Minnesota Public Utilities Commission

Staff Briefing Papers

Meeting Date:

November 14, 2013 ................................................................ **Agenda Item #9

Company: Docket No.

Xcel Energy (Xcel or the Company) E002/RP-13-368 In the Matter of Xcel Energys Sherco Life Cycle Management Study / 2014 Integrated Resource Plan Does Xcels Sherco Life Cycle Management Study comply with the Commissions order in the Companys 2011 resource plan? Should the Commission modify the February 1, 2014 deadline for Xcels 2014 resource plan?

Issues:

Staff:

Sean Stalpes ................................................................................. 651-201-2252

Relevant Documents Commission Order Requiring Sherco Study (Docket No. 10-825) ...................November 30, 2012 Xcel Energy Sherco Life Cycle Management Study ..................................................... July 1, 2013 Minnesota Pollution Control Agency comments ..................................................... October 1, 2013 Environmental Intervenors comments (public version) ........................................... October 2, 2013 Minnesota Chamber of Commerce comments ......................................................... October 8, 2013

The attached materials are workpapers of the Commission Staff. They are intended for use by the Public Utilities Commission and are based upon information already in the record unless noted otherwise. This document can be made available in alternative formats (e.g., large print or audio) by calling 651-296-0406 (voice). Persons with hearing loss or speech disabilities may call us through their preferred Telecommunications Relay Service.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 2

Background In Xcels 2011 resource plan, the Commission adopted the Environmental Intervenors (EIs) recommendation for Xcel to further analyze the costs for pollution controls at Sherco 1 and 2 and to compare the retrofit costs to retiring the unit. In Xcels response to the EIs Information Request #81 of the 2011 IRP, the Company provided a preliminarily projection of costs for pollution controls at Sherco 1 and 2: 2012-2016: $33 million o $11 million for a new Wet Electrostatic Precipitator for particulate matter controls; o $10 million for SO2 control; o $12 million for mercury controls 2017-2020: $254 million o $254 million for a Selective Catalytic Reduction (SCR) NOX reduction project

Xcel did not include these projected costs in the Present Value Revenue Requirement (PVRR) of its scenario analysis in Strategist. According to Xcel, The 2017-2020 anticipated costs are just that, anticipated. No requirements currently exist to install SCRs at this time and no commitments have been made for installation of these controls at this time.1 Likewise, the Department of Commerce (the Department) did not include Xcels projected costs of pollution controls in its modeling runs. Instead, the Department evaluated scenarios in which Sherco 1 and 2 units were retired in 2015, 2016, and 2017. In their June 12, 2012 initial comments, the Department states: In summary, shutting down Sherco 1 and 2 would impose significant costs on Xcels system and require immediate acquisition of significant resources; the typical expansion plan changes from the base case by acquiring over 1,400 MW of additional fossil-fuel resources (largely combined cyle units) combined with an additional 600 to 1,200 MW of wind.2 The EIs disagreed with the Departments conclusions about Shercos retirement, arguing that the Departments analysis could not be supported because it failed to include the projected costs of refurbishment. Moreover, the EIs argued that not comparing the refurbishment costs to that of renewable resources expansion fails to comply with Minn. Stat. 216B.2422, subd. 2, which requires resource plans to include a least cost plan for meeting 50 and 75 percent of all new and

1 2

Xcel Energy, Response to MCEA IR#81, March 22, 2012 Department of Commerce Initial Comments, June 12, 2012, p. 26.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 3

refurbished capacity needs through a combination of conservation and renewable energy resources.3 Shown in Attachment A of this document, through the discovery process in the 2011 IRP, the EIs requested Xcel re-run the Strategist scenarios under the Proposed Plan assuming: SCR, multi-hazardous air pollution (HAP) controls, and hazardous waste coal ash disposal and handling requirements must be installed at Sherco 1 and 2 by 2017; Sherco 1 and 2 are retired in 2017/18 prior to investments in retrofits; and Sherco 1 and 2 are retired in 2022/23 at the end of their book lives, including the estimated costs of likely retrofits.

According to Xcels responses to the EIs Information Requests, the EIs note that across many of Xcels sensitivities, the decision to retire Sherco 1 and 2 in 2017 rather than retrofit it is nearly equal on a PVRR basis.4 Thus, the EIs recommended the Commission require a study, within six months from the date of the Order, to further analyze the costs for pollution controls at Sherco 1 and 2 and to compare the retrofit costs to retiring the unit. In Xcels reply comments, the Company explained that the future of Sherco 1 and 2 beyond 2023 is still being evaluated. Xcel announced the Company already had a Life Cycle Management Study for Sherco Units 1 and 2 underway. According to Xcel:5 We are willing to work with parties to develop a scope for a study that would leverage the work currently being done and address other concerns related to the use of coal, such as our coal price assumptions and least-cost options for meeting 50 percent and 75 percent of new and refurbished capacity with renewables and conservation. We are willing to commit to file the study by July 1, 2013. At that time, after seeing the status of our work, the Commission can better determine the best procedural course, either to establish a new, issue-specific docket or fold the issue into a future resource plan proceeding. In its November 30, 2012 Order, the Commission directed Xcel to file its evaluation of Sherco 1 and 2, and the Commission allowed parties to comment on the study. As part of the Sherco Study, the Commission directed Xcel to examine the feasibility and cost-effectiveness of continuing to operate, retrofitting, or retiring these generators. Specifically, Commission ordering paragraph 4 required the following items:

3 4

Minnesota Office of the Revisor of Statutes, 216B.2422, Resource Planning; Renewable Energy Environmental Intervenors comments, page 24. 5 Xcel reply comments, August 13, 2012, p. 17-18

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 4

4. By July 1, 2013, Xcel shall submit a Sherco Life Cycle Management Study that examines the feasibility and cost-effectiveness of continuing to operate, retrofitting, or retiring Sherburne County (Sherco) Generating Station Units 1 and 2. Procedurally, interested parties shall have the opportunity to intervene, conduct discovery, and comment. Substantively, the study shall include: A. Specific cost estimates of controls and other required investments. B. An analysis of how a temporary or permanent outage at either Sherco Units 1 or 2 would affect system reliability. C. A base case that includes Commission-adopted carbon dioxide (CO2) costs and externality values. D. A base case that accounts for all likely federal Environmental Protection Agency (EPA) regulations. E. Analysis of scenarios that include the following: A range of updated externality values based on those used by this Commission and the federal government for regulatory impact analyses. A wide range of fuel prices. Least-cost scenarios to reduce greenhouse gasses relative to 2005 levels by at least 15 percent by 2015, 30 percent by 2025, and 80 percent by 2050. A least-cost plan for replacing 50 percent of the capacity of Sherco Units 1 and 2 through a combination of conservation and capacity powered by renewable sources of energy. A least-cost plan for replacing 75 percent of the capacity of Sherco Units 1 and 2 through a combination of conservation and capacity powered by renewable sources of energy.

