. “
The company’s proposal is an outgrowth of the e21 Initiative, a statewide effort whose goal is “to develop a more customer-centric and sustainable framework for utility regulation in Minnesota that better aligns how utilities earn revenue with public policy goals, new customer expectations, and the changing technology landscape.” The group, which included representatives from Xcel, submitted its first report in December (it can be downloaded here).
Xcel’s can-do attitude is a refreshing approach in what all too often is a can’t (or don’t want to) do industry.