In September of 2020,  Xcel Energy (NASDAQ: XEL) filed for permission to cancel a solar power purchase agreement, which given the current climate for renewable energy projects, it seemed like a strange thing to do.  When you do a little digging, it isn’t strange at all.  And that’s the problem.  Here’s the background.

In June of 2010, Xcel Energy, a publicly traded company which serves 3.3 million electric customers and 1.8 million natural gas customers in the U.S., entered into a solar power purchase agreement (PPA) with Korea Electric Power Corporation (KEPCO) to buy electricity from their as of yet to be built 30 MW Solar Generating Project at Alamosa Colorado. The solar facility was one of the first utility scale HCPV projects in the U.S., and this particular project would build the largest electric generation plant of it’s type in the world.  Over the 20 year life of the contract, Xcel would purchase electricity for $127.50/MWh (with a 1% price escalator starting at facility commissioning in 2012).  At $127.50/MWh, that is roughly double the cost of the alternative, but we will come back to this point later.

With Xcel’s PPA in hand, KEPCO was now free to build their experimental solar farm and so, went to the Department of Energy and successfully secured a $90.6 million loan under a program designed to “support the deployment of commercial technologies along with innovative technologies that avoid, reduce or sequester greenhouse gas emissions.” One of the requirements was to have lots of new tech and boy, did this plant have new tech!  It used both a dual-axis tracking system with hydraulic motors to rotate the solar panels to follow the sun and “multi-junction” cells that were used were meant to absorb different wavelengths of light, it was expected to nearly double the efficiency of more traditional PV panels.  So far, so good.

Flash forward to 2019.  7 years into the 20 year contract, KEPCO informed Xcel Energy that “it was in danger of falling under the the minimum requirement of the PPA.”  More alarming, KEPCO said that it was not feasible to repower the facility with replacement HCPV technology, as the manufacturer of the equipment was no longer in business.  Worse, even the equipment that needed to be replaced wasn’t commercially viable to make.  For reasons unknown, instead of terminating the contract for a breach of agreement, Xcel instead proposed to regulators that Xcel would pay $41 million to terminate the contract.  The upshot? It would save customers $38 million over the course of the next 11 years.  The downside? That $41 million payment would be amortized over 11 years and charged back to retail customers through it’s Electric Commodity Adjustment (ECA) in order to earn a return for Xcel Energy (and their public shareholders) at the Company’s authorized weighted average cost of capital.  I can’t make that up.

It would be reasonable to ask, as I did, how can Xcel say they are saving their customers money when they are charging them for the termination of the contract.  Remember the cost of energy that Xcel agreed to purchase from KEPCO?  It was $127.50/MWh.  Fun fact, when using natural gas to create power, it does so at a conversion of 0.01003 mcf per kWh which, at $2.50/mcf, costs about $25/MWh.  According to a range of calculations on the Levelized Cost of Energy (LCOE), the average natural gas power facility costs makes power at $60/MWh.  So the savings come from using lower cost energy that was a result of overpaying for power in the first place.  I can’t make that up, either.

The big question is “How did this happen and how did a publicly traded company convince their board to sign onto a high cost, experimental facility that hadn’t been built yet and required a loan from the DOE to build it?” Two reasons.  The first, the Colorado government has enacted regulations that incentivize utilities to take assume unparalleled business risk if it can be justified as ‘clean.’  Under the it’s resource plan and the Code of Colorado Regulations that governs new technologies, companies can avoid a competitive bid process when:

An eligible energy resource will be considered a new clean energy, or energy efficient technology, or a demonstration project if it is clean and incorporates one or more technologies, representing a substantial portion of its overall installed cost, that have not been regularly commercially demonstrated, up to the point in time that the resource is formally bid, or if not bid, acquired. considered a new clean energy.

Testimony by Xcel (hearing Exhibit) expressly acknowledge that Xcel assumed both the expense and risk knowingly:

Such special treatment and heightened consideration of Section 123 resources is needed to support the development and adoption of new clean energy technologies for multiple reasons. First, such technologies may be more costly than other alternatives and may not be selected under a least-cost resource planning approach. Second, inherent in the nature of new technologies that have not been commercially demonstrated is the possibility that such technologies may fail or otherwise not deliver as expected.  Unfortunately, this is what ultimately happened with the HCPV technology at the Facility.

The second reason is that Xcel Energy (and utilities in general) exist as legislated Monopoly, exchanging fixed returns for additional oversight, but binding consumers to cover of the operating costs and ‘reasonable profits’, regardless of the decisions made by the board (as in this case).  Xcel knows that every penny lost and risk assumed will, in fact, be covered by the 3.3 million electric customers.  As such, they are incentivized to spend as much as possible, on any technology possible, because the more they spend, the larger “reasonable profits” they can take…and we are obligated to pay it no matter what, even in non competitive bid for building an unproven facility. Now, does this ridiculousness compete with Tesla selling EV carbon credits to other car companies in order for them to meet emission standards in California, a program put in by the government and without which Tesla would a) not be profitable and b) not be in the S&P 500 which led to a 25% increase in their already lofty valuation?  No.  But it’s close.

Like the Federal reserve pumping liquidity into the market has had the impact of backstopping risk for investors and driving the market to all time highs, there is moral hazard in the power market as well.  The Government is making rules that cause publicly traded companies to CHOOSE to buy more expensive power, and when it fails, they pass the cost on to customers and earn a return anyway, instead of simply defaulting the contract and lowering costs by using alternate power options (the trick here is Xcel gets a return on the termination payment, but not on the cancelation due to a breach).  There are no consequences for bad decisions and this example underscores the point that Government intervention is harmful to vulnerable populations.

Higher costs are not good for consumers overall and marginalize lower income families and yet, this moral hazard is the basis for rebuilding an entire energy grid.  The Government is being encouraged to spend $3 trillion to replace existing infrastructure in a system where projects are guaranteed a riskless return with no transparency.  That push has nothing to do with climate change and everything to do with broken capitalism and THAT is what we need to shine light on.  Affordable and reliable or clean at any cost?