Unquestionably, the best part of doing my MBA was learning accounting, reading financial statements, and in particular, doing so with the case study method where you knew there was a smoking gun, you just had to find it.  And so, with Xcel Energy’s announcement last week that they had spend $1.2 BILLION in incremental fuel charges to generate power during the 5 day storm that impacted Texas, I had a lot of questions.  Today, we answer some of them.  Here is the source document.  I’m happy to answer any questions subscribers to the newsletter have if you want to get more familiar with reading financial statements.

Key Questions:

1.  How large a percentage is $1.2 billion of the total annual revenue?

In 2020, Xcel had $11.4 billion in revenue from their natural gas and electric generating business. That’s $31.2 million per day in revenue. Over the February 11 – 16 5 day period when Xcel had to buy natural gas on the spot market to meet energy demands, they spent $240 million extra PER DAY.  10.5% of their entire 2020 revenue as a company was spent in 5 days.

2.  How much natural gas is hedged?

175 MMBtu for 2021. Xcel has two business segments they report separately: the natural gas delivery business and the electrical generation business.  For the purposes of this discussion, we will look at the natural gas delivery business first.

In 2020, for natural gas customers, Xcel energy delivered 444.3 MMBTU.  That means that they have hedges in place for ~40% of total natural gas they deliver.  Said a different way, 60% of the gas they deliver in a year is exposed to the spot market, and as we know between February 11 and 16, the spot market saw gas prices spike up to 200x the amount and spot power jump in places from $25/MW to $9000/MW.

For Xcel, they generate 32% of their electricity from natural gas. Therefore, including this amount, the additional gas exposure they have is almost 200% of the natural gas distribution which implies they have less than 13% of their natural gas exposure hedged.

3.  How will this impact utility bills (and by extension, if it happen to Xcel… it happened to everyone)?

Roughly speaking, that 5 days of spot exposure will increase your utility bill by a minimum of 10% this year.  Xcel’s comment from the 10K.

“Xcel Energy has fuel recovery mechanisms in all of its states to recover the increased cost of natural gas and electricity. However, given the impact of these higher costs to our customers during a pandemic, we expect our regulators to undertake a heightened review and we intend to work with our commissions to recover these costs over time to help mitigate the impacts on customer bills.”  

In short, Xcel bears no responsibility for running an incredibly light hedge book to protect customers and passes the costs onto them.  As you will see, this is a common theme and, as we build out more intermittent power supplies and underinvest in “on demand” and “base load” power, this will be more frequent.  To demonstrate the importance of the difference from “base power” and “intermittent power”, I love this graphic from the 10K.

I raise this as a topic because it brings into question the LCOE for wind… specifically, if you can’t generate any power from wind during a high demand time, you MUST pay for the natural gas or coal to make up for it. That excess demand without long term contracts stabilizing your price, ensures you pay the spot rate. Here is how wind generation varies during a period of time.

It’s important to remember that:

a) wind is predictable but not perfect;

b) power demand in a community fluctuates during the day;

c) nuclear and coal take a long time to ramp up and down;

d) the peaks and valleys from wind AND from community demand at different times of the day MUST BE filled in by natural gas or oil/diesel generators, biomass (burning of carbon) or batteries.

And yet, wind is prominently featured as the preferred method for Xcel to build out “the Clean Energy Transition”.  The word carbon is mentioned 19 times in the first 5 pages of the report.  Xcel was the first major U.S. utility to establish a carbon free vision and is targeting 100% carbon-free electricity by 2050.  They are the number 1 provider of wind for 12 of the last 15 years and they expect to have 11,000 MW of wind capacity by the end of 2021.  Xcel has made “de-carbonization” the strategy, the focus, and the future.

When it comes to power generation, Xcel Energy (the parent) has 4 utility subsidiary systems: NSP (MN and WI), PSCo and SPS that serve Minnesota, Wisconsin, Colorado, Texas and New Mexico.  Colorado and Minnesota are by far the largest share of customers with 3 million electric customers and 2 million natural gas customers.

For future reference, here is a handy conversion.  1 mmbtu = 0.293 MWh.  It’s important if you want to compare costs since nuclear, gas and coal are reported in delivered fuel source $/mmbtu and wind and solar are reported in $/MWh.  For reference, here is the breakdown of cost per MMBTU in 2020.

Nuclear: $0.80

NG: $3.01 (PSCo feedstock cost, Xcel charges on average $6.09/mmbtu for delivered natural gas)

Coal: $1.45

Wind: $7.30 (owned), $10.58 (purchase price agreements PPAs… similar construct to the Alamosa solar facility we wrote about)  BLENDED COST: $9.38

Solar: $26.08

(Here are the average power prices across the U.S. which reflect varying generation compositions)

Let’s focus on solar for a moment.  They are also proposing 460 MW of solar facilities with $550 mm of incremental investment, on top of the 3,500 MW of additional projects targeted for Minnesota with plans to significantly expand that offering in Colorado.  Why are they willing to do it in spite of the significant cost difference relative to wind?  Because they can charge it directly to you.  The new transmission lines they build?  Charged directly to you.  And when you make a regulated rate of return of 10.2% on everything you do…. no cost, operating expense or capital charge hurts your earnings, which helps your stock price, which makes the employees and shareholders more green than they would have using existing infrastructure and depreciating it.

So let’s put into perspective what it takes to manufacture wind and solar facilities.  For fun, here’s a 3 minute video from the movie ‘Planet of the Humans’ that might be helpful in thinking about what is behind these investments.

Humans are incredible creatures.  We change our climate to make it better.  We build houses, generate power, build large scale industrial equipment to mass produce goods, and move food all over the world.  There is a cost to that.  Only “less” will address the problem of scarcity.  Of water, of resources, of desires.  That’s the inconvenient truth that gets covered up whenever we say “clean energy transition.”  It isn’t clean, and it certainly isn’t green, unless you mean enriching… and on that, I totally agree.