Wrong incentives drive energy decisions in Minnesota

Two large purple circles cover much of Minnesota on a new map from Bloomberg Research. The circles represent gas-fired power plants proposed by Xcel Energy and Minnesota Power that will last 40 years, despite pledges from both utilities to produce all carbon-free energy by 2050. The utilities are trying to square a circle, asking state regulators for permission to build a power plant that will be obsolete long before the end of its useful life, generate millions of tons of carbon and methane pollution, and cost their customers millions of dollars in higher electric bills than clean-energy options.

If shape-changing geometry seems as fruitless as paying more for dirty energy, it's only because the utility companies operate by a different kind of math. A century ago, Minnesota lawmakers artificially turned the electricity business from a competitive one into a game of Monopoly. Industry leaders convinced lawmakers that it would be more efficient if a single company strung the new electric lines to each home and business, rather than a Wild West of wiring. As a result, Minnesota Power and Xcel Energy don't compete for your business. If you live within a prescribed geographic area, you are their customer — no marketplace, no options, no choice.

Without a competitive market, leaders in Minnesota (and all 50 states) settled on a different model of compensation. Utilities would be paid on a "cost plus" model. They'd spend money on new power lines and power plants (cost) then earn a profit on top (plus). The "plus" would vary over time, but in 2021, electric utilities on average earn 9 to 10% back on every dollar they spend. (Not bad, eh?) Forty years ago, the "plus" percentage largely aligned with similarly low-risk investments like corporate bonds and U.S. Treasuries (after all, the utilities have no competition). Today, however, utility shareholders earn a return three times greater than they would from investments in other low-risk activities.

In other words, utilities have captive customers (you) and a big incentive to spend capital to earn their shareholders an outsized return. The utilities also benefit from rules that allow them to socialize their investment risk.

For decades, Minnesota Power and Xcel Energy have operated fossil-fuel power plants that have generated millions of tons of carbon pollution, among the biggest contributors to Minnesota's being one of the fastest-warming states. Thousands of tons of sulfur dioxide and mercury have triggered respiratory illnesses, especially among communities of color and poor folks forced to live next door to the power plants, and have polluted Minnesota's lakes and rivers. But utility shareholders don't care; these health and environmental impacts are off the balance sheet.

Minnesota's laws also allow utilities to "pass through" the fuel costs of power plants directly to customers. While shareholders of Minnesota Power and Xcel Energy will collect their profits shortly after the proposed plants begin operation in the mid-2020s, utility customers will be paying for fossil gas for decades, at whatever price the market requires.

The Star Tribune reported that the gas price spike caused by the unexpected Texas cold snap in February will cost Xcel Energy gas customers $215 million even while the utility made $27 million in commodity trading profits. Xcel's electric customers will similarly be responsible for the fuel costs resulting from the utility's choice of power plant.

There's also ample evidence that both utilities' gas plants will be obsolete long before the end of their typical life span (even if they operate long enough to generate a shareholder profit). The Institute for Local Self-Reliance sounded the alarm on new gas plant construction in 2018, noting that solar energy and battery storage were rapidly becoming competitive alternatives. Xcel Energy's Colorado division showed similar results from project proposals shortly thereafter — gas plants are a costlier way to produce electricity than wind and solar. And the Rocky Mountain Institute found that 90% of proposed gas plants were likely to be uncompetitive by 2035 due to these clean-energy competitors, just 10 years into the 40-year life span of the proposed Xcel and Minnesota Power gas plants.

Sophisticated energy grid modeling from advocates — including the Citizens Utility Board, Minnesota Center for Environmental Advocacy, Fresh Energy, the Clean Grid Association, and the Sierra Club — has shown several alternatives to Xcel Energy's proposed gas plant that will cost less and pollute less. Minnesota Power has refused to study alternatives, asking the state's regulators to take on faith that its proposed Nemadji Trail Energy Center plant can defy the economics of nearly every other gas plant in the country.

Shareholders from Xcel Energy and Minnesota Power stand to gain a handsome windfall from these two proposed gas plants, but the deal isn't done. The state's five-member Public Utilities Commission must grant approval for the utilities to recover the power plants' costs from their captive customers. They need to be told that, for Minnesota, power from fossil gas just doesn't add up.

John Farrell is co-director of the Institute for Local Self-Reliance. On Twitter: @johnffarrell.