Minnesota's days of cheaper electricity seem numbered

Hefty rate hikes that Minnesota's largest utilities are seeking could push the state's electricity prices above the national average for the first time in years.

Residential prices in Minnesota have been more expensive than for the nation as a whole since 2016, federal data show. With businesses included, the state's total power price last year almost hit the national average.

Then earlier this month, Minnesota's two largest electric utilities — Xcel Energy and Minnesota Power — asked state regulators for significant rate hikes. Xcel filed for a 15% increase over three years, which would leave residential customers paying an estimated $110 more per year by 2022.

"Any time prices go up, we are concerned," said Steve Kelley, commissioner of the Minnesota Department of Commerce, which is charged with looking out for consumers in rate cases before state regulators.

Electricity is one of the most basic expenses for households and businesses — and rising electricity prices have become a growing issue in recent years for Minnesota businesses, said Lauryn Schothorst, a public policy analyst at the Minnesota Chamber of Commerce.

"When cost competitiveness starts to change — and the state becomes less competitive — we take notice," she said.

The cost increases are in large part because investments by Minnesota utilities — with the blessing of state regulators — are surging at a rate not seen since the 1970s and early 1980s, industry executives and industry analysts said.

Over the past decade, over $2 billion has been sunk into new transmission projects, reinforcing the reliability of Minnesota's power grid with hundreds of miles of new power lines. And with environmental concerns mounting, the investment in wind farms is now counted in billions of dollars.

Xcel Energy, by far the state's largest electricity provider with 1.3 million customers, has spent $1 billion converting coal-fired plants to natural gas. And the company has invested $2 billion in its Minnesota nuclear plants.

Minnesota once enjoyed a comfortable discount on electricity compared with the nation as a whole, but that gap has been steadily narrowing.

However, in Minnesota, the residential electricity price grew by an annual average of 3.6% from 2002 through 2018, a Star Tribune analysis of U.S. Department of Energy data shows.

In the same period, U.S. residential power prices on average grew 2.7% annually, while the annual U.S. inflation rate averaged 2.1%.

"Anytime time you see rate increases, it is going to be difficult for some people in Minnesota to pay their bills," said Annie Levenson-Falk, executive director of the Citizens Utility Board of Minnesota, a nonprofit ratepayer watchdog group. Lower-income consumers and people on a fixed income — often seniors — usually face the most difficulty as higher power costs eat up a greater proportion of their budget.

However, Minnesota residential electricity consumption in 2018 was about 15% below the national average, the federal data show, so the actual monthly bills sent to households are still on average below the norm.

"Minnesotans have a long history of investing in conservation and efficiency," Kelley said.

The state has had conservation programs for utilities dating back to the 1980s. Energy legislation in 2007 required Minnesota electric utilities to invest 1.5% of their average annual retail sales in conservation improvements, a program essentially funded by ratepayers.

Minnesota ranks eighth in the most recent state "energy efficiency scorecard" done by the nonprofit American Council for an Energy-Efficient Economy and has been in the group's top 10 for 12 of the last 13 years.

That lower-per-household power consumption helps cushion the blow of the higher rates. However, the gap between the national average residential bill and those in Minnesota has narrowed in recent years, beginning to follow the pattern with prices. In 2018, the average monthly U.S. residential bill was $117.65 compared to $103.34 in Minnesota, federal data show.

While energy efficiency gains are important, the increase in electricity prices is troubling, Minnesota business interests say.

Ten years ago, the price of electricity for commercial customers on average in Minnesota was .0024 cents per kilowatt hour below the U.S. average, federal data show. In 2018, Minnesota was only .0003 cents below the U.S. average.

For Minnesota industrial customers in 2018, the average electricity price was .006 cents per kilowatt hour higher than for the U.S. Ten years earlier, Minnesota's industrial electricity price was .011 cents below the national average.

Industrial ratepayers include industries of all kinds — taconite mines, paper mills, refineries and scores of manufacturers.

They are often large power users, where price hikes of even cents per kilowatt hour can mean tens of thousands of dollars in additional costs, said Schothorst of the Minnesota Chamber of Commerce.

"With high energy-using portions of the economy, energy prices are very significant — they can make up to 30% of costs," she said. "Businesses do say they are constrained with growth because they have to find ways to hedge against increasing rates."

Rate increases are critical for utility profits, particularly as electricity sales — in volume — stagnate due to flat consumption. Rate increases in turn pivot primarily on capital spending.

Minnesota utilities have been pouring money into transmission projects over the past decade. Xcel and Minnesota Power were among 11 utilities that spent $2 billion on CapX2020, one of largest regional transmission projects since the 1970s. Including its portion of the CapX2020 project, Xcel said it has spent about $2.4 billion on transmission projects.

"CapX2020 gave us a strong backbone for the reliability of the system," said Christopher Clark, Xcel's president for Minnesota and the Dakotas.

Bolstering grid reliability has been a big concern since the widespread East Coast blackout of 2003, an epic failure for utilities. In the Upper Midwest, the growth of wind power has also prompted investment in new transmission because wind farms are often far away from the hubs of electricity demand.

The biggest wind energy investments are directly in wind farms, which have long been subsidized by federal tax credits aimed at fostering clean energy. Wind power generation more than tripled in Minnesota from 2007 through 2018.

Xcel alone has invested $1.4 billion in the Upper Midwest wind farms it owns, and it's putting another $2 billion into several more that are under construction. In addition, Xcel buys power under long-term purchase deals from other wind farms.

Minnesota now gets around 20% of its electricity from wind, ranking in the top 10 wind power-producing states for several years. A 2007 state law set out aggressive clean energy goals for utilities, and they've been mostly met with wind power.

Some academic studies have concluded that such state renewable energy standards have added to electricity costs. Still, wind power in the past few years has become a cheap source of power; its costs have come down with technology and economies of scale.

Clark said Xcel's wind investment has contributed to the shrinking gap between electricity prices in Minnesota and the nation as whole. But several other "wise investments" over the past decade have had the same effect, he said.

That includes about $2 billion in nuclear spending, including projects aimed at lowering operating costs and keeping Xcel's plants safe into the 2030s, when their federal licenses expire.

"The investment in nuclear will continue to allow a substantial part of our electricity generation mix to be carbon free," Clark said. Xcel has set aggressive carbon-free energy goals, and the company said its nuclear plants — which provide 30% of Xcel's electricity in Minnesota — play a critical role.

Xcel and Minnesota Power — the latter increasing its spending on wind and hydro power — also have made large investments over the last decade on pollution control equipment for their coal plants.

Said Frank Frederickson, Minnesota Power's vice president of customer experience: "It's been a decade of investments based on what the societal expectations are for utilities."

The next decade portends more big projects, which could mean billions of dollars in further spending and more rate increases.

Both Xcel and Minnesota Power plan to build new natural gas plants, each with price tags of at least $700 million. Xcel will likely spend many millions of dollars on new solar farms. And the region's utilities are studying more transmission investments: The new lines built under CapX2020 are almost fully subscribed, they say.