Opinion: The economics of municipalization

“Those who cannot remember the past are condemned to repeat it.” 

Originally electric utilities in the U.S. competed with each other by covering the streets with multiple sets of wires, but this competition lowered prices and cut profits. Then, roughly 100 years ago, these utilities realized that it would be a lot more profitable to not compete but rather to control their regulators. Thus was born the regulated private monopoly structure we now have. As new power plants got bigger, the unit price of electricity dropped, so customers could tolerate these excess profits. (Nonprofit public utilities also emerged as an alternative. Per the American Public Power Association, Colorado now has 31, and all 151 utilities in Nebraska are public.) 

Recently, the for-profit private vertically integrated monopoly structure has begun to break up. Large sectors of the country(but not Colorado) now have competitive markets for electricity supply, independent system operators that match supply and demand, and separate entities to handle distribution to customers.

The cost of wind is now low enough that two former members of the Colorado Public Utilities Commission, Ron Binz and Ron Lehr, recently wrote a paper showing that wind could replace much of Xcel’s Colorado coal-generated electricity for what it costs just to fuel and operate their coal plants. In other words, even if these coal plants themselves were free, wind is still a better deal. And coal is becoming increasingly expensive to mine, forcing coal companies into bankruptcy. Elon Musk’s new roof tile solar panels are projected to be cheaper and last longer than standard roofing, so their solar electricity is essentially free. Storage technologies (batteries, ultra-capacitors,etc.) are advancing rapidly. Micro-grids now allow integration and sharing of supply, demand, and storage at the local level, reducing the need for backup power and long distance transmission lines with their attendant losses. So a new system based mostly on renewables can now be less costly than an existing fossil fuel based system.

Buying the local lines, poles and transformers from Xcel is actually a good deal because it allows micro-grid sharing between customers. Assuming Boulder ends up paying what Xcel still has invested, plus the cost of separating the systems and making necessary improvements, the cost to a typical household would be less than $10 per month. That’s pretty reasonable for access to cheap wind and other resources through a local micro-grid.

Dealing with Xcel generation assets that might be “stranded” by Boulder’s departure, i.e. left without a market, should not be a problem. Xcel’s resource plan indicates the need for significantly more power in the near future than Boulder uses, so Boulder’s proposal to phase out energy purchases from Xcel should minimize any “stranding” issues.

Boulder’s goal is to replace Xcel’s mostly fossil fuel energy with mostly renewables. To understand the comparative economics, it’s necessary to look at how regulated monopoly utilities like Xcel make money. All their expenses (fuel, salaries, debt, operations and maintenance) are passed through 100 percent to the ratepayers. So,because Xcel has a captive market, it has no real financial incentive to save. Also, all Xcel’s capital investments, once certified by the PUC, provide way too much profit given the negligible risk: Xcel funds them with an investment of over 50 percent equity on which it gets an almost guaranteed return of nearly 10 percent. Worse, this financial structure creates a strong incentive for Xcel to hang onto its coal plants; its huge investments in these plants are simply too lucrative to give up.

Once Boulder’s system is well integrated with a high level of renewables, a fossil fueled backup system’s cost and flexibility become more important than having the highest efficiency because so little fuel is needed. So internal combustion engines, which are considerably cheaper than large-scale turbines and can ramp up very quickly, may be a much better deal.

Simply buying either Renewable Energy Credits (RECs) or Windsource from Xcel makes no sense, either economically or environmentally. An Xcel REC represents 1,000 kilowatt-hours of electricity generated from an already existing renewable energy resource. So buying RECs creates no new clean energy, it just raises costs. And as I pointed out above, wind power is actually cheaper than much of Xcel’s coal-based electricity, but Windsource costs an additional 1.5 cents per KWh above Xcel’s standard approximately 10.5 cents per KWh residential rate.

Xcel was created to take advantage of the now outdated regulated monopoly structure, and so will resist fundamental change. So let’s not repeat the past; let’s shift to having a cheaper, greener, and more democratic municipal utility.