Power Plant Expansion

This photo from last summer shows an expansion of the Mankato Energy Center natural-gas power plant on the city's north side. Xcel has a deal to buy the plant, but the utility has run into strong opposition from state regulators worried about the effect on ratepayers.

MANKATO — Xcel Energy’s proposed $650 million purchase of a gas-fired power plant in Mankato has run into strong opposition from two state agencies concerned about its potential impact on ratepayers.

Minneapolis-based Xcel in November announced its intent to buy the large power plant from Atlanta-based Southern Power. Xcel currently buys electricity from the Mankato plant on a long-term contract. The company says owning the facility would entail significant savings for ratepayers and would help preserve electric grid reliability.

But the Minnesota Department of Commerce concluded that Xcel’s proposed ownership of the Mankato plant “is unlikely to create substantial savings,” according to a recent regulatory filing. “Overall, Xcel has not shown need or any net benefits to ratepayers for Xcel’s proposed (gas plant) purchase.”

The department also ripped Xcel’s economic modeling of the deal’s impacts, saying it was flawed. At the commerce department’s request, Xcel did four rounds of modeling. All were “invalid” and “inappropriately inflate the value” of the Mankato plant, the filing said.

Meanwhile, the Minnesota Attorney General’s Office slammed the deal in a recent regulatory filing, saying Xcel “structured the proposed acquisition in an opaque backroom deal and in the absence of any competition, transparency or meaningful need for alternative analysis.”

The two state offices represent the public before the Minnesota Public Utilities Commission, which is likely to decide next month on the Mankato deal.

Xcel, Minnesota’s largest electric utility, rejects criticisms from both agencies, noting in a statement to the Star Tribune that it has followed the “appropriate process” with its acquisition proposal.

Xcel said the Mankato deal is vital for system stability as the company adds variable solar and wind energy while closing its coal-fired power plants, a primary source of constant power.

“The purchase of the Mankato Energy Center will help pave the way to exit the use of coal in the Upper Midwest a decade earlier than planned,” Xcel said in the statement. The company declined to make an executive available for comment.

In a PUC filing, the Commerce Department questioned whether the Mankato purchase is needed to facilitate Xcel’s early exit from coal.

The Mankato Energy Center consists of two gas-fired generators, which together can produce 760 megawatts of electricity. (Xcel’s current largest gas-fired plant has a 530-megawatt capacity). Independent power operator Calpine built the first Mankato generator in 2006, and Xcel has been buying its electricity since.

Southern Power, the Mankato Energy Center’s owner, opened a second generator there this spring. Xcel has power purchase agreements running through 2026 and roughly 2039 for the two generators.

Critics fear consumers would end up paying more for Xcel’s proposed buyout of the Mankato plant than they would pay if Xcel maintains its long-term power purchase contracts with Southern.

“Xcel customers would presumably be asked to cover the entire cost of purchasing the plant, but it just hasn’t been shown to be in the public interest to do so,” said Annie Levenson-Falk, executive director of ratepayer watchdog group Citizens Utility Board, which opposes the Mankato deal.

When a utility buys or builds a new power facility, the costs usually get built into its rates in a rate case before the PUC.

Under the Mankato proposal, Xcel would charge ratepayers $10.6 million in 2019 — outside of a rate case. The commerce department said utilities are generally not entitled to recover costs outside of rate case except under “extraordinary circumstances.” Xcel argues this is one of those situations.

The commerce department and Xcel are also at odds over whether the company can charge ratepayers for a $96 million “acquisition adjustment” — the difference between the plant’s book value and its market value reflected in the $650 million price. If Xcel can’t charge the $96 million, the company says the deal wouldn’t be financially viable.

Xcel maintains that even after recovering the deal’s costs, ratepayers would still save $124 million over 30 years. The company has a Sept. 27 deadline with Southern for regulatory approval. If the PUC rejects the deal, Xcel is prepared to buy the plant through an unregulated subsidiary.

Xcel would “step into the shoes of Southern Power” under the current power-purchase agreements, accepting all the risk — and the potential upside — of the Mankato plant, the company said in a PUC filing. Essentially, Xcel would own the plant, yet also purchase power from it.

While Xcel has made much of its commitment to 100% carbon-free energy by 2050, natural gas power plays a significant role in its plans until at least then. The company has already gotten approval to build a 786-megawatt gas plant — at a cost of $800 million — in Becker in the mid-2020s.

Gas-fired power and more renewable energy are supposed to offset lost capacity from four coal-fired generators — three of which are in Becker — that Xcel plans to close between the end of 2023 and the end of 2030.

Coal emits about twice as much carbon dioxide, a key climate-change culprit, as natural gas. Still, environmental groups have criticized Xcel for pursuing gas projects as renewable energy gets cheaper.

The Sierra Club, in a March PUC filing, said that given Xcel’s greenhouse gas emission goals and the rapid technological developments in renewable energy, the Mankato gas plant “will not be the most economic or prudent option” in the long term. The deal would be “locking in a major commitment to fossil fuel generation through the mid-2050s.”

The Sierra Club has since asked the PUC to withdraw its comments after the organization and five other environmental and clean energy groups came to a “settlement agreement” with Xcel in early May. The agreement is sort of a trade-off.

The groups will support the Mankato plant buyout in tandem with Xcel’s aggressive clean-energy goals in its new “resource plan.” Electric utilities must file such master plans every few years with the PUC. Xcel’s plan calls for a complete exit from coal by 2030 and a more than tripling of its solar power generation by the same year.

Environmental and clean-energy groups said in a PUC filing that Xcel’s ownership of the Mankato plant would create a “very small increase” in greenhouse-gas emissions.

However, the “ownership scenario is dwarfed” by large carbon dioxide cuts through the closures of the coal plants, the groups said.

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