Over the past month or so, no utility has popped up more often in my news feed than longtime Income Portfolio holding Xcel Energy (XEL), suggests Robert Rapier, income specialist and editor of Investing Daily's industry-leading advisory, Utility Forecaster.
There were two major developments that led to the flurry of news. First, industry magazine Utility Dive named Xcel its “Utility of the Year.”
Xcel’s footprint spans eight states across the Southwest and Upper Midwest. But more than 80% of its earnings are derived from regulated electric and gas utilities in Minnesota (43%) and Colorado (41%).
These two windy states have enabled Xcel to become the biggest wind-power supplier among U.S. regulated utilities, with 6,700 megawatts (MW) of wind accounting for over 21% of the utility’s electricity supply last year.
Historically, most of Xcel’s wind generation was produced under power-purchase agreements from third parties. But that’s about to change. Xcel has approved 4,780 MW of new wind power by 2021, of which it will own 74%.
Xcel plans to invest $1 billion in Colorado over the next few years. It is targeting an increase in renewables to about 55% of its energy mix by 2026. The company is targeting a reduction in carbon emissions of about 60%, by 2026 relative to a 2005 baseline.
A couple of days after receiving the “Utility of the Year” award, Xcel became the first major multi-state U.S. utility to announce plans to reduce its carbon emissions to zero. It seeks to reduce carbon emissions 80% by 2030 and 100% by 2050.
Xcel intends to achieve its goals by adding more renewable energy and retiring fossil fuel generators, while continuing the operation of its nuclear power plants.
Xcel isn’t just doing this to be a good corporate citizen. Investment bank Lazard recently reported that the cost for U.S. onshore wind has fallen to between $26/megawatt hour (MWh) and $56/MWh (without subsidies or a penalty for carbon emissions), while utility-scale solar averages between $36/MWh and $44/MWh.
Further, those costs continue to trend lower, which challenges the average cost for existing coal plants of $27/MWh to $45/MWh.
The company acknowledges that it can’t get to a 100% reduction of emissions with just renewables and batteries. Phasing out that final 20% beyond 2030 will require technologies that are either not commercially available today, or in some cases that have yet to be invented.
Expect more utilities to follow Xcel’s example. Global pressure to address climate change has been a factor to this point in the rapid adoption of renewables. But now that they are becoming cost-competitive with coal, renewables increasingly look like a smart decision, for both utilities and investors.