EPA Regulations Commission ordering paragraph 4D. required Xcel to include a base case for the Sherco Study that accounts for all likely federal EPA regulations. Xcels Sherco Study base case (Xcel names it the Reference Case) assumes the following: a CO2 cost of $21.50/ton beginning in 2017 and escalating at 2.3 percent per year; and capital investments required to meet currently applicable environmental regulations, including:

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 5

o o o o

activated carbon injection (mercury control); flue gas desulfurization (SO2 control); wet electrostatic precipitator replacement (particulate matter filtration); and boiler combustion optimization controls

Staff notes that Xcels base case does not include the SCR NOX reduction project, which is the roughly $200-400 million retrofit decision upon which the Environmental Intervenors conclude, Xcels Study demonstrates little difference between the cost of retirement versus retrofit. Xcel does not define the SCR NOX reduction project as being currently applicable to any finalized environmental regulations. Appendix A of Xcels Sherco Study provides a discussion of several regulatory mechanisms by which Xcel could be required to install SCRs for NOX reduction at Sherco 1 and 2. The Minnesota Pollution Control Agency (MPCA) also filed comments addressing the near-term regulatory actions that may determine the need for emissions controls. Whether or not Xcel may need to install SCRs depends on several pending court cases and rulemaking concerning EPAs visibility protection under the Clean Air Act. The Clean Air Acts visibility program requires clean-up of visible air pollution at Class I national parks and wilderness areas. Under the Act, best available retrofit technology (BART) is required at sources if there is a reasonably attributable impairment of visibility (RAVI) in any Class I area. In 1999, EPA expanded the visibility program, promulgating the regional haze rule. Under that rule, states are directed to submit a State Implementation Plan (SIP) containing emissions limitations representing BART and schedules for compliance for each BART-eligible source that may be anticipated to cause or contribute to any visibility impairment in a Class I area. The MPCA is required to determine BART for each source subject to BART, which includes Sherco 1 and 2. The analysis must consider the technology available, the costs of compliance, the energy and non-air quality environmental impacts, any pollution control equipment in use at the source, the remaining useful life of the source, and the degree of improvement in visibility which may reasonably be anticipated to result from use of the technology. MPCA approved the Minnesota regional haze SIP in December 2009, and the SIP was submitted to EPA for review and approval on December 30, 2009. MPCAs regional haze SIP concluded that SCRs were not cost-effective to meet BART: 2.2 MPCA Determination of the BART Limit The MPCA has determined that the NOX emissions limitation of 0.15 lb/MMBtu on a 30-day rolling average is BART for Sherco Units 1 and 2. The emission limits are achieved with low NOX burners and over-fire air at Sherco 1 and additional computerized combustion controls on Unit 2. The technology achieves the presumptive BART emissions rate, and does not prohibit or prevent the

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 6

future installation of additional NOX control technology if needed to achieve future reasonable progress requirements or other regulatory efforts. [A]t this time SCRs are an order of magnitude more expensive than other NOX controls. Xcel determined that implementing SCRs on these units would be $33 million (annualized) above the cost of proposed BART, and result in only 3,500 additional tons of NOX removal. Getting only 1.5 times the pollutant reductions at greater than ten times the cost is not cost-effective for BART.6 On December 30, 2011, EPA proposed a rule finding that the Cross-State Air Pollution Rule (CSAPR) is more beneficial in mitigating visibility impairment than application of BART. MPCA submitted a revised regional haze SIP in May 2012 to rely on the emissions reductions required under CSAPR in lieu of applying source-specific BART requirements. EPA approved the revised regional haze SIP on June 12, 2012, with both MPCA and EPA expecting that CSAPR = BART for regional haze compliance. However, in its final approval of the SIP, EPA deferred action on the requirements for Sherco because the U.S. Department of the Interior identified Sherco as a source of reasonably attributable visibility impairment to Voyageurs and Isle Royale parks under the RAVI program. In August 2012, the D.C. Circuit Court of Appeals vacated the CSAPR and remanded it back to the EPA. In June 2013, the U.S. Supreme Court accepted a review of the vacated CSAPR. The Supreme Court will hear oral argument in December 2013. In December 2012, a lawsuit was filed against the EPA seeking agency action on the U.S. Department of the Interior certification of Sherco as a source of haze contributing to visible impairment. It is not yet known when the EPA will publish a proposal under RAVI or what that proposal will entail. The difference between the RAVI program and the regional haze SIP is its scope. RAVI assigns visibility impairment to a specific source, which the Department of the Interior did in 2009. The regional haze rule does not apply to a single source; instead, it relies on SIPs to reduce haze emissions throughout a region, considering several factors including cost. Moreover, utilities can be credited for previous emissions abatement investments.

MPCA 2009 Regional Haze State Implementation Plan, p. 906

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 7

Xcel Sherco Study Sherburne County (Sherco) Plant The Sherburne County (Sherco) generating facility is located in Becker, Minnesota, 45 miles northwest of the Twin Cities. Sherco 1 and 2 were built in the 1970s on a 4,500-acre site to accommodate future expansion. The Sherco 3 expansion was completed in 1987. Sherco is Xcels largest power plant in terms of square feet, steam production, power generation capability, and coal consumption. All three Sherco units use low-sulfur Western coal from mines in Montana and Wyoming. The plant burns 30,000 tons of coal (three trainloads) every day and more than 9 million tons a year. The table below shows the total capacity, age, and remaining life at the Sherco Plant.7 Sherco 1 and 2 represent nearly 1,400 MW of the total 1,900 MW at the Sherco site. Staff notes that there are two different retirement dates for Sherco one which is used for ratemaking purposes, and the other for resource planning.8

Unit Sherco 1 Sherco 2 Sherco 3

Accredited Capacity (MW) 697 682 521

Year Installed 1976 1977 1987

Accounting Retirement Date 2023 2023 2033

Resource Planning Retirement Date 2049 2049 2049

Together, Sherco 1 and 2 provide almost 1,400 MW of capacity and fulfill approximately 20 percent of Xcels energy requirements. Given the magnitude of these units, the Commission directed Xcel to evaluate as an intermediate step between resource plans the environmental compliance measures which could affect Sherco 1 and 2, and the cost-effectiveness of alternative expansion plans which refuel or retire the units.

