Energy Policy. Conservation. Report

Transcription

1 M i n n e s o t a D e p a r t m e n t o f C o m m e r c e Energy Policy & Conservation Report 2000

2 January, 2001 This is the completely new and improved quadrennial Energy Policy and Conservation Report for 2000, prepared and issued under Minnesota Statutes, 216C.18. We put the report on a stringent diet and reduced its bulk significantly. All of us in the Energy Division at the Department of Commerce have worked hard this year to make the report more understandable and usable. The report first explains who we are and what we do. In the second part, we present basic energy data on consumption, supply, and prices of energy resources. Following the data section, we address key issues for Minnesota s energy future, including: an explanation of how the energy industry is changing; energy reliability; energy conservation; environmental concerns; renewable energy and modern energy technologies; and affordability for consumers. Finally, the Public Utilities Commission, the primary electric and natural gas regulatory body in Minnesota, provides its views on energy rates and other current regulatory issues. Energy is basic to life. Energy provides basic necessities like heat, cooling, light, and food production and preparation, as well as all the enhancements we have come to consider basic like transportation, manufacturing, home and business appliances, and the like. We are entering an era of increasing volatility in energy prices and supplies in nearly every sector of the energy industry, from petroleum to electric generation and delivery. With the federal government and many states moving to deregulate various aspects of electric production, transmission, and delivery, a whole new set of issues has arisen related to how to make the transition from vertically integrated monopolies to competitive markets for electric services. Price volatility or rapidly increasing prices for other energy sources are also a matter of concern. Natural gas prices have now topped in real terms the levels of the late 1970s and early 1980s and they did so in an incredibly short time period with little or no warning. Projections for natural gas prices for the early 2000s show some decrease but probably not back to the prices of 1999 for the foreseeable future, if ever. Various energy supplies are now publicly traded on futures markets for the first time and reflect the more volatile pricing structures inherent in those markets. Petroleum prices also again are going through a period of volatility. In the year 2000, consumers saw large increases in the price of gasoline at the pump, as well as in home heating fuels like fuel oil and propane for the winter heating season. All of this makes our jobs interesting and challenging. We do not regulate most energy prices, with the exception of some portion of the business expenses related to providing electric and natural gas services. Nonetheless, we are charged by statute with promoting energy conservation, renewable energy, and alternative fuels, all of which affect traditional energy systems, whether they are regulated or unregulated. This report will acquaint you with all the aspects of energy with which we deal on a daily basis and will lay out the policies and principles we apply in our work to ensure a secure and reliable energy future for Minnesota. Enjoy! Linda S. Taylor, Deputy Commissioner, Energy Division

3 TABLE OF CONTENTS TABLE OF CONTENTS Introduction Energy Division: Past, Present & Future Minnesota Data Key Issues: Introduction The Changing Industry Reliability Conservation Environment Renewable & Modern Technologies Affordability Public Utilities Commission Energy Policy Implementation Glossary ENERGY POLICY & CONSERVATION REPORT 2000 Minnesota Department of Commerce

