Utilities Have Big Plans to Cut Emissions, But They’re Struggling to Shed Fossil Fuels

As major U.S. utilities began making pledges this past year to cut their greenhouse gas emissions to net-zero, or close to it, by mid-century, one of them was already drawing up a road map to make it happen.

Minneapolis-based Xcel was the first large investor-owned utility in the country to set the goal, in December 2018, and it spent 2019 planning how to get there.

But even a leader in renewable energy like Xcel is finding it difficult to shed fossil fuels completely before the 2040s, raising questions about any utility’s ability to break from coal without adding new carbon energy in other forms, mainly natural gas.

Xcel, which serves 3.6 million customers in eight states, laid out a detailed proposal in 2019 for the Upper Midwest part of its territory. It is proposing to retire coal plants early, extend the life of a nuclear plant, and dramatically expand solar and wind energy.

“They are putting some very tangible flesh on the bones to get to their 2050 goal,” said Kevin Lee, director of the climate and energy program for the Minnesota Center for Environmental Advocacy. It’s a “pretty monumental thing,” he said.

But Xcel’s plan would also expand its use of natural gas by purchasing a gas plant and converting one of its coal plants to run on gas. The utility says it needs the fossil fuel to maintain reliability.

That decision is dividing local activists and is a microcosm of the broader debate around gas’s future that has become pervasive in the fight over the nation’s energy economy, as scientists warn about locking in decades of planet-warming greenhouse gas emissions.

Lee’s group was one of several that agreed not to oppose Xcel’s purchase of a natural gas plant in exchange for the company making firm commitments to close its two coal plants in Minnesota a decade earlier than planned and expand programs that help customers use less electricity.

The Citizens Utility Board, a consumer advocacy group, was more critical. It has described Xcel’s large new investments in natural gas plants as being financially risky because the costs of renewable energy technologies are falling and the gas plants are a multi-decade commitment.

“Because this is the first resource plan, both in the state and nationally, in which an investor-owned utility is voluntarily offering a pathway to 100 percent decarbonization, it represents a significant place in the resource plan continuum,” said Joseph Pereira, regulatory director for the Citizens Utility Board, in a July filing. “The resource mix selected in the upcoming plan will set the foundation for moving forward toward 100 percent decarbonization.”

If approved by Minnesota regulators, the proposal would sharply cut emissions across Xcel’s system in Minnesota, South Dakota and North Dakota while keeping its rates close to flat, with an average annual increase of about 1 percent. Its use of solar in those states would jump from 3 percent to 17 percent, and wind would go from 27 percent to 37 percent.

Companywide, Xcel is aiming to reduce emissions 80 percent by 2030 compared to 2005 levels. Cutting that remaining 20 percent will likely be even harder.

Many Utilities Are Keeping Fossil Fuels Longer

Four other large utilities issued plans in 2019 to get to net-zero emissions, or close to it, but most of them also have plans to expand natural gas in the coming years.

Duke Energy, the largest electricity generator in the country, and Michigan-based DTE Energy pledged to be at net-zero emissions by 2050. Southern Company, headquartered in Atlanta, is aiming for “low to no carbon” by mid-century. And PSEG, based in New Jersey, says it will cut its carbon 80 percent from 2005 levels by 2046, with “a vision” of net zero by 2050.

Among them, Xcel’s plan seems the best designed to actually lead to net zero, said Michael O’Boyle, director of electricity policy for Energy Innovation, a clean energy research firm.

For example, Duke’s plan for North Carolina calls for construction of about 10,000 megawatts of natural gas plants by 2033. In comparison, Xcel’s new natural gas capacity in Minnesota would add up to about 1,600 megawatts.

DTE currently has an 1,100-megawatt gas plant under construction, and it plans to operate its largest coal plant into the 2040s.

O’Boyle thinks these investments in fossil fuels will ultimately be bad for utilities and their consumers as wind, solar and battery storage that can provide on-demand renewable power get less expensive.

‘Steel for Fuel’: A Different Way to Make Money

The plummeting costs of renewable energy are already forcing investor-owned utilities to retool the way they do business, which was built around fossil fuel generation. Xcel has been a leader in embracing these changes. 

“Xcel Energy has kind of coined this term, ‘steel for fuel,’” said David Giroux, head of investment strategy for T. Rowe Price, speaking in November as the asset management firm presented its 2020 economic outlook. “It’s a really powerful change in the utility business model.”

“Steel for fuel” is, essentially, Xcel’s economic case to its shareholders for replacing coal plants that require large amounts of fuel with wind and solar. The costs associated with renewable sources are mostly upfront—the “steel”—with no ongoing fuel costs.

Regulated utilities aren’t allowed to profit from the fuel they buy—they have to pass those costs on to consumers with no markup. So by shifting to wind and solar, its argument goes, Xcel can increase spending on the assets that earn utilities a profit, including more clean energy infrastructure. As the price of generating renewables continues to drop even further below coal, savings would grow—and could more than offset the costs of unpaid investments in retired coal assets.

The result, Giroux said, is that the returns for investors would grow because the utility has found a way to operate more efficiently.

Beyond the natural gas question, the greatest uncertainty for Xcel is what will happen in later years as it tries to cut those final emissions. Its current proposal doesn’t go that far into the future.

The company acknowledges that the final steps toward net-zero carbon in the 2040s will likely depend on technologies that do not yet exist at a scale that can be affordably used. That may mean new types of nuclear plants, deployment of carbon-capture systems or possibly something entirely new.