Modeling Results There is a difference between a Reference Case and base assumptions. The Reference Case is one of 23 scenarios, or possible futures in which Sherco 1 and/or 2 are installed with SCRs, replaced with another resource, or neither. Base assumptions, on the other hand, reflect Xcels view of the most reasonable conditions within that future; for example, natural gas prices, coal

7 8

Sherco 3 is jointly owned by Xcel and SMMPA. The 521 MW at Sherco 3 represents Xcels share. Staff used the 2023 accounting retirement date for Sherco 1 & 2 by adding the 11 years of remaining life proposed by the Company in Xcels November 2, 2012 rate case filing, Depreciation and Remaining Lives, Docket No. 12 961. The resource planning retirement date is from Xcels 2011 IRP.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 8

prices, SCR technology costs, etc. These base assumptions are stressed to upper and lower bounds across 26 sensitivities. Thus, Xcel ran 598 simulations to evaluate the cost-effectiveness and emissions profile of various futures for Sherco 1 and 2. The scenarios compare the relative costs of installing SCRs (and continuing coal-fired operations) on one or both units, and Xcel compares these costs to retiring one or both units. Xcels Reference Case does not include the installation of SCRs. Under this Reference Case, Sherco 1 and 2 are only retired when natural gas prices are low, CO2 is priced at $34/ton, or wind is priced at $30/MWh. When Xcel compares the relative economics of retiring or retrofitting Sherco, the modeling results show that the assumed prices for natural gas and CO2 have the most significant influence over which is least-cost. Figure 7.1 illustrates the relative Present Value Revenue Requirement (PVRR) impacts of retiring Sherco 1 and 2 by 2020 to the alternative of retrofitting the units with SCRs and continuing operations until 2040.

Figure 7.1 shows that under base assumptions (which include a $21.50/ton CO2 cost) the PVRR difference between the retirement and the SCR scenarios is negligible, but slightly favor retirement. Some general trends occur regarding the input assumptions that favor each strategy and the extent to which sensitivities change the PVRR results as they are stressed. For example, Xcels analysis shows that:

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 9

Lower natural gas prices, higher CO2 costs, higher coal prices, and higher-than expected costs at the Sherco plant all favor retirement of the units. Higher natural gas prices, lower CO2 costs, later implementation of CO2 costs, low coal prices, and higher construction cost for new natural gas plants all favor installation of SCRs. Load sensitivities and availability of MISO market energy have little impact on the results.

EPA Regulations According to Xcel, Sherco 1 and 2 are well prepared to comply with EPAs Mercury and Air Toxics Standards (MATS). In 2009, Xcel submitted to MPCA its mercury reduction plan in accordance with the Minnesota Mercury Emission Control Act of 2006 (MERA). Xcel plans to install mercury controls to comply with MERA, with an expected date of completion for the installation of the sorbent injection system by December 31, 2014. Two regulatory areas that could require additional pollution control equipment beyond what is currently installed, or being installed, include: 1. National Ambient Air Quality Standards (NAAQS) for ozone or particulate matter (PM); and 2. Regional Haze Rule or reasonably attributable visibility impairment (RAVI) visibility regulations, which focus on emissions of SO2, NOX and PM. Ozone On June 6, 2013, EPA published in the Federal Register its proposed rule to implement the 2008 ozone NAAQS. EPA expects to finalize the rule in 2014. According to the ozone NAAQS implementation schedule shown below and in Appendix A, further NOX reductions might be required in the early to mid-2020s if Minnesota is designated as being in nonattainment for ozone.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 10

According to Xcel, monitored data in Minnesota shows that ozone concentrations at all monitoring sites are below the 8-hour NAAQS. Thus, EPA has designated all of Minnesota as in attainment of the 2008 ozone NAAQS. However, depending upon the level of the new standard to be set in 2014, portions of Minnesota may not be in attainment with the standard. In this case, MPCA would be required to develop a SIP to achieve further emissions reductions of compounds, such as NOX, that contribute to ozone formation. RAVI, Regional Haze, and the Cross-State Rule In 2009, the Department of the Interior certified that a portion of the visibility impairment in Voyageurs and Isle Royale National Parks is reasonably attributable to emissions from Sherco 1 and 2. The EPA is required to make its own determination as to whether Sherco 1 and 2 cause or contribute to RAVI and, if so, whether the level of controls required by the MPCA is appropriate. Xcel strongly disputes the contention that emissions from Sherco 1 and 2 have a direct RAVI-type impact on the national parks. Sherco 1 and 2 were among several facilities subject to BART in the 2009 regional haze SIP, which is intended to reduce haze that results from the combined emissions of a large number of sources over a broad regional geographic area. MPCA must revise the regional haze SIP by 2018. Before the D.C. Circuit Court vacated EPAs CSAPR, it was expected that CSAPR = BART. Whether the U.S. Supreme Court will overturn the D.C. Court ruling, or what EPA will propose as a replacement to CSAPR is not known at this time.

Timing Considerations As discussed above, SCRs might be required under the following conditions: If Minnesota has areas that do not meet the ozone NAAQS as it may be revised in 2014, or falls into nonattainment for particulate matter. If EPA determines Sherco 1 and 2 are a reasonably attributable visibility impairment to Class I areas, Voyageurs and Isle Royale national parks; or If SCRs are required as part of the 2018 revisions to the Minnesota Regional Haze SIP.

In its scenario analysis, Xcel assumes early implementation of SCR systems in 2018 and 2019, and later implementation in 2024 and 2025 to address the range of potential timelines for additional pollution controls. Sources are generally given up to five years to complete installation of controls after they are required, so if one or both units require SCRs, they would need to be installed and operating by 2018-19 at the earliest. According to Xcel, the addition of an SCR system on one of the units would take approximately four years to receive the necessary regulatory approvals and install and test the system for

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 11

operation. Due to the scheduling of major overhauls for the units, addition of an SCR on the second unit would likely require five years. Xcel believes it is premature to make any conclusive decisions regarding whether to install SCR or to retire Sherco 1 and 2. Xcel recommends the Commission direct the Company to reassess the decision as environmental compliance costs become more apparent. Xcel states: We have identified two key public policy decisions, either of which should trigger a reassessment. If and when air quality regulations require the addition of selective catalytic reduction, we intend to reexamine the alternatives before making the nearly $400 million investment in the plant. If and when policies are established that create significant costs associated with CO2 emissions a reassessment is warranted as well.

Reliability The Commissions Order required the Sherco Study to include an analysis of how a temporary or permanent outage at either Sherco 1 or 2 would affect system reliability. Xcel hired a consultant to analyze the impact of a temporary or permanent outage at both Sherco 1 and 2, as well as determine if any new system reliability concerns arise from the new generation pattern. A stability study was developed to evaluate voltage conditions following regional and local transmission disturbances. The analysis did not identify any areas of concern regarding voltage stability, and all conditions were within the reliability requirements. The analysis did show a slightly worse voltage response for regional disturbances with the generating units out of service, but all were within the allowable limits. The transmission studies only evaluated a few specific conditions on the transmission system. A more thorough analysis would necessitate studying additional conditions and would include stressing the transmission system for a larger range of conditions. This additional analysis would include studies at various power transfer levels across the transmission system, various load levels, and various generation dispatches. Of note, replacement generation would need to be in place prior to retirement of one or both units. This ensures adequate supply in the absence of Sherco 1 and 2, which would mitigate reliability issues.

