Xcel Energy’s customers in Colorado are facing significant electric rate hikes, with fears that their costs may double or triple due to an ambitious spending plan to enhance generation, transmission capabilities, and cater to the growing demands of data centers.
The state’s largest electricity provider, serving 1.6 million customers, is set to invest a staggering $22.3 billion in Colorado by the year 2032—marking the highest level of investment among the eight states where it operates.
This investment aims to increase the company’s rate base—the total value of the electric assets upon which rates are determined—from $8 billion in 2021 to an estimated $36 billion by 2029 and over $44.6 billion by 2032.
Colorado Public Utilities Commission Chairman Eric Blank expressed concern regarding this level of investment, stating, “I can’t get comfortable approving anything like the level of resource need and investment the company is seeking. That just seems like an enormous increase.”
Xcel Energy primarily profits from constructing plants and transmission lines, receiving returns determined by the Public Utilities Commission (PUC) on these capital investments, suggesting a direct correlation between construction activities and company earnings.
Blank cautioned that the company’s capital spending might be influenced more by internal financial incentives than by actual system needs or customer demands. “The result of these overly generous higher returns is that customers may be overpaying for their utility service,” noted Ryan Foelske, an analyst at clean energy consultants RMI, who highlighted that such practices could inflate the costs of transitioning to sustainable energy.
In a recent filing, Xcel Energy stated that retail rates would be managed effectively by an anticipated 8% growth in electricity sales for the next five years, predicting that sales could double by 2034—an increase rate potentially 40 times higher than historical averages.
Chairman Blank raised skepticism, stressing, “This is the heart of the concern. I am worried about the potential long-term rate impacts if capital spending continues to increase and the sales and revenue growth doesn’t materialize.”
Commissioner Megan Gilman pointed out that the primary beneficiaries of the current trajectory appear to be the company itself, while the associated risks rest largely with customers. “That is the piece we need to address.”
Current projections by Xcel Energy indicate that residential customers might see their basic electric charge rise by 30% by 2032, reaching approximately 21 cents per kilowatt-hour, while rates for industrial and commercial customers are also expected to increase by 2%, reaching about 14 cents per kilowatt-hour.
While Jack Ihle, Xcel’s regional vice president for regulatory policy, downplayed the rate disparity as an optical concern, he acknowledged under scrutiny that there are substantial customer-focused investments, including a remarkable $5 billion earmarked for distribution system upgrades.
Nevertheless, environmental organizations like Western Resource Advocates and the Southwest Energy Efficiency Project criticized Xcel Energy, asserting that the utility may be underestimating the potential rate impact based on its own model—estimating, based on the company’s long-term rate forecast, that residential rates could surge by 50% by 2031.
Colorado Governor Jared Polis has also weighed in, recently sending correspondence to the PUC and other state agencies, urging coordination to meet the needs of data centers while promoting beneficial electrification in sectors like transportation and heating.
Polis emphasized the importance of maintaining affordable energy costs, recalling states like California that have struggled with significant rate increases—where utility prices have doubled over the past decade to become one of the highest in the nation behind Hawaii.
Blank echoed these concerns, suggesting that Xcel’s current residential charge of 15 cents per kilowatt-hour could potentially double by 2036 and even triple by 2044 without proper management of spending.
Pointing to Xcel’s substantial projected rate base growth of 16% between 2020 and 2032, Blank noted that this trajectory is starkly higher than that observed in California, comparing it to Pacific Gas and Electric, which has rates soaring on an upward trajectory to 45 cents per kilowatt-hour.
The pressures leading to these rate increases are multifaceted—prompted by state mandates to cut greenhouse gas emissions and foster clean energy solutions, growing electricity demands amid inflationary costs and supply chain hurdles, and corporate motives centered on escalating shareholder value.
Throughout the past decade, Colorado has enacted several policies aimed at decarbonizing its economy and boosting clean energy, all carrying substantial financial implications. For instance, the 2019 passage of House Bill 1261 mandated an 80% reduction in greenhouse gas emissions from 2005 levels by 2030, catalyzing Xcel Energy’s $12 billion Clean Energy Plan.
In conjunction, similar legislative actions have required utilities to devise strategies for electric vehicle charging stations and develop clean heat plants aimed at reducing emissions by 22% below 2015 levels by 2030, thereby incurring significant costs to the utility.
In response to growing concerns, Xcel Energy indicated that investments, including those for wildfire mitigation, are being made to uphold reliability and enhance customer safety.