4 ENERGY DIVISION: PAST, PRESENT & FUTURE PAGE 1 Energy Division: Past, Present, Future

5 ENERGY DIVISION: PAST, PRESENT & FUTURE PAGE 3 THE ENERGY DIVISION: WHO WE ARE NOW In August 1999, Governor Jesse Ventura transferred the Energy Division, formerly of the Department of Public Service, to the Department of Commerce. The Division consists of two units, the State Energy Office and Energy Planning & Advocacy. The State Energy Office, also known as the Energy Programs and Technologies unit, is the main state conduit for U.S. Department of Energy funding. State energy programs are implemented through loans and grants, maximizing the benefits of energy efficiency and renewable energy through promoting energy conservation in buildings and demonstrating renewable energy tech- nologies, with the objective of bringing them closer to market realities. The State Energy Office also includes the Energy Information Center, which provides conservation information directly to Minnesota consumers. The mission of the Minnesota Department of Commerce s Energy Planning and Advocacy unit is to serve as the public s chief advocate in gas and electric utility matters to ensure that all categories of Minnesota consumers receive low-cost, reliable energy service from regulated utilities. As such, this unit advocates for the public interest on matters in front of the Minnesota Public Utilities Commission as well as in other energy policy matters at the state, regional and national levels. THE ENERGY DIVISION: OUR HISTORY STATE ENERGY OFFICE The Minnesota Department of Commerce s State Energy Office (SEO) can trace its beginning back to the Minnesota Energy Agency, created on March 29, 1974 in response to the combined effects of the OPEC oil embargo, natural gas production and distribution problems, and colder than normal weather (Minn. Laws 1974 c307). The Agency initially consisted of 33 employees in nine activity units that were then organized into four divisions in 1978 (Conservation, Data & Analysis, Research, and Administration). The Agency experienced rapid growth during this time, which peaked in the early 1980s at around 120 staff. The Agency s directive was to prepare Minnesota for the existing and forecasted energy price increases through research and public education on energy conservation and alternative technologies, and offer energy conservation loans and grants to public and private, large and small institutions across the state. In 1981 the Energy Agency was consolidated with other agencies and became a division within the Department of Energy, Planning and Economic Development (Laws 1981 c356 s65). In 1983 the State Planning Agency was reinstated and removed from the Department, which was renamed the Department of Energy and Economic Development (Laws 1983 c289 s40). During this twoyear period, the Energy Division s budget was cut by nearly one-third as the U.S. economy declined, and federal and state funding for energy programs were reduced. Minor financial budget cuts continued each year through the end of the 1980s. In 1987, the Legislature transferred the Energy Division s functions to the Department of Public Service (DPS) (Law 1987 c312 art1 sec9), which joined them with the Energy Planning and Advocacy unit to form the new DPS Energy Division. The Energy Planning and Advocacy unit had been part of the DPS since 1975, working to represent the public interest in utility regulation issues. Pairing such an advocacy unit with an energy conservation, research and education unit seemed to be a logical symbiosis with those who regulated energy. During the 1990s, a hands-off position was taken regarding energy conservation related issues and the SEO was slowly downsized. This position, in turn, affected the overall Divisions work with outside interested parties in promoting energy technology and other energy policies. Many of the initial Energy Agency functions are still in operation today. The Energy Information Center has operated continuously since 1974, responding to phone calls and providing brochures that provide practical advice on various energy issues from fixing attic bypasses to promoting efficient lighting alterna-

6 PAGE 4 ENERGY DIVISION: PAST, PRESENT & FUTURE tives. Since 1989, over 400,000 people have contacted the Energy Information Center by phone or trade show. Over the past decade the Energy Information Center has distributed over 1.7 million publications. Federally funded loans and grants continue to aid in the conservation of energy in homes and businesses. The SEO has also been instrumental in developing, updating, and implementing new building energy codes that make Minnesota homes more energy efficient, durable and comfortable. Petroleum fuels data and analysis has continued as well, although shifts in staffing and changes in federal programs have reduced the depth of analysis over the years. Over the past decade the Energy Information Center has distributed over 1.7 million publications. New programs have started as well. Since 1992, the Wind Resource Assessment Program has been collecting data on wind speed and direction around Minnesota, providing an information foundation for Minnesota s emerging wind energy market. Also, as of mid- August 2000, nearly 50 gas stations in Minnesota were selling E-85, a mixture of 85 percent ethanol and 15 percent gasoline. Ethanol is made from Minnesota-grown corn. With flexible fuel vehicles available that can run on either gasoline or E-85, this new, domestically-produced transportation fuel is becoming a market reality. The current State Energy Office, which traces its lineage back to the Energy Agency, is now in transition. Optimism for reemphasizing energy and economic efficiency is growing within the unit under the new administration as ties to community stakeholders are being redeveloped. Effective cooperation is ENERGY PLANNING AND ADVOCACY The Energy Planning and Advocacy unit (EPA unit) intervenes on the public s behalf in all natural-gas and electric utility matters before the Public Utilities Commission (PUC). The EPA unit s role is to ensure that energy rates are reasonable and service is reliable. The EPA unit works in energy rate cases, miscellaneous rate proposals, integrated resource planning, electric and naturalgas restructuring, nuclear decommissioning and nuclear waste disposal, mergers and acquisitions, depreciation rates, capital structures, electric service territory matters, and consumer complaints. The EPA unit also works on energy conservation, both with the Commission and within the Department. Under law, regulated utilities are mandated to spend a certain percentage of their gross revenues on cost-effective energy conservation and efficiency measures. The Department s Commissioner has final approval authority over the utility-sponsored conservation projects and monitors each project s success. The EPA unit collects data on Minnesota s energy production, use and rates, maintains historical databases, and conducts analyses of energy use in Minnesota, from production to distribution. The EPA unit also develops and advocates energy policy issues before the legislature, federal agencies, in cooperation with other state agencies, and in regional and national forums. The EPA unit was part of the Department of Public Service from its formation in 1975, until the 1999 transfer to the key to developing a sound and efficient energy system for Minnesota s future....regulated utilities are mandated to spend a certain percentage of their gross revenues on cost-effective energy conservation and efficiency measures. the Department of Commerce. The EPA unit s authority comes from the establishment by the Legislature of state regulatory authority over natural gas and electric utilities on Jan. 1, Employees were officially separated by their skills, rather than by the type of utility with which they worked. Three units of accountants, economists, and engineers worked primarily in either natural gas, electric, or telephone areas, but the lines between utility areas weren t as clearly defined as they are today. A substantial change occurred in 1980 when the Legislature separated the PUC, a division within the Department of Public Service, from the Department. The Legislature found conflicts of interest between the decision-makers of the PUC and the public interest advocacy function of the Department ( Evaluation of the Department of Public Service, Legislative Auditor s Office, 1979). Separating the functions of advocacy and decision making into two entities was intended to remove the conflicts. In 1981, the Department was restructured into energy and telecommunications units. The energy unit s analysts remained mixed between natural gas and electric utilities until their formal ENERGY POLICY & CONSERVATION REPORT 2000 Minnesota Department of Commerce