Environmental Intervenors Comments The Environmental Intervenors (EIs) include: the Izaak Walton League of America -Midwest Office, Fresh Energy, Sierra Club, and the Minnesota Center for Environmental Advocacy. The EIs comments were prepared with assistance from Anna Sommer of Sommer Energy, LLC, as well as Professor Steven Polasky and Andrew Goodkind from the University of Minnesota.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 12

The EIs conclusion is stated on page 2 of their October 1, 2013 comments: The Sherco Study makes clear that retirement of Sherco Units 1 and 2 is equally as cost effective as investing in Selective Catalytic Reduction (SCR) controls for the units. Given the overwhelming benefits of eliminating coal-fueled electricity generation, it is imperative that the units be retired without further investment. To that end, Environmental Intervenors recommend that the Commission order Xcel to model retirement of Sherco Units 1 and 2 in 2020 in the base case of its next IRP. We believe the next IRP should be submitted in spring 2014. As Xcels scenarios are stressed across various sensitivities, Strategist toggles between favoring the retrofit versus the retirement options. Overall, the Sherco Study indicates that the costs are nearly identical whether Sherco 1 and 2 should be retired or retrofitted with emissions controls. When the Commission-ordered CO2 values are applied to the model, retiring and replacing the units is commonly the least cost alternative. Likewise, if updated externality values that reflect the real costs of pollution from Sherco are included, retiring Sherco 1 and 2 is again least cost. The EIs argue that it is in the publics and ratepayers interest to include the Commissions CO2 values and updated externality values for long-term planning. With these considerations in mind, the EIs recommend the Commission order Xcel to develop its 2014 resource plan such that Sherco 1 and 2 are retired by 2020 in the Companys base case. The importance of ordering Xcel to apply these findings to the base case is largely because Xcels Sherco Study base case assumes no action (retire or retrofit) will be needed at Sherco 1 and 2. The EIs contend that the most probable future is one in which Sherco 1 and 2 will face the decision of whether to make major capital expenditures to comply with environmental regulations or to retire the units. Thus, the base case of Xcels 2014 resource plan should reflect this future, and the EIs believe the most reasonable course of action for compliance is retiring Sherco 1 and 2. Xcels Modeling Assumptions The EIs disagree with several components of Xcels modeling assumptions. Two categories of disagreement include: 1. Unjustifiable fuel cost assumptions Xcel assumes unjustifiable coal and natural gas prices, which skew the analysis to favor continued coal operations. Xcels base case assumes the price of coal declines in real terms while natural gas prices increase by 33 percent in the first ten years of the study period. In the upper bounds fuel cost sensitivities, coal prices increase (in real terms) by 34 percent over a 37year period, while natural gas prices increase by more than 100 percent by 2034.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 13

2. Externality Values The Commissions order requires Xcel to include a range of updated externality values based on those used by this Commission and the federal government for regulatory impact analyses.9 The EIs do not believe Xcels Sherco Study complies with the Commissions directive. The EIs contend that externality values adopted by the Commission no longer represent the true costs of pollution emitted from sources such as Sherco. The federal government has developed a Social Cost of Carbon, which is a value that could be used as a federal regulatory impact to be adopted for use in state resource plan proceedings. The purpose of using updated externality values is not to project what a regulatory cost might be; it is to account for the environmental damage to society. Thus, the EIs do not agree with Xcels premise that externality values used for resource plans need to mimic the policies which may or may not be enacted.

Energy efficiency At the EIs request, Xcel examined additional energy efficiency beyond its current projection of 1.5 percent from 2014-2016 declining to 1.4 percent for the remaining years. Xcel examined an increment that would raise savings to 1.6 percent of sales from 2016 to 2020. Since Xcel models energy efficiency as a reduction in load, the EIs use the additional increment of savings by Xcel as the basis for determining the avoided cost implied by additional energy efficiency. Avoided costs as a result of the implementation of energy efficiency include the cost of capacity and energy that would otherwise be required to meet future needs, as well as those costs avoided by ramping down existing units. The EIs calculated avoided costs by using the modeling results of two scenarios that have comparable resource plans but with just one including the additional energy efficiency. The scenarios the EIs compared suggest levelized avoided costs between $94 and 108 per MWh. Thus, the results of the Strategist model suggest there is additional, cost-effective energy efficiency potential on Xcels system. Additionally, IRPs must consider the DSM resource available from CIP-exempt customers. The Legislature amended the efficiency statute to make clear that the savings goal applies not just to utilities CIP programs but to all electricity consumption throughout the state: it is the energy policy of the state of Minnesota to achieve annual energy savings equal to at least 1.5 percent of annual retail energy sales of electricity ... directly through cost-effective energy conservation improvement programs and rate design [and] energy efficiency achieved by energy consumers without direct utility involvement.10

10

Ordering paragraph 4E. from the Commissions No vember 2, 2012 Order requiring the Sherco Study Minn. Laws 2013. chapter 85, Article 12, section 2

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 14

Thus, it is clear that Xcel ought to consider cost-effective energy efficiency savings above and beyond its CIP goal as well as from CIP-exempt customers in its next IRP.

Minnesota Chamber of Commerce The Chamber of Commerce (Chamber) supports Xcels plan to continue to operate Sherco 1 and 2 as coal-fired facilities and to require reanalysis when: 1) air quality regulations establish a need for SCRs, or 2) a carbon regulation framework takes shape. The Sherco units currently comply with existing state and federal environmental rules and regulations. The Studys retirement analysis is based on the potential of future environmental regulations and not current environmental rules. Thus, the Chamber believes it is unreasonable to make any retirement or retrofit decisions when there is such high regulatory uncertainty. Doing so would have substantial cost implications to ratepayers. The Chamber also makes several recommendations for Xcels 2014 IRP, which are included in the decision options. Staff notes that many of the Chambers recommendations were already considered as decision options in Xcels 2011 IRP. Staff takes no position on the Chambers recommendations, but the Commission should be aware that the recommendations: mostly pertain to general IRP review questions, in many cases have already been considered in the 2011 resource plan, and may be under consideration again in Xcels 2014 resource plan.

Minnesota Pollution Control Agency State and Federal Rulemakings The Minnesota Pollution Control Agency (MPCA) discusses the near-term rulemaking that may determine the need for SCRs at Sherco 1 and 2. MPCA expects these rulemakings will be completed in the next 3 to 5 years. One regulatory area likely to affect the need for, and timing of, additional air pollution controls is regional haze reduction. A second area which may affect Shercos operations is EPAs effort to control greenhouse gases from existing power plants. 1. Regional Haze and Visibility Impairments EPA has been sued to force a determination as to whether air emissions, specifically NOX, from Sherco 1 and 2 constitute reasonably attributable visibility impairment under RAVI. Should EPA determine that these units impair visibility under the RAVI program, Xcel would be provided five years after the determination to install best available retrofit technology (BART). MPCAs assessment of reasonable progress of the states regional haze implementation plan (the regional haze SIP) could also determine that SCRs should be installed at Sherco 1 and 2. A

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 15

progress report on reasonable progress toward visibility goals is due in late 2014.11 By 2018, the MPCA is required to revise Minnesotas regional haze SIP to include additional reductions, if necessary, to achieve reasonable progress towards visibility goals. If the MPCA finds that Minnesota is not making reasonable progress, then additional controls such as SCRs at Sherco 1 and 2 may be required. Given the unknown outcome and timing of the decisions related to the regional haze SIP and RAVI, the MPCA believes that Xcels estimated time frames (2018-2019 and 2023-2025) for SCR installations are reasonable. 2. Greenhouse gas emissions at existing power plants EPAs intends to adopt standards of performance addressing emissions of CO2 from existing power plants by using its authority under Section 111(d) of the Clean Air Act. President Obama has directed EPA to propose the 111(d) standard for existing facilities by June 2014 and to issue final standards by June 2015. MPCA is required to report on statewide progress toward the greenhouse gas reduction goals established in the Next Generation Energy Act (Minn. Stat. 216H.02). 216H.02 established the following greenhouse gas reduction goals: 2015: 15 percent below 2005 emissions 2025: 30 percent below 2005 emissions 2050: 80 percent below 2005 emissions Table 1 of MPCAs comments shows Xcels CO2 emissions from the scenarios in its Sherco Study compared to its CO2 goals pursuant to 216H.02 (in millions of tons CO2). This emissions budget, shown in the bottom row of Table 1, is a linear extrapolation of the percent reduction of CO2 emissions. The shaded areas reflect those scenarios in which MPCA expects Xcel to meet the 216H.02 goals.

11

40 CFR Section 51.308(d)(1) of the EPA's Regional Haze Rule requires each state containing a Class I area to establish, for each Class I area within the state, visibility goals that provide for reasonable progress toward achieving natural visibility. The Class I states must show that they considered a uniform rate of improvement and the emission reduction measures needed to achieve the reasonable progress goal for the period of the implementation plan.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 16

According to MPCA, greenhouse gas emissions from Xcel meet the reduction goal through 2023. If Sherco 1 and 2 are retired, Xcel remains under the goal through 2030. No scenarios, however, meet the 2040 greenhouse gas goal.

Carbon Values In its sensitivity analysis, Xcel determined that retiring Sherco 1 and 2 is least-cost when using the Commission-ordered high CO2 value $34 per ton, starting in 2017. While Xcel argues in its Study that using the high value of CO2 is inappropriate, the MPCAs position is that this value is reasonable to consider the potential impacts of the various scenarios. In May 2013, the U.S. Interagency Working Group on Social Cost of Carbon published an update to the Social Cost of Carbon (SCC) for federal agencies to use to evaluate climate impacts. The MPCA views the federal SCC, which arises out of a growing body of scientific literature on the damage costs of carbon emissions, as representing the best available estimate of the environmental and other non-market costs of greenhouse gas emissions. If the Commission chooses to open a docket to re-evaluate CO2 externalities values, the Commission should consider the use of the federal SCC estimate in relevant future Commission proceedings.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 17

Public Comments Minnesota residents The Sherco Study proceeding attracted a large amount of public comment. The overwhelming majority of public comments encourage the Commission to replace Sherco 1 and 2 with cleaner sources of energy, although there are many public comments which indicate a desire to keep Sherco 1 and 2 operating as coal-fired facilities. Conservation Minnesota, Fresh Energy, the Sierra Club, and the Minnesota Public Interest Research Group (MPIRG) all filed petitions which include several thousand signatures from Minnesota residents advocating for replacing Sherco with clean energy. In addition, the Commission received several hand-written letters. Some of these notes express concern over the pollution emitted the Sherco facility, while others are concerned about the idea of potentially adding more wind turbines in the state.

City of Becker, Minnesota The City of Becker, Minnesota, filed a letter supporting the installation of pollution controls at Sherco 1 and 2. The Sherco site represents 62 percent of the Citys geographical footprint, and employs 350 permanent workers and 1,500 temporary workers. Sherco has also accounted for 70-77 percent of Beckers property tax revenues over the last five years. The City of Becker believes that Xcels proposal to replace Sherco with on-site natural gas generation would result in changes to the Plants footprint which would carry costs above that which are identified in the Sherco Study. If all or part of the Sherco site were decommissioned, the costs to rehabilitate the brownfield site would be costly. Moreover, replacing Sherco with gas generation would affect jobs. The City believes a transfer from coal-fired power to other technologies would result in current employees becoming displaced. If the Commission requires Xcel to further explore the replacement of Sherco with some combination of natural gas and renewable energy, the City of Becker asks the Commission to also consider the local economic impacts and Sherco site characteristics which may require additional infrastructure or higher-than-expected site redevelopment costs.

City of Minneapolis, Minnesota The City of Minneapolis believes it is imperative that Xcel include a plan and timeline for replacing Sherco 1 and 2 with cleaner sources of energy. Sherco emits more greenhouse gases than any other generating facility in Minnesota. Given its size, Shercos replacement is critical to the Citys Climate Action Plan goals, which are to reduce greenhouse gas emissions by 15 percent in 2015 and 30 percent by 2025.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 18

Electricity consumption accounts for over 42 percent of greenhouse gases in Minneapolis. The City has made strides to reduce overall electricity consumption in Minneapolis. However, these improvements in energy efficiency can be overwhelmed by even small changes in the greenhouse gas intensity of Xcels generation. Xcel has recently committed in writing to help the City of Minneapolis achieve the goals set forth in its Climate Action Plan. The City believes Xcels next resource plan is an opportunity for Xcel to propose a replacement for Sherco 1 and 2 which is consistent with the Citys Climate Action Plan.

Solar Organizations A joint letter was filed from seven Minnesota solar power manufacturers, installers, companies, and organizations. The solar organizations encourage the Commission to consider the solar potential that exists within Minnesota, and the organizations notify the Commission that the solar-related businesses within the state are ready to deliver solar energy.

