Xcel may buy Minnesota gas generator as merchant asset

US utility holding company Xcel Energy may use an unregulated subsidiary to buy a natural gas-fired power plant in Minnesota if state regulators block the acquisition because of perceived negative effects for ratepayers.

Xcel wants to purchase the 760MW Mankato Energy Center in Mankato, Minnesota, from Southern Power, an arm of Southern Company, for $650mn.

But the Minnesota Department of Commerce has filed economic objections, while the Minnesota Public Utilities Commission (PUC) questioned the environmental benefits of the acquisition.

The proposed purchase comes at a time when the multi-state utility holding company has pledged to eliminate coal-fired generation by 2030. At the same time, the Minnesota arm of Xcel is pursuing rate adjustments based on the life of service of much of its fleet.

The case is complicated by the challenges in assessing the ramifications for ratepayers in the retirement of existing coal units, buying new gas units, using more renewables or buying energy from the grid of the Midcontinent Independent System Operator (MISO).

A second combined cycle unit was completed at the plant in June. Southern now sells output from Mankato to Xcel under long-term contracts.

Environmental and labor groups support the Mankato purchase. Xcel said the purchase furthers the state's environmental goals, benefits customers in every scenario and "needs to be viewed through a simpler lens."

Xcel said the $650mn price tag for the combined cycle plant would allow the utility to own capacity at the same cost of a new combustion turbine, a less efficient type of unit. The transmission interconnection rights of the plant alone are worth $100mn-$370mn.

The state Department of Commerce said the benefits of the Mankato purchase would be nearly equal to the fixed costs, but that the risks weighed against the transaction. The department said the utility used invalid assumptions about the use of its resources in the MISO energy market, and market pricing assumptions are not borne out.

Xcel said it is "open to commitments around life cycle cost caps and accepting some stranded cost risk."

The PUC disputes the long-term CO2 emissions reductions from displacing coal with gas.

A Minnesota law says the commission shall not approve a non-renewable energy facility in an integrated resource plan unless the utility has demonstrated that a renewable energy facility is not in the public interest.

The case is not listed on PUC dockets in coming weeks, but the Minnesota regulator meets every week and is among the most active of any state.

If the commission disallows the purchase, Xcel is prepared use an unregulated subsidiary "to step into the shoes of Southern Power" and continue the remaining long-term sales contracts, and then operate Mankato as a merchant plant.