7 ENERGY DIVISION: PAST, PRESENT & FUTURE PAGE 5 separation in Today the natural gas and electric units within the EPA unit collaborate on overlapping energy issues, but analysts focus their expertise in their respective fields. Also in 1990 the Legislature transferred the decision-making authority concerning Conservation Improvement Programs (CIP) to the Commissioner of Public Service, now Commerce, where it resides today. In 1997, the Legislature also empowered the Commissioner with the authority to decide compensation disputes between utilities and railroads concerning right-ofway usage. THE ENERGY DIVISION: OUR FUTURE Together, the two units of the Energy Division are working more cooperatively than ever with each other, outside agencies and stakeholders to implement energy policy that is consistent with established energy principles and can meet the energy challenges of the future. The next section will discuss some of these key energy issues and goals for meeting Minnesota s energy needs in the 21st century.

8 MINNESOTA DATA PAGE 7 Minnesota Data The data in this report primarily comes from two sources: data collected internally through our Regional Energy Information System (REIS), and data obtained through the U.S. Department of Energy s Energy Information Administration (EIA). The primary sources for each graph in this section are noted on the graph and additional information about the data and assumptions used is included in the appendix. Verifiable data is only available through 1998; information about 1999 and 2000 will be included in the projections section at the end of the chapter. More detailed information about utilities and state electric and natural gas consumption and expenditures is available in the Department s Utility Data Book which is available on the Commerce website and is included as an accompaniment to this report on the CD-ROM format.

9 MINNESOTA DATA PAGE 9 HOW MUCH ENERGY DOES MINNESOTA USE? OVERVIEW Minnesotans consumed a total of 1,261.3 trillion btus of energy (electricity, natural gas, petroleum products, coal and biomass) in Btu (British Thermal Unit) is the measurement of the heat content in energy, and is approximately equivalent to the heat produced by one wooden kitchen match. Figure 1 shows the relative amounts used for commercial, residential, industrial and transportation end uses. The following sections will further explain this energy use in the major sectors of electricity, natural gas and petroleum products. ELECTRICITY Minnesotans consumed a total of trillion btus (59,274 gigawatt hours) of electricity in Figure 2 shows electric consumption in Minnesota for the primary customer classes of residential, commercial and industrial. This graph shows an overall steady and increasing demand for electricity. Many factors influence consumption including weather, price, population levels and the general economic climate. Weather is a major factor in residential usage. Figure 3 (following page) shows the electric consumption per residential customer, taking into account differences in weather from year to year. Adjusting for abnormal weather is called weather normalization, and accounts for increased energy use in hotter summers or colder winters as well as decreased use during milder years. Once weather factors are account- Commercial Residential Industrial Transportation Figure 1: Energy End Use in Minnesota, Trillion Btus Source: REIS and EIA Watts are used to measure total electric consumption or generation at a given instant in time, which is known as the demand or capacity component of electricity. Watt-hours measure electricity consumed or needed for a given time period, which is often referred to as the energy component of electricity. Both watts and watt-hours are used in this report in units of kilo (thousand), mega (million), and giga (billion). Annual Gigawatt Hours 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Figure 2: Electric Consumption in Minnesota by Customer Class Commercial Residential Industrial Total Source: REIS