However, critics argue that Xcel might be exploiting these legislative mandates to inflate their investment schemes, thereby maximizing shareholder returns at the customers’ expense. Joseph Pereira, deputy director of the Colorado Office of Utility Consumer Advocate, asserted that while decarbonization serves as a necessary goal, it does create a conflict between the immediate profit pursuits of investor-owned utilities and the long-term energy transition objectives.
Despite past expectations that the transition to renewable energy sources like wind and solar would lower energy bills—capitalizing on declining costs of these technologies—recent conditions have reversed this trajectory.
Factors such as ongoing supply chain issues initiated during the COVID-19 pandemic, inflation, and tariffs have stunted previously falling costs for solar and wind installations. Wind energy costs rose 74%, solar went up 84%, and prices for combined-cycle gas turbines jumped by 40% according to Xcel Energy’s recent input to the PUC.
Additionally, Xcel cited substantial price variances for essential items such as transformers, which drastically increased from $5 million to $6 million over several months, highlighting the unpredictable nature of the current market.
While renewable sources still prove to be economically advantageous compared to traditional fossil fuels, the recent spike in costs was not incorporated in Xcel’s statements projecting a 30% rise in consumer rates, leading to further questions about the validity of their estimates.
Xcel had anticipated capturing $10 billion in federal tax credits for its electric resource plan; however, the diminishing availability of these credits could inflate costs for renewable energy projects by 30% to 50%, emphasizing the pressing subject of tariff repercussions as well.
The utility’s substantial reliance on imported solar panels subjects it to potential tariffs, while sensitivity to imposed tariffs on other essential materials, including metals, also amplifies financial pressures.
Amid these challenges, an undeniable wildcard is the anticipated impact from data centers, projected to account for two-thirds of the new electricity demand. Xcel Energy estimates peak demand could rise by 19%, reaching 8.6 gigawatts between 2024 and 2031, equating to enough energy for roughly 90,000 households.
Xcel Energy asserts that a significant shift toward unprecedented energy growth mandates a re-evaluation of planning procedures: “For the last several decades, energy growth has been flat. That dynamic is changing, and with that, how we plan our system must change as well.”
Nevertheless, uncertainty surrounding the actual number of data centers set to be constructed raises concerns about potential overbuilding by Xcel, risking either an overloaded grid or unnecessary costs forked out by customers due to excess infrastructure.
This predicament has led to discussions about rebalancing the risk versus reward dynamic, as highlighted by Commissioner Gilman, who queried the fairness of putting such a gamble on the customers’ shoulders without any shared risk.
The crux of this issue lies in how utility rates are structured and which costs are passed onto customers compared to the risks absorbed by the utility and its shareholders. This assures significant influence from the methods of financing new generation and how much profit is allowed from capital expenditures, central to whether consumers may face exorbitant rate hikes.
Historically, public utility commissions have allowed utilities to pursue excessive returns, meaning that the structures could lead to misaligned incentives where utilities seek to enhance their rate bases without necessary consumer benefits, posited Blank.
Currently, Xcel Energy’s approved Return on Equity (ROE) sits at 9.3%, evidencing a substantial degree of profitability derived from high rate base growth.
According to utility analyst Foelske, the methods employed to calculate required ROE generally go unchallenged despite shifts in financial markets, where regulated returns adjusted by commissions often remain inapplicable to the current economic climate.
Studies indicate that utility commissions frequently grant utilities returns that are deemed too generous, compromising affordability for customers.
The rate frameworks and the costs passed on to customers also amplify this discontent, with a significant percentage of the monthly bill—approximately 16.7%—representing ROE.
A reduction of just 1% in ROE could reduce household electricity bills by $2.33 per month, showcasing the tangible impact regulatory decisions have on consumer costs.
There exist alternative project financing options that potentially lessen the burden on customer bills, including acquiring funds through bonds or employing independent developers for energy generation projects through long-term Purchase Power Agreements (PPAs).
These methods could distribute the financial impact over a longer timeframe compared to the conventional cost-of-service approach, which sees rapid front-loading of costs.
Conversely, Xcel Energy has shown proclivity towards extensive capital raises, amassing $1.1 billion through stock issues in 2024 alone, possibly signaling a response to heightened investor expectations.
Meanwhile, within the investor community, there exists optimism around utility stocks amid rising electricity demands, particularly fueled by advancements in technology and the burgeoning market for data centers.
Bob Frenzel, CEO of Xcel Energy, confirmed the expectation for further increases in electric rates later this year, seeking to bolster the ROE. While the PUC invests in evaluating alternative regulatory approaches, the pathway to tangible change appears limited, according to Pereira.
He noted the persistent grip of cost-of-service models on the regulatory framework, rendering modifications to the played-out structures only speculative at best, devoid of compelling consumer advocacy against utility pressure.
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