This is the last in a series of six blogs that summarize discussions by top executives, investment bankers, and ex-Federal Energy Regulatory Commission (FERC) Commissioners about developments in the U.S. utility and power sectors. The discussions took place at the virtual 34th Annual Power and Gas M&A Symposium on February 24, 2021.
Heike Doerr, Principal Analyst at S&P Global Market Intelligence, conducted an in-depth interview with Bob Frenzel, President and COO of Xcel Energy.
President and COO of Xcel Energy
The discussion focused on:
- The company’s energy transition plan, including goals for electric vehicles (EVs).
- The social and governance components of ESG.
- M&A trends
A few highlights:
- Xcel had over 8,000 megawatts of coal in its system 15 years ago, but expects to have less than 2,000 megawatts in the system by the end of 2030. Most of the plant closures have come through long lead-time notifications to communities and partnering with employees to make effective transitions.
- The firm has been able to integrate wind into the system, and will put almost 6,000 megawatts of new wind and solar into the upper Midwest over the next decade.
- There is a need to recognize the interdependency of the electric business and the natural gas business. Some of the challenges seen in Texas highlight that relationship — that the supply chain for fuel is critically important on resiliency, as well as generation.
- Xcel’s product can help transfer the EV systems in the country to a lower-emissions footprint, by partnering with OEMs and other manufacturers. In August, the firm announced a commitment to have 1.5 million EVs in its service territory by the end of the decade, which represents 20% of the installed cars.
- Regulated utilities are embedded in the fabric of their communities, and have done a lot of the “S” in ESG. Xcel’s people work and live in the communities they serve, so the firm wants to mirror what they look like from a diversity, equity, and inclusion perspective.
- Consolidation is going to continue. There was a flurry of activity when debt costs were cheap, but there are less opportunities today. That likely means more stock-for-stock deals and mergers of equals.
Questions for Bob Frenzel:
Would you tell us about Xcel for those that may not be familiar with the company?
We are a $50 billion, multi-state gas and electric utility that serves customers throughout the Southwest and upper Midwest — 5.5 million customers, 150-year history as a company. We are guided really by three strategic priorities: 1) Lead a clean energy transition that is going on in the country, 2) Continue to enhance the customer experience, and 3) Keep our product affordable, available, and reliable.
It has been turbulent down in Texas in the last couple of weeks. How are your employees and your customers doing?
Broadly speaking, our SPS company performed exceptionally well during the storm. We learned a lot about winterization from a very cold event in 2011, and our power plants performed exceptionally well. Like many of the companies in ERCOT, though, we struggled to get natural gas to some of our natural gas-fired power plants, and some were unable to run. However, we exported power from our Northern States Power Company into MISO, and even in Colorado our company was exporting power to the broader state through the crisis. So, our plants ran exceptionally well, and we were happy to support our neighbors like this industry has a hallmark of doing.
Xcel has a goal of reducing carbon emissions 80% by 2030 and having 100% carbon-free electricity by 2050. How are these milestones going to be achieved?
Roll the clock back 15 years, and we had over 8,000 megawatts of coal in our system. By the end of 2030, we expect to have less than 2,000 megawatts in our system. Most of those plant closures have come through long lead-time notifications to our communities, partnering with our employees in the local bargaining units to make sure that the transition was made effectively. Through the process, we haven't had any layoffs and have supported our communities to maintain the property base, helping local communities remain intact. We think partnering is the best way to do this. We partner with stakeholders, including regulators to make sure that we can transition the coal fleet to what will be a much more renewable fleet.
We have been a leading wind provider in the U.S. for the past 15 years, and are one of two utility companies that crossed 10,000 megawatts of wind on our system. So we have been able to integrate wind into our system very effectively and provided both emission and cost benefits to our customers.
What portion of your assumptions from now to 2030 have been approved? Which part requires you jumping through some regulatory hurdles to reach the finish line?
We partner closely with our regulators and, by and large, our plan is regulatory approved. We have a resource plan for the upper Midwest where we are asking the regulators to approve the shutdown of our final two coal plants. Shortly, we are going to make an announcement in partnership with our President of Colorado and the Governor of Colorado about the framework for our Colorado energy plan. It will talk about early retirements of coal plants, and the incremental additions of renewables and storage to make our Colorado company have an 80% carbon reduction by the end of the decade.
Was there a regulatory climate that was more constructive early on that enabled you to make headway in certain jurisdictions?
We have been a leading provider of wind for 15 years, and that has happened predominantly in the upper Midwest and in Colorado. We are fortunate to sit in some of the windiest areas of the country, and some of the best solar resources as well, making this transition to a lower-emissions profile very cost effective because of the resource rich areas that we serve, and we have been able to keep our customer bills flat for the past five years. We expect by the end of the decade to be able to make this entire transition for less than the rate of increase in inflation.
The company recently increased its CapEx plan, since you have a few more projects that you are bringing online. Can you tell us about these projects?
It is what we call the Minnesota Relief and Recovery Act, which stemmed from the catastrophe that occurred because of the pandemic and the economic slowdown in our states. We recognized that we had an opportunity to repower some legacy wind farms, and put people and capital to work in our local communities. So, we are going to repower four existing wind farms, and we are also proposing to add almost 500 megawatts of solar at a legacy coal plant that we are proposing to shut down over the next decade. The combination of wind and solar in the upper Midwest is going to be about $1.5 billion of investments, and $1 billion of that has already been approved.