10 PAGE 10 ed for, residential usage appears to be growing slowly and steadily. It is too soon to tell whether the 1998 spike is an anomoly or a new trend. NATURAL GAS Minnesotans consumed a total of trillion btus (approximately million Mcf) of natural gas in Natural gas is usually measured in Mcf (thousand cubic feet) or therms. (One Mcf is roughly equivalent to one million btus and one dekatherm.) Figure 4 shows the consumption by residential, commercial, industrial, electric generation and transportation (which includes pipeline operation and, since 1990, natural gas fueled vehicles) customers. This graph shows two trends. First, residential consumption of natural gas in the last few years has decreased. This is largely due to unusually warm weather, as Figure 5 will illustrate. Conservation has also been successful at keeping overall residential consumption flat even as the number of residential consumers using natural gas is increasing. Second, electric generation is using more natural gas. During the years of the energy crisis in the middle and late 70s, use of natural gas in electric generation declined sharply. Recently, however, natural gas is being used at significantly higher rates to generate electricity. This upward trend is only slightly evident in this data, which ends in 1998, but will become much more dramatic in the near future. Annual Megawatt Hours Annual 250 Mcf in 200 millions Figure 4: Natural Gas Consumption in Minnesota by Customer Class, MINNESOTA DATA Figure 3: Weather Normalized Electric Consumption per Residential Customer, NOTE: Customer is defined as a residential meter.. Sources: REIS, DNR State Climatologist Electric Generation Commercial Industrial Residential Total Source: REIS ENERGY POLICY & CONSERVATION REPORT 2000 Minnesota Department of Commerce

11 MINNESOTA DATA PAGE 11 Figure 5 shows natural gas consumption per residential customer after normalizing for weather. This graph illustrates that after factoring in weather, residential consumption of natural gas has moderately declined in the past thirty years and changed very little in recent years as gas-fueled appliances have increased in operating efficiency PETROLEUM Minnesotans consumed a total of trillion btus (5,239 million gallons) of petroleum products in Petroleum products, as used in this section, include: asphalt and road oil, aviation gasoline, distillate fuel, jet fuel (all types), kerosene, liquid petroleum gases, lubricants, motor gasoline, and residual fuel. Figure 6 shows total petroleum consumption in Minnesota for the residential, commercial, industrial, transportation, and electric generation customer classes. In 1998, Minnesotans used about 85 percent of all petroleum products for air, land, and water transportation. These products include asphalt and road oil as well as actual fuels like diesel, jet fuel, and motor gasoline. Most agricultural use of petroleum falls under the transportation category. Commercial, electric utility, industrial, and institutional space heating and processing accounted for about nine percent of petroleum products. About one-fourth of Minnesota households currently use either fuel oil or propane for their heating source. This use constituted about 6 percent of the total petroleum products used in Annual Mcf Figure 5: Weather Normalized Natural Gas Consumption per Residential Customer, 1970 to NOTE: Customer is defined as a residential meter. 6,000 5,000 4,000 3,000 2,000 1,000 0 Sources: REIS, DNR State Climatologist Figure 6: Petroleum Products Consumption in Minnesota by Customer Class, (millions of gallons annually) Residential Commercial Industrial Transporation Electric Utility Total Source: EIA, 1998 data is preliminary

