Xcel Energy Inc. will seek to phase out subsidies for solar power and spend more to help customers conserve energy in Minnesota.

The Minneapolis-based utility said Friday that it will reduce spending on its popular Minnesota Solar Rewards program to $2.5 million in 2013 -- half its current level -- before its elimination. The program has helped 560 Minnesota homes and businesses install solar arrays since 2010.

Even though the cost of solar power has dropped significantly, it still isn't as cheap as other energy sources, including natural gas, an Xcel executive said. And Xcel no longer sees solar incentives as a value to all ratepayers -- who pick up the tab -- at a time when electric demand is flat.

"For all those reasons, we thought it didn't make sense to continue this particular program," said Laura McCarten, regional vice president for Xcel in Minnesota.

Solar Rewards has been so popular with businesses and homeowners that this year's $5 million in incentives already has been committed to projects -- seven months before the year is over. The subsidy is $2.25 per watt of installed power, though that will drop to $1.50 in 2013 before expiring.

It has been a boon to dozens of businesses, especially in the Twin Cities, that design and install solar arrays.

"It is really going to be a hit on the industry," said Kelley Benyo, co-owner of EcoVision Electric of Minneapolis, which does all kinds of electrical contracting, but has tried to focus on solar. "That is going to probably make solar just a fraction of our business."

Other state or federal solar programs still exist, including one for Minnesota-made solar panels funded by Xcel ratepayers. But solar industry officials said they will encourage regulators to consider other policies to advance solar in the marketplace.

Xcel announced the change as part of its proposed Conservation Improvement Program for the next three years. That program, which must be approved by state regulators, promotes electricity and natural gas conservation by offering technical assistance and rebates for low-energy lighting and other energy-saving efforts.

Xcel proposed boosting its conservation spending to $260 million for 2013-2015, a 9 percent increase over the prior three years. Xcel will offer 56 programs to help customers meet a state goal of reducing energy use by 1.5 percent, or roughly the power of 155,000 homes for one year, the utility said.

Ken Bradley, director of the advocacy group Solar Works for Minnesota, said he believes Xcel's decision to drop solar incentives reflects a change of thinking under Ben Fowke, who began CEO last August. His predecessor, Dick Kelly, established Xcel as a leader in renewable energy.

"The new CEO does not have the same level of commitment to renewable energy and reducing greenhouse gases that Dick Kelly did," Bradley said.

Xcel's McCarten said "that is patently contrary to the facts," and pointed to the company's record conservation-related energy savings last year, its continued ranking as the No. 1 utility in wind power and ongoing spending to clean up its largest coal-burning power plant.

Lynn Hinkle, director of policy development for the Minnesota Solar Energy Industries Association, said industry officials will meet with Xcel to consider other solar policies, including market-based rates that reward solar output on hot summer days when power is most needed.

David Shaffer • 612-673-7090