Staff Analysis Staff has six main takeaways from Xcels Sherco Study: 1. Given Shercos size and the uncertainty regarding environmental compliance standards, Staff believes it is premature to take conclusive action on Sherco 1 and 2 at this time. The environmental regulations which would be most impactful to the economic feasibility of continued operation of Sherco 1 and 2 as coal-fired units are still uncertain, unknown, or in litigation. All parties presently agree that the fate of Sherco 1 and 2 will not be finalized in this isolated study, but as part of a regular and ongoing review of Xcels aging coal-fired facilities within developing environmental compliance standards. Resource planning is inherently an uncertain and iterative process. Sherco 1 and 2 represent approximately 1,400 MW and 20 percent of Xcels energy requirements on an annual basis. Thus, it may require several iterations to drill down on the probably several candidates to reliably replace units of this size. Given this ongoing development of the record, as well as the uncertainty regarding EPA rules and determinations, Staffs recommendations in this proceeding are administrative only.

2. While major uncertainties exist, it appears likely that within the next decade, Sherco 1 and 2 will require substantial modification of some form to reduce its emissions profile. Xcel defines the $400 million SCR NOX reduction project as one that could reasonably be anticipated to be required. However, at this time, Xcel does not need to install SCRs at either Sherco 1 or 2. The EIs recommend the Commission require Xcel to assume retirement of Sherco 1 and 2 by 2020 in Xcels next IRP base case. Staff believes this recommendation is too

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 19

presumptive as worded, given the lack of detail that is known about which rule Xcel would actually be complying with. It may also be unnecessarily complicated to basically force Strategist to select a retirement date for base case planning, especially since Xcels potential compliance deadlines for various NOX rules occur as early as 2019 but as late as 2027. Given EPAs trajectory, though, for reducing NOX and greenhouse gases, in combination with the expiring remaining economic life at Sherco 1 and 2, Staff does not oppose the idea of planning for Shercos replacement in the next decade. If the Commission wishes to see a base case analysis reflective of the EIs recommendation, Staff would recommend modifying the language to give the Strategist model more flexibility regarding what the most reasonable replacement date could be.

3. To accommodate replacement generation of similar size to the capacity and energy from Sherco 1 and 2, significant transmission investments are likely to be required. Xcels Sherco Study provides preliminary cost estimates including approximately $200 million for new natural gas pipeline in scenarios which add natural gas, and $500-$700 million for transmission infrastructure to deliver new wind. In subsequent proceedings, Xcel should further assess and build on the Sherco Studys preliminary estimates for delivery of natural gas and wind as a realistic replacement for Sherco 1 and 2.

4. The Sherco Study does not thoroughly evaluate demand response as a major contributor to replace capacity lost by retiring Sherco 1 and 2. Xcel evaluates demand response in the Sherco Study as a component of the Natural Gas Combustion Turbine + Wind + Solar + 55 MW DSM option. Realistically, if the Commission or the Company moves toward retiring Sherco 1 and 2, Staff assumes that potential from demand response resources would be vetted much more thoroughly than what is modeled in the Sherco Study. While demand response potential may not have been maximized in the Sherco 1 and 2 replacement scenarios, Staff notes that there are several Commission ordering points for Xcels 2014 resource plan which already require the Company to thoroughly evaluate and strongly consider demand response resources. 5. While Xcels modeling runs capture a broad range of system costs under various conditions, operational questions remain. With the retirement of Black Dog 3 and 4, Sherco 1 and 2 comprise more than 50 percent of the coal generation left on the Northern States Power system. Throughout the life of Sherco 1 and 2, capital investments will continue to be made to retain the production performance and environmental performance of the units. Sherco 1 and 2 each have approximately 25,000

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 20

discrete components. Each year, a portion of components that cannot economically or practically be repaired are replaced or rebuilt as a capital investment.12 The Study assumes Sherco 1 and 2 operate until 2040 with a 4 percent forced outage rate, and with fixed escalators to account for increased operation and maintenance expenses over time. Whether Sherco can be expected to perform this reliably far beyond its economic life may be more of a policy question for the purposes of this Study, but aging plant performance is an issue which has been frequently raised in previous IRPs. The Chamber recommends several decision options related to natural gas prices, operational characteristics of natural gas facilities, wind variability, and wind integration. While Staff believes the Chambers recommendations are outside the purview of the Sherco Studys scope, it is a valid point to continue to examine these issues in general, as well as for Sherco itself. Xcel has added a significant amount of natural gas combined-cycle capacity in recent years via the MERP projects. According to comments from Xcel in its 2011 IRP, capacity factors at High Bridge and Riverside have been relatively low to date, with significant unused generation capability at those plants.13 The Sherco Study does not discuss this unused generation. Xcel will also be adding 750 MW wind to its system in the next few years.14 Xcels modeling includes cost impacts of wind on other facilities due to plant cycling. According to Xcel: We have taken the cycling issue very seriously as more and more wind power is incorporated into our system and have commissioned engineering investigations at each of our major power plants to examine the effects of cycling on major plant systems. Our study work identified a series of recommendations to minimize the potential cost of cycling. For example, one of the largest potential mechanisms for cost impacts is metal fatigue associated with rapid temperature changes that occurs with rapid changes in power output. We have put in place limits on the rate at which our baseload plants can ramp power output up or down to keep fatigue in check and we have incorporated those limits in our offers in the MISO market. MISO then dispatches our plants with those limitations in ramp rates. We agree that this is an issue that will merit additional study and monitoring as wind penetration continues to grow.15 MISO currently operates an ancillary services market to provide operating reserves that support variable wind generation, as well as unexpected generation outages. Xcel includes estimates to incorporate operating reserves in its analysis, although it is somewhat hidden to the extent that the input assumptions can provide meaningful insight

12 13

Sherco Study, p. 30 Docket 10-825, Xcels August 13, 2012 reply comments p. 10 14 The Odell, Courtenay, Pleasant Valley, and Borders projects were approved in Docket Nos. 13-603 and 13-716. 15 Docket No. 13-603, Xcel reply comments, September 26, 2013 pp. 4-5.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 21

into the decision-making process. The additional study Xcel mentions related to ramp management and incorporating additional wind will be of interest to future proceedings. The EIs contend that the costs of installing SCRs compared to constructing two [combined cycle units] at the Sherco siteis not an apples to apples comparison due to the size difference between the options. As it pertains to capacity replacement, energy replacement, and operational characteristics, Staff believes a fundamental question moving forward will be what resources, or combination of resources, qualifies as an apples-to-apples replacement of 1,400 MW of baseload coal units with a 95 percent availability factor. 6. Staff believes Xcels 2014 resource plan deadline should be delayed to incorporate the Companys recent wind additions and results of the competitive resource acquisition process. Xcels Sherco Study expansion plan includes 200 MW of wind by 2015 and three generic peaking units by 2019. This expansion plan is already somewhat outdated. Xcel was recently granted approval to add 750 MW of wind generation by 2015. The outcome of its competitive resource acquisition process is presently unknown, but it could further affect the relative economics of future decisions at Sherco 1 and 2. Xcel is currently required to file its next IRP by February 1, 2014. It is likely that Xcel will not be able to fully include the resource acquisition process results by this time. Staff recommends the Commission discuss with the parties whether this deadline should be modified and what the most appropriate filing date for Xcels 2014 IRP would be.

