The politics of renewables

...lead to corporate profits and higher consumer costs

On Tuesday, March 2, Xcel Energy announced plans to invest $1.7 billion in order to build transmission lines to 5,500 MW of new renewable energy projects in Colorado.  Using an estimated $1,300/kW to construct, this implies the cost to build was/will be $7.1 billion. We will come back to this at the end of the post.  First, some data.

Since 2014, electric consumption in Colorado (EIA data) has grown from 53.8 mm MWh to 56.3 MWh, growth of ~1% per year. Peak summer generating capacity (when it's windy and sunny) has grown from 14,900 MW to 16,600 MW, meaning that on average, we are using 41% of existing peak capacity (we know from Texas that "peak" is extremely important). Given that we are only using 41% of our generating capacity at present, and only growing 1% per year, the obvious question is "why is Colorado growing generation capacity by 33% when we don't even use what we have?"

The answer: the state has set a goal to reduce utility emissions 85% below 2005 levels by 2030. As 38% of the state's power generation is coal, that's 2,470 MW. In layman's terms, we are replacing existing coal plants, before their useful life has expired, which produce stable power for the baseload energy of the grid with wind.  To borrow a quote from the wind lobby after the polar vortex smashing ERCOT "we don't expect it to be windy in the winter so it's not wind's fault."   (I recently did a presentation for some Texas A&M students and we talked about the ERCOT crisis: the comment was "it's generally accepted that wind wasn't to blame..." to which I said ... where did you read that?  Bloomberg?  You mean the newspaper owned by a man worth $50 billion dollars who ran for President of the United States and is adamantly anti fossil fuel.  Forgive me if I question the source...)

With that backdrop, it brings us back to how utilities work in a regulated system like Colorado.  Unlike in Texas, where wholesale electricity prices fluctuate and 2c/kwh subsidies help producers survive normal conditions (as an example of what happens in a deregulated market, here's a glimpse), in regulated markets like Colorado, Xcel MUST pay for all the power they receive from renewables WHEN it is generated at a fixed price defined in the PPA.  From Xcel's 2020 10K, their cost for wind was $32/MWh (blended) and solar was $90/MWh (I have been inundated by solar proponents telling me how much cheaper solar is today than it was when those contracts were signed and I can't disagree, however I can say that in Kauai, electricity which is primarily solar and batteries is 33c/kwh and the average in Colorado is 10.17c/kwh so .... I'm going to lean on that for how). The bottom line, is for Xcel, it doesn't matter the cost of the energy because they pass it on to consumers.

Which brings me to Xcel's new project.  Xcel is regulated to have a 10.2% rate of return.  That regulated covers decommissioning coal plants, breaking contracts with experimental solar facilities, and new projects such as this one.  So for Xcel Energy, on the $1.7 billion transmission line to get to the 5,500 MW, there is a regulated $173 million per year in profit plus return of capital on the investment.  YOU pay for that.

On the 5,500 MW of new generation capacity, that's $710 mm per year in profit plus $355 mm per year on for depreciation (the useful life of a turbine is 20 years).  YOU pay for that.

When we started the post, the data showed that demand for electricity is growing 1% per year and we have 59% excess capacity (on average).  The only reason these investments are being made are because we are decommissioning existing coal plants to meet the state's goal to reduce CO2 emissions 85% below 2005 levels.  But if we learned anything from Texas, whether wind was expected to blow or not, IF it doesn't blow, you have no power unless you have coal, nuclear and natural gas.  Or batteries.  And if batteries are the plan?  You guessed it. 10.2% rate of return.

Can you imagine if we decided CO2 wasn't a pollutant?