Xcel Energy - Perspectives on U.S. Energy Policy

Perspectives on U.S. Energy Policy

Dick Kelly, Chairman, President and CEO
2009 Deloitte Energy Conference
Washington, D.C.
April 20, 2009

It’s good to be here with Commissioner Kelly to offer Xcel Energy’s perspective on federal energy policy. It’s getting a lot of attention right now, and I’ve given it a fair amount of thought.

In fact, any time I’m asked that standard interview question, “What keeps you up at night?” I usually respond, “Energy policy.”

I’m not saying we lack intelligent energy policy in this country. My point is that:

federal policy has an enormous impact on our industry, our company and our customers; and
there is a lot of uncertainty in connection with it. It’s the uncertainty that keeps me awake at night.

So I appreciate the opportunity to share our take on what constitutes good energy policy.

I want to set the stage by telling you about Xcel Energy.

Our headquarters are in Minneapolis, and we operate in 8 states with the 4 operating companies you see represented. We serve 3.4 million electricity customers and 1.9 million natural gas customers.

We are fortunate to operate in a healthy service territory, with a diversity of industries and a supportive regulatory climate.

For the past several years, Xcel Energy has been getting ready for what we call a clean energy future:

We recognize that we make a big impact on the environment, and we work hard to reduce that impact.
We think that environmental stewardship is good business, and that environmental investments can be attractive.
Most important, our customers and our policymakers expect us to deliver on that vision.
I’m going to take a few minutes to describe our efforts because it will shed light on some of the issues we’re facing, and the policies we’d like to pursue.

Renewable energy

Xcel Energy has the nation’s best portfolio of renewable energy—in part because we have some geographical advantages, but also because we are genuinely committed to that clean energy future.

Today, Xcel Energy is the No. 1 provider of wind energy in the nation, according to the American Wind Energy Association—and we’ve held that No. 1 spot for 4 years in a row. We had almost 3,000 megawatts on our system at the end of 2008. And we are planning to deliver about 7,400 megawatts by 2020.

We are No. 5 in the nation for solar capacity. We operate a solar rebate program for customers called Solar*Rewards that has already resulted in more than 2,000 new solar systems in Colorado.

We’ve also placed an 8-megawatt solar facility in operation, and recently reached an agreement to build an additional 17-megawatt solar facility in Colorado.

Over the next 5 to 6 years, we have plans to add up to 600 megawatts of concentrating solar power, with storage capacity.

In Wisconsin, we have plans for the largest biomass plant in the Midwest. Depending on approvals, construction should start in 2010 and the plant should be online by 2012. We also are refurbishing hydro plants in Wisconsin—and have relicensed several of them.

Transmission

To deliver renewable energy—especially wind power—we are making big investments in transmission. In Minnesota and Colorado, we are working with other energy companies to develop transmission plans to meet regional needs. The effort is further along in Minnesota, where the approval process is well under way and we’ve identified corridors for some of the new lines.

Nuclear power

We also believe that nuclear power is part of a clean energy future. With that in mind, we’ve secured all of the necessary approvals to relicense one of our nuclear plants and have applied to relicense both units of the other plant.

We also are planning to make significant investments to uprate the plants, adding about 235 megawatts of generating capacity.

Obviously, our nuclear plants have no greenhouse gas emissions, which addresses the issue of climate change.

Emission reductions

In another climate change effort, we will soon complete a major, billion-dollar emission-reduction project in Minnesota. We converted two coal-fired plants to natural gas facilities and completely refurbished a third coal-fired plant with advanced emission-reduction equipment.

In Colorado, we will bring a new coal unit on line this year, and refurbish two existing units. It’s a project we started several years ago after reaching a comprehensive settlement with several prominent environmental groups. We will more than double the capacity of the entire facility—but we will decrease overall sulfur dioxide and nitrogen oxide emissions from the plant.

Bringing the new unit on line also helps us retire older, less-efficient plants. We’ve proposed a resource plan in Colorado that reduces system-wide CO2 emissions by 10% over the next few years—even with the new coal unit.

Conservation

Conservation, of course, is also an effective way to reduce greenhouse gases. We’ve been working with customers for more than 20 years to help them conserve energy. Over that time, our customers have saved in the neighborhood of 3,000 megawatts of electricity. We look at those conservation efforts as the equivalent of about a dozen power plants we didn’t have to build.

Several of our states have established ambitious new conservation goals so despite the fact that we’ve been aggressive in this area over the years, we are ramping it up considerably.

New technology

So we’ve made some great strides—but it’s not yet enough to get us to the clean energy future we envision. For that, we are going to have to rely on new technologies. You might have heard about SmartGridCityTM, which is an effort we’ve launched in Boulder, Colorado. It brings together all of the smart grid technologies in one pilot project—and it’s going to teach us a lot about what we can accomplish when we have all these technology tools at our disposal.

In Minnesota, we have a project under way to examine the potential of storing wind power in big batteries. At this point, it’s looking very promising. If we can figure out how to store electricity in a cost-effective way, we’d really be able to boost the value and use of renewable energy.

In Colorado, we are working with the National Renewable Energy Lab and others to develop a world-class solar technology acceleration center. It’s going to give us the opportunity to test new solar technologies and eventually deploy them.

Federal policy

With all of our initiatives in mind, I’d like to focus on several policy areas in particular:

Climate change;
Renewable energy standards, also known as renewable portfolio standards;
Transmission; and
Smart grid technologies.

Again, we’ve been working with these issues for quite some time and have a good understanding of the policy parameters that will enable us to achieve a clean energy future but also ensure reliable service and reasonable costs for our customers.

Climate change

We’ve given significant thought to climate change, and I’ll quickly walk you through these conclusions. This is what we’re looking for in federal climate change policy.

Our first point reflects a significant issue. Xcel Energy has already done a lot to reduce CO2 emissions and our customers have already paid for those efforts. Not all utilities are starting from the same point, and climate legislation should take that into consideration as it determines how to dole out allowances under an emissions cap-and-trade program. We think it would be fair to either set aside allowances to reward utilities that started early or let us start from a baseline year we think is fair.

The same is true for utilities that have made significant investments in renewable energy. Because we’ve already invested a lot in wind power, for example, we’ve contributed to the advancement of wind technology. (And when I say we, I mean Xcel Energy and its customers.) We’ve helped reduce the cost of renewable energy for the utilities that will be following us. That should be rewarded.

And speaking of allowances to emit under a cap-and-trade program, we think they should be allocated—or distributed without cost—instead of auctioned by the government. Otherwise, in effect, our customers are going to have to pay twice:

once to cover the cost of the reductions necessary to meet the cap; and
a second time for allowances needed to cover the remaining emissions.

Now, you may have heard some people suggest that allocating allowances under the cap without cost will create a financial windfall to companies that emit greenhouse gases. Well, it’s been my experience that state utility commissions are pretty adept at making sure regulated utilities like Xcel Energy don’t enjoy windfalls at the expense of their customers.

Let me say again that allocating allowances will save our customers money and reduce the cost of meeting climate goals. But if the decision is made to auction allowances, it’s our position that the proceeds should be used to promote more clean energy development, not to meet federal budget requirements or fund federal programs. Otherwise, the government sale of allowances will become just another federal tax.

As you can tell, the cost of a cap-and-trade program is a big concern to us. A federal climate program should also establish mechanisms to keep the cost of the program from skyrocketing and hurting the economy.

One cost-containment mechanism would be to allow a reasonable number of “carbon offsets” that could be used for compliance. These are efforts like planting trees. They are as effective as cutting emissions—and they cost less.

Another cost-containment approach is to set a maximum price on the cost of an allowance in the marketplace. When it reaches the maximum, the government could issue additional allowances as a “safety valve.”

Finally, we very much believe that whatever climate change law is eventually passed by Congress should be the nation’s only climate program. Right now, the states and regions where we operate are initiating overlapping climate plans that have the potential for creating a compliance nightmare.

Renewable portfolio standards

We’ve also established priorities for renewable portfolio standards—and in this case I’m only going to cover our top three.

First of all, we think that the renewable energy we are buying or producing should count for both state and federal requirements. One shouldn’t cancel out the other. It’s a small point but an important one.