Carbon / Greenhouse Gas Goals There is substantial discussion in this proceeding, from both public comments and intervenors, about Xcels plan to reduce CO2, as well as the Commissions directives to reduce emissions. The EIs state in their comments that [p]articularly in light of the Commissions recent decision to approve an enormous investment in Minnesota Powers Boswell coal plant, the opportunities for [greenhouse gas] reductions in the electric sector that can keep pace with the states emission reduction goals are narrowing. The EIs present a figure from MPCAs 2013 Report to the Legislature to illustrate that the state is not on track to meet its 2015 goal.16,17 Regarding the MPCA report which the EIs cite, Staff notes that the Public Utilities Commission does not have jurisdiction over all sectors of the economy in which Minnesota can reduce its emissions. According to Table 2 of the MPCA report below, the electric utility industry is
16 17

Environmental Intervenors October 1, 2013, comments, p. 4. Minn. Stat. 216H.02, Subdivision 1, states: It is the goal of the state to reduce statewide greenhouse gas emissions across all sectors producing those emissions to a level at least 15 percent below 2005 levels by 2015, to a level at least 30 percent below 2005 levels by 2025, and to a level at least 80 percent below 2005 levels by 2050.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 22

making the most significant reductions in greenhouse gases, and is well-positioned to meet the 15 percent reduction by 2015, as defined in 216H.02.

The Commission has taken several steps in recent resource planning proceedings in order to position the state to meet longer-term greenhouse gas targets. For example, the Commission has directed electric utilities to use Commission-approved CO2 values in their base case planning. Additionally, the Commission has ordered baseload diversification studies (including this Sherco Study) for all investor-owned utilities to evaluate opportunities to cost-effectively retire, retrofit, or refuel existing coal units. The recently-approved Minnesota Power IRP the EIs reference expects to reduce greenhouse gases by 30 percent in the 2005 to 2015 time period. Xcel states in its Sherco Study that the Company has already reduced CO2 emissions by over 25 percent from 2005 levels. Moreover, Xcel believes continued operation of Sherco 1 and 2 still enables the Company to meet the 2025 goal of a 30 percent reduction in greenhouse gases. Appendix E of Xcels Study shows the Companys Strategist outputs for its system CO2 emissions. In Planning Years 2013-2027, Xcel expects to reduce its CO2 output by 6.7 percent, according to the modeling results in the Reference Case.18 In the Reference Case expansion plan, CO2 emissions drop sharply in the early years of the 2013-2027 planning period, as coalfired Black Dog 3 & 4 and vintage gas-fired Granite City and Key City plants are shut down. Moreover, the Reference Case includes the addition of 1,800 MW of wind and 15 MW of solar.

18

Xcel Energy Sherco Study, p. Appendix E-5.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 23

The EIs broader point that the SCR retrofit could inhibit Xcels ability to meet 216H.02 in the long-term is demonstrated by the following table. Staff chose four scenarios with their corresponding CO2 emissions in the 2013-2027 planning period and compared the percentage reduction in CO2 over that timeframe. Both the Reference Case and Scenario #2, which installs SCRs in 2024/25, result in a slightly less than 7 percent reduction in CO2 from 2013 levels. The two Strategist-optimized retirement scenarios, which replace Sherco 1 and 2 with combined cycle capacity, result in a 33 percent reduction in CO2 emissions in 2013-2027.
Reference Case % Reduction CO2 6.74 #2: SCR Late (2024/25) 6.86 #13: Retire Early (2019/20) 33.21 #18: Retire Late (2024/25) 33.21

Staff developed the next figure to show the timing of the CO2 reductions. Both the Retire Early scenario (Scenario #13) and the Retire Late scenario (Scenario #18) have equivalent system CO2 emissions by 2025, reducing from about 22 million tons of CO2 per year in 2013 to about 15 million tons of CO2 per year in 2027.

Xcel's Strategist Output - Annual CO2 Emissions (Tons)

24,000,000.00

22,000,000.00 Annual CO2 emissions (tons) Reference Case 20,000,000.00 #2: SCR Late (2024/25) 18,000,000.00 #13: Retire Early (2019/20) #18: Retire Late (2024/25)

16,000,000.00

14,000,000.00

12,000,000.00

Year

As shown in the figure, under the Reference Case and retrofit scenarios, CO2 emissions begin to creep above 20 million tons of CO2 by 2025. Recalling from MPCAs Table 1 (on page 16 of this document), the CO2 emissions which correspond to the state goal, in millions of tons, are: 2015: 22.79 million tons of CO2 2025: 18.77 million tons of CO2 2040: 10.72 million tons of CO2

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 24

The above figure and MPCAs estimated CO2 budgets confirm Xcels position that the Company will be able to meet the 216H.02 goals in the short-term. However, regarding long-term achievability, MPCAs analysis is not consistent with Xcels expectation to meet the greenhouse gas goal in 2025 and 2040 without retiring Sherco 1 and 2. (MPCAs estimates do not include the 750 MW of wind Xcel plans to add by 2015, or the results of the pending resource acquisition process, both of which will affect how Sherco is dispatched.) Since Xcel is not planning to install SCRs at this time, the issue of whether Xcels retrofit decision will preclude the Company from meeting greenhouse gas targets can await future proceedings. The greenhouse gas goal is one component of a several-item IRP checklist which Staff reviews in each IRP, which will include Xcels 2014 IRP.

EPA Regulations Xcels Sherco Study and MPCA-approved MERA report both demonstrate that Xcel will require minimal cost measures to control mercury via activated carbon injection by year-end 2014. This installation will put Xcel into compliance with EPAs MATS rule and Minnesotas MERA requirements. Xcel, MPCA, and the EIs are in general agreement that the timeline Xcel proposes for complying with the Clean Air Acts regional haze regulations is reasonable. By 2018, the MPCA is required to revise Minnesotas Regional Haze SIP. EPA has an unknown deadline for determining whether Sherco 1 and 2 impair visibility under the RAVI program. According to MPCA, Given the unknown outcome and timing of the decisions related to Regional Haze and visibility impairment, the MPCA believes that Xcels estimated time frames (2018-2019 and 2023-2025) for SCR installations are reasonable. The Chamber emphasizes the uncertainty which would require Xcel to install SCRs in the first place. The Chamber recommends the Commission take no action at this time regarding Sherco 1 and 2, since the Company does not need to take any action at this time.