What are the biggest risks to a plan like this?
The conversations that are happening nationally around the challenges we saw down in ERCOT over the past week is really informative for how we think about making this transition. We have to do it with exceptional planning and a focus on both reliability and affordability. We have to recognize that we are planning for resiliency. What used to be a one in 30-year weather event, may be a one in 10-year weather event now, and we need to make sure that our systems are hardened for that, both on the generation side and the transmission side. We need to recognize the interdependency on the electric business and the natural gas business. Some of the challenges we saw in Texas highlighted that relationship, that the supply chain for fuel is critically important on resiliency as well as generation.
As we make these transitions, we are focused on keeping it affordable and reliable, which means we are likely going to need storage as an asset class. We need to preserve our existing nuclear power plants, and we have filed for that with our Minnesota regulator. And, we are going to need to continue to use natural gas as a bridge fuel to make sure that we are resilient. Over time, we need to find carbon-free resources that can be dispatchable as we transition away from fossil fuels.
What does the solar resource plan look like in Minnesota?
The resource plan in Minnesota is in front of the commission and stakeholders, and we have just received comments back in the regulatory process. We are effectively going to put almost 6,000 megawatts of new wind and new solar into the upper Midwest over the next decade. As part of the Minnesota Relief and Recovery Plan, we proposed an almost 500-megawatt solar facility at our Sherco Coal plant. We are going to use land and interconnection that we already own to repower that site with predominantly solar. But, that is just a fraction of what we expect in the upper Midwest over the next 10 years. In addition to wind and solar, we will add storage to the mix, and we will request to add new combustion turbines to the mix. Although we don't expect them to run much, they will have a very low carbon footprint.
How have your regulators treated these proposed projects that have to do with resiliency, while simultaneously managing the cost to customers?
When you think about climate change in Colorado, for example, we have a wildfire mitigation program that is in front of the staff and the commission out there, and the plan received resounding support from staff. While nobody likes to have incremental costs passed on to customers, we also recognize that wildfires have become more frequent, and we need to make investment decisions to mitigate the impacts.
What kind of coordination goes on with other utilities to make sure that best practices are being communicated for things like this?
We have very strong relationships with all the utilities in the state. As we move forward with our Colorado energy announcement, we have the obligation to build the infrastructure to bring those renewables to market. In order to do that, we are partnering with the five other transmission owners in the state to build a renewable backbone to enable renewables to come into the population centers in Colorado. That same coordination happens as we look to make investment decisions around wildfire, as well as operations day-to-day. We have an obligation to each other to maintain our assets, to partner on the operations of the generation fleet, and to make sure that the grid is resilient and operated efficiently and effectively.
What are the goals of Xcel for EVs, and where are you on this path?
We are down more than 50% since 2005 on an emissions level, and the sector is a lower emitter of greenhouse gases than the transportation industry today. Our product can help transfer the EV systems in the country to a lower-emissions footprint, and it comes with partnering with OEMs and other manufacturers. In August, we made an announcement to have 1.5 million electric vehicles in our service territory by the end of the decade, which represents 20% of the installed cars. Looking at the Biden administration's plan for EVs, we recognize that we can do more, particularly in partnership with the federal and state governments. EVs cost about $700 a year less to operate than an internal combustion engine just in fuel costs, which is about $1 billion of customer savings annually by 2030. We can build the infrastructure and make ownership easier for residential customers and municipalities. Our grid can accommodate a significant number of EVs today, and our generation systems can accommodate EV demand as long as it is off peak. As soon as there is significant demand to the on-peak hours, we will need investments in the distribution grid, the transmission grid, and the generation fleet.
What are you doing on the S and G in ESG — the social and governance pieces?
On the S side, I think both as an industry and as a company, regulated utilities are embedded in the fabric of their communities. Our people work and live in the communities that we serve, so we want to mirror what they look like from a diversity, equity, and inclusion perspective. 70% of our supply chain spend is in the states that we serve, and 10% of that is with minorities and women in better-known businesses. This industry has a legacy of societal benefits. Oftentimes, we are the largest property tax providers in the states where we operate, so we drive a significant amount of economic development. All that leads to excellence on the S side of the equation. If you expand that to governance, I would say that starts at the top with the Board of Directors.
Since 2005, 30% of our executive compensation has been tied to achieving environmental goals. We have a 10% safety goal, both public and personnel safety. And just this year, we added diversity, equity, and inclusion to our executive scorecard. During the pandemic, we sold a power plant for a substantial gain, and donated that gain to mitigating the impacts of COVID-19, as well as racial and equity justice.
How do you view the current M&A landscape?
Our efforts will be focused on renewable generation and transitioning our fleet. We need investment in the transmission grid to enable those renewable assets to get to the market, plus we need heavy investment in both EV enablement and our distribution grid. We see a large growth profile for the company, but M&A is not part of our earnings forecast. That said, Xcel Energy is a product of several mergers that happened in 1999 and 2001. We gained a lot of scale and diversity of regions, so there are always things that we can consider. We have been disciplined about where we want to invest, and our focus has been on organic growth. I do think consolidation is going to continue. There was a flurry of activity when debt costs were cheap, but there are less opportunities today, and we are likely to see more stock-for-stock deals and mergers of equals.
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