Second, I mentioned that we are planning to add much more wind and solar to our system. Because they’re intermittent sources, their availability can drop in a heartbeat. It causes a lot of wear and tear on the rest of our system as we bring other gas or coal units up and down to compensate for those big swings.

In fact, a recent DOE study found that integrating wind into the grid costs about $5 more a megawatt-hour. We think a federal RPS should compensate those costs by creating a renewable integration tax credit.

Finally, we believe a federal RPS should allow utilities to meet part of their compliance obligation through investments in energy efficiency and smart grid technologies. The environmental benefits of conservation and renewables are the same. But it’s less expensive to conserve energy in the first place than it is to generate it with renewables.

Transmission

Let’s move on to transmission. No matter what other issues we might argue about, everyone agrees that we need a stronger transmission system. Whether it’s to deliver more renewable energy or to increase the reliability of the grid, everybody recognizes the need for a “robust” transmission system. You hear that word a lot in connection with transmission: robust.

It gets more complicated, of course, when you dig into the details. I’d like to look at three issues in particular and offer our perspective:

Planning;
Siting; and
Cost allocation

Planning

There are a couple of schools of thought around transmission planning. On one hand, we have proponents of what might be called the streamlined approach: they like big, bold projects. They want to build a green superhighway to deliver wind power. And they want to give all planning authority to the federal government. End of story. Let’s get this done.

Then there is a more collaborative approach that goes to great lengths to get everyone’s input: the feds, the states, the counties, the cities, the neighborhood groups, the environmentalists, you name it. Sometimes those projects get so bogged down in the approval process that they never get built.

Xcel Energy’s approach is somewhere in the middle—but leaning toward the collaborative:

We believe that new transmission should be integrated with our existing system—not designated to only deliver renewable energy, for example;
We think every stakeholder deserves a say; and
We think it’s our responsibility to listen but also help people understand our needs.

Siting

The same goes for transmission siting, which is never popular. I mentioned the consortium we have in Minnesota for building new transmission. We went to great lengths to prepare people for the need for that new transmission. Lots of communication, hours of hearings, you know the story. All good things. But as soon as we announced the proposed corridors, we got the same old pushback. It wasn’t unexpected but it points out the fact that siting a transmission line is never going to be easy, no matter how well prepared you are.

Transmission projects get hung up—especially large ones that go beyond local boundaries. When that happens, we agree with EEI that FERC needs additional authority to step in when it’s difficult to reach agreement.

Cost allocation

Finally, we need a better system for cost allocation. Who is going to pay for that robust system we all want—especially when a project extends across several states? The old model works for local projects, but transmission is much bigger now.

We need a mechanism that requires everyone who benefits in a broad way to pay. So we support broader cost allocation.

Smart Grid technology

I’m going to wrap up with a couple of thoughts about smart grid technologies—and the stimulus bill. I guess the proper name for that is the American Reinvestment and Recovery Act, but you know what I mean.

We’ve been monitoring it closely, especially the funding for smart grid regional demonstration projects and the smart grid investment fund. We have a special interest, of course, because of the SmartGridCity™ project in Boulder that I mentioned.

Because we think smart grid technologies are the future of our industry, we appreciate the fact that the bill is trying to advance those technologies.

Our concern is that the funding requires a 50% match, and doesn’t recognize previous investments—like SmartGridCity™. These are challenging times and all utilities are watching their capital spending. It will be interesting to see how that unfolds. We’re still waiting for the DOE to release details before we make a decision about applying for stimulus funds.

Finally, I’d caution us to proceed carefully with all of these efforts. This is an exciting time and in many ways we are moving in the right direction. But we can’t let ourselves get so caught up in the frenzy of new ideas that we lose our perspective. Public utilities in particular have a fundamental obligation to customers. We have to provide safe, reliable, affordable energy—and we have to protect the environment while we do that. We can’t lose sight of that responsibility. In fact, Xcel Energy’s new tagline is Responsible By NatureTM. That’s the way we’ve always done things and that’s how we will carry on.

So that’s the view from the trenches, so to speak. We’re looking at a lot of issues and many challenges. But, again, this is an exciting time to be in the energy business. I’ve been doing this for more than 40 years, and I can’t remember another time like it. It’s very rewarding—and I’m enjoying it.