12 PAGE 12 MINNESOTA DATA HOW MUCH DOES OUR ENERGY COST? OVERVIEW Figures 7, 8, and 9 show the total real expenditures (adjusted for inflation) on electricity, natural gas, and petroleum in Minnesota. All price and expenditure data in this report has been converted to 1998 dollars. In 1998, Minnesotans spent approximately $3.2 billion on electricity, $1.3 billion on natural gas and $4.6 billion on petroleum products. These three sectors account for the majority of all energy expenditures. Total energy expenditures in any given year depend on consumption and prices. The previous section discussed energy consumption patterns in Minnesota. The following sections will address factors that influence price in the different energy sectors. Millions $ (1998 Dollars) 3,500 3,000 2,500 2,000 1,500 1, Figure 7: Annual Real Expenditures on Electricity in Minnesota by Customer Class, Residential (Including Farm) Industrial Commercial Total Sources: EIA, REIS Figure 8: Annual Real Expenditures on Natural Gas in Minnesota by Customer Class, The Department estimates that in 1997, Minnesota households used the following sources for their space heating: natural gas 64%, fuel oil 19%, electric 7.5%, propane 7.5%, other 2%. Millions $ (1998 $) Residential Commerical Industrial Transportation Total Source: EIA ENERGY POLICY & CONSERVATION REPORT 2000 Minnesota Department of Commerce

13 MINNESOTA DATA PAGE 13 Millions $ (1998 Dollars) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Figure 9: Annual Real Expenditures on Petroleum Products in Minnesota by Customer Class, Residential Commercial Industrial Transportation Electric Utility Total Source: EIA, 1998 data is preliminary The U.S. Department of Energy estimates that the price paid at the pump can be broken down as follows: 37% crude oil; 36% federal and state taxes; 13% refining costs; and 14% distribution, marketing, & retail station costs and profits. ELECTRICITY Figure 10 shows the average electric prices in Minnesota for the non-farm residential, commercial and industrial classes. Minnesota has historically enjoyed low electric prices relative to other parts of the country. Figure 11 shows the average price that residential, commercial and industrial customers paid for electricity in Minnesota relative to the rest of the country. One of the most significant factors affecting the price of electricity is the availability of generating capacity. As consumption increases and approaches or exceeds the level of available capacity, more capacity must be built which will cause the price of electricity to increase. cents/kwh (1998 dollars) Figure 10: Real Prices for Electricity in Minnesota by Customer Class, Non-Farm Residential Commercial Industrial Figure 11: 1998 Minnesota Electric Prices Relative to Prices in Other States ( /kwh) Residential Commercial Industrial Customers Customers Customers Minnesota price Minnesota rank 21st 19th 30th Average U.S. price Highest price Lowest Price Source: EIA Source: EIA

14 PAGE 14 NATURAL GAS Figure 12 shows natural gas prices for the residential, commercial, industrial and electric generation customer classes. Minnesota customers have historically enjoyed very low natural gas prices compared to other states. Figure 13 shows the average price that residential, commercial and industrial customers paid for natural gas in Minnesota relative to the rest of the country. One reason for these low prices is Minnesota s strategic location between the Canadian and the southern U.S. natural gas production areas, with interstate pipelines bringing gas to the state from both areas. Minnesota s utilities have wisely used competition and differing market fluctuations among gas producers and transporters in Canada and the U.S. to get attractive prices for Minnesota consumers. PETROLEUM Figure 14 shows the prices in Minnesota for the following petroleum products: distillate fuel (diesel and heating fuel), jet fuel, liquid petroleum gases, and motor gasoline. $/Mcf (1998 dollars) MINNESOTA DATA Figure 12: Real Prices for Natural Gas in Minnesota by Customer Class, Residential Industrial Commerical Electric Utilities Source: EIA Figure 13: 1998 Minnesota Natural Gas Prices Relative to Prices in Other States (Dollars per Thousand Cubic-Feet) Residential Commercial Industrial Customers Customers Customers Minnesota price $5.48 $4.45 $2.93 Minnesota rank 9th 8th 7th Average U.S. price $7.14 $5.77 $3.59 Highest price $19.26 $13.93 $5.86 Lowest Price $3.74 $2.33 $1.40 Source: EIA The price of petroleum products is largely comprised of the basic cost of crude oil and assessed taxes. World political and economic market forces primarily determine the cost of the crude oil. Federal and state governments assess the taxes on petroleum products. Many factors influence the other aspects of the price of finished petroleum products. Some price changes are due to supply and demand imbalances. For example, supply shortages sometimes occur due to maintenance or damage on the pipelines or at refineries. