Dive Brief:

• Xcel Energy on Monday announced the sale of its 720 MW natural gas plant, despite less than three months ago creating an unregulated subsidiary to purchase the plant, and previously naming it a "critical" step toward the utility's 2050 carbon-free goals.

• Xcel purchased the Mankato Energy Center (MEC) on Jan. 17 through a newly-formed unregulated subsidiary after Minnesota regulators last fall rejected Xcel Minnesota's bid to buy the plant through its rate base. But investors preferred the utility remain a wholly regulated company, prompting the sale, Xcel spokesperson Randy Fordice told Utility Dive.

• The nonregulated Xcel subsidiary first purchased the Minnesota plant from Southern Company for $650 million, and Xcel is now selling it to Southwest Generation for $680 million. The sale "makes financial sense for the company and will enable us to continue concentrating on our core business of delivering electricity to customers in the existing regulatory environment," said Fordice.

Dive Insight:

Xcel was the first large investor-owned utility to set a goal of 100% carbon-free energy by 2050, with a benchmark target of reducing carbon emissions 80% below 2005 levels by 2030. It and other utilities have since focused on getting coal plants off their system, and make the argument that gas-fired plants provide a natural transition toward a power grid with more renewable generation.

But there are many critics who say these gas buildouts are unnecessary and present a stranded asset risk to customers in the long term as renewable energy prices drop.

"Utilities will say anything to get gas infrastructure into rate base and earn more in profits," Research Director at the Energy and Policy Institute Matt Kasper told Utility Dive in an email. And the Xcel case "is why we should be skeptical when utilities say they need these large assets in the first place," he said.

Xcel initially filed to acquire the asset in 2018, arguing the plant was essential to reaching its clean energy goals, and that it would eventually reach cost parity.

But regulators in their rejection of the utility's plan noted the plant would not be worth its cost until well into the 2030s. The power purchase agreements included two units — the 375 MW MEC I and the 345 MW MEC II, whose agreements expired in 2026 and 2039, respectively, and regulators noted the facility would need to operate at least beyond the contract of MEC I for customers to see savings.

"Operating MEC past the expiration of the PPAs appears to be the only way to make the purchase cost effective, but doing so would likely conflict with Xcel's environmental commitments," the Minnesota Public Utilities Commission wrote in its rejection of the purchase. "Retiring MEC early to comply with those environmental commitments could leave ratepayers responsible for stranded costs."

But instead of scrapping plans to purchase the plant altogether, Xcel decided to form an unregulated subsidiary to purchase the facility, leaving MEC outside the customer rate base and satisfying consumer advocates who feared customers would be left with stranded asset costs.

Now, Xcel is selling the plant to Denver-based Southwest Generation. "Some of our investors had expressed a preference that we remain a fully regulated company, which this sale accomplishes," said Fordice.

In general, investors are more partial to regulated entities, because they have less market volatility or lower risk, Glenrock Associate Analyst Paul Patterson told Utility Dive, though he didn't see the plant as a high-risk asset to begin with.

"It's not that big a deal in the whole scheme. It's a big company," he said. "So I think it's more probably just an opportunistic move."

In the utility's Jan. 30 earnings call, Executive Vice President and Chief Financial Officer Robert Frenzel acknowledged the unregulated asset would provide lower returns for shareholders.

"We expect the non-regulatory returns will be slightly lower in the near term and more robust towards the back end of the forecast," he said.

A portion of the MEC sale will go toward "corporate giving efforts, including support related to the COVID-19 recovery," according to the utility's press release. Though the portion donated won't be known until the transaction is closed, Xcel expects proceeds to total over $20 million in corporate giving and relief efforts across the eight states it operates in. 

The sale is expected to close in the third quarter of 2020 and is not expected to impact short or long-term earnings, according to the utility. Xcel will continue to purchase power from the plant through the length of the original power purchase agreement.

"I'm surprised, and in some ways, as an Xcel customer, pleased for them that they're going to be able to offload this thing after having just bought it, because it was never a good idea to own it," Minneapolis-based John Farrell, co-director of the Institute for Local Self-Reliance, told Utility Dive.

Xcel was initially supposed to file an updated modeling scenario including the gas plant April 1, but its deadline has been extended to May 15.

A 2017 law allows the utility to build a gas plant to replace the power from its over 2.2 GW coal-fired Sherco power plant, circumventing regulators, but the size of that buildout still needs to be approved by the PUC.

"We're going to play this game all over again with Xcel here in just another month," said Farrell. "Again, Xcel is going to have to prove that they need a gas plant. And I think, again, they're going to find out actually, it's not going to pay off for us to do that. Because we have lots of other options."