In the June 7 commentary "Wrong incentives drive energy decisions," the author correctly notes that utilities have the wrong encouragements. However, these bad incentives encourage them to build new wind turbines, solar panels and natural gas plants as quickly as possible to reap enormous corporate profits.
Unfortunately, these profits are paid for by Minnesota families and businesses who must spend more for their electricity and cannot choose another provider.
The math for utility profits, as laid out in the previous piece, is straightforward. The more the utility company spends (costs), the more guaranteed profits the company is allowed to earn on top (plus).
However, the author omitted an aspect of the formula: The amount of profit a utility makes on a power plant declines every year as it depreciates. As older power plants pay off their capital costs, the cost of producing electricity from them declines, which allows customers to enjoy lower-cost, reliable electricity.
The process is like paying off your mortgage. Every month, you pay off more principal and less interest than the previous month. Eventually, the whole loan is paid off, and you save a substantial amount on your housing costs. You need only pay for taxes, utilities and repairs.
This is where the wrong incentives truly come into play. Utilities like Xcel Energy are rushing to retire their largely depreciated coal plants — which produce lower-cost electricity than unsubsidized wind or solar, according to federal data — a decade before the end of their useful lifetimes because they don't make much profit on them anymore.
To increase profits, Xcel is seeking to build an expensive combination of new — read: undepreciated — wind turbines, solar panels, transmission lines and the natural gas plants needed to make sure we do not experience blackouts when the wind isn't blowing or the sun isn't shining. This is an enormous amount of "cost" in which to make a "plus."
The numbers are startling. According to the most recent cost estimates from the federal government, it costs $1.2 million per megawatt to install solar panels, $1.4 million per MW for wind, and $1.1 million per MW to build a combined-cycle natural gas facility in Minnesota.