Next Steps The analysis in the Sherco Study, along with the parties comments, is an important and meaningful contribution which will guide future IRPs. Resource plans are generally filed every 2-3 years, and this in-between step which focuses on Minnesotas largest power plant enables the Commission (and Commission Staff) to be better informed of the forecasted economics of operating Sherco 1 and 2, as well as the rulemaking and litigation affecting its future. At this time, Staff believes too much uncertainty exists for the Commission to make conclusive findings, especially those which are predicated on decisions before various U.S. District Courts. As such, Staff recommends only administrative decision options #1-3 on the next page.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 25

Decision Options Staff recommendations 1. Accept Xcels Sherco Life Cycle Management Study for informational purposes. 2. Modify the deadline for Xcels next resource plan to May 1, 2014. 3. Direct Xcel to continue to evaluate the feasibility and cost-effectiveness of continuing to operate, retrofitting, or retiring Sherco Units 1 and 2 in its next IRP.

Xcel Energy recommendation 4. Require reanalysis when air quality regulations establish a need for Selective Catalytic Reduction (SCR) technology, or a carbon regulation framework takes shape.

Environmental Intervenors recommendations The Environmental Intervenors recommend the following conditions for Xcels next IRP: 5. A base case in which Sherco Units 1 and 2 retire in 2020. 6. A base case that includes updated externality values. 7. Evaluation of energy efficiency potential among CIP-exempt customers. 8. Evaluation of a higher level of CIP savings using the Strategist model.

Minnesota Chamber of Commerce The Chamber recommends that Xcels next IRP: 9. Include sensitivity cases for phasing in carbon costs (various cost amounts) beyond the 2017 timeline.

10. Include three carbon value reference cases - one that includes the carbon assumption specified by the Commission in past orders, one for carbon assumptions to commence at a time when industry experts project such carbon legislation is most likely to be implemented, if at all, and another one that has no carbon cost or other externality cost assumptions.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 26

11. Obtain and incorporate price models for future MISO hourly pricing that incorporates hourly variability resulting from significant additions of wind resources in the region, as well as incorporates retirements of several baseload facilities. 12. Provide a statistical assessment associated with fuel price volatility associated with natural gas so that the risks can be quantified and included in the analysis. 13. Provide a risk assessment of the reliability impact of increasing renewable generation on Xcels system. 14. Provide rate impacts by cost drivers, specifically RPS mandate, solar mandate and nonmandate related expenditures. 15. Provide an analysis of the price elasticity of demand to address the impact of rising rates on large business customers. 16. Provide a detailed analysis of wind integration cost assumptions. 17. Address costs related to limitations in modeling the operational characteristics of combined cycle units. 18. Provide greater transparency and justification into costs associated with siting any new generation. 19. If resource pricing assumes utilization of a tax credit, add the cost of the tax credit to the assumed pricing used in the model. 20. If potential environmental regulations become a reality and Xcel 's revisits its Sherco analysis, all the aspects stated above should be addressed.

Minnesota Pollution Control Agency recommendation The Pollution Control Agency requests the following for Xcels next IRP: 21. Direct Xcel, for its next IRP, to model a possible legislative increase in the renewable energy standard to 40 percent, and the addition of a 10 percent solar energy standard.

Staff recommends decision options #1, #2, and #3. Staff takes no position on recommendations from the other parties. Staff would support other directives which come from the Commission.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 27

Attachment A: MCEA Information Requests #29 and #30 (July 21, 2011) MCEA Question #29: You report that Sherco units 1 and 2 are expected to be subject to regulatory requirements under the Regional Haze Rule (IRP, p. 9-7); NESHAP (IRP, p. 9-5); and Coal Ash Rules (IRP. p. 9-9). EPA recently stated to the Minnesota Pollution Control Agency that the available evidence supports a finding that SCR is BART for NOx at Sherco. (June 6, 2011 Aburano letter to Seitz) a. Has Xcel included the expenses of pollution control measures required by the regulations referenced above in the scenario for the Proposed Plan Expansion Plan? b. If so, describe the pollution control measures assumed, the timing of installation of controls, and the associated costs. c. If not, please re-run the Strategist scenario for the Proposed Plan assuming SCR, multiHAP controls, and hazardous waste coal ash disposal and handling requirements must be installed at Sherco 1 and 2 by 2017. Xcel Response to Question #29: a. We did not include the cost of pollution control measures described in this IR. The Company is still in the early stages of determining the best overall strategy to meet the various regulatory mandates for different effluents across different time periods. We expect to develop more comprehensive analysis over the next year and include more concrete actions as part of our next Resource Plan filing. b. As noted above, the pollution control measures described were not included in the modeling. c. Please see Attachment A for an overview of the results for this scenario. There are several important points to note regarding this analysis. First, any costs and effluent reduction projections are very preliminary and should be treated as indicative estimates, and not actual projections. As noted above the Company is still in the early stages of the analysis process so costs and impacts can change depending on updated information, changes in strategy, or advances in technology or expertise. Second, an additional Base Case is included as a reference for both this IR and MCEA IR 30. In this Resource Plan, Sherco Units 1 and 2 were treated as fixed assets and never removed. As such, no capital projects were included in the model. In contrast, this IR and IR 30 focus on the units and the costs directly associated with them. As a result, appropriate capital costs were removed from a generic generation pool used by the model and assigned explicitly to Sherco 1 and 2. This allows a direct comparison across plans as the units either receive pollution controls or they are retired from service. Any cost comparisons should be made to this Plan.

Staff Briefing Papers for Docket No. E002/RP-13-368 on November 14 2013

Page 28

Third, the Company has not included any costs associated with hazardous waste coal ash disposal and handling requirements. The Company has not attempted to quantify any estimates regarding this possibility so it is excluded from any of these model runs.

MCEA Question #30: Your Strategist analysis assumes the extension of Sherco units 1 and 2 beyond their book lives (2022/23). The IRP acknowledges that Sherco units 1 and 2 will be subject to a host of regulations with near term impacts, p. 2-9, requiring significant modifications at these units. Please provide the results of Strategist model runs using inputs from the Proposed Plan Expansion Plan run but where Sherco units 1 and 2 a. are retired in 2017/18 prior to investments in retrofits; and b. are retired in 2022/23 at the end of their book lives, including the estimated costs of likely retrofits described in IR# 29 above.

Xcel Response to Question #30: Please see Attachment A for the results of the model runs as specified in parts a and b of this IR. As noted in response to MCEA IR 29 we are in the early stages of evaluating the costs of pollution control equipment and on-going capital costs that may be applicable for Sherco Units 1 and 2. Thus, this information should be considered very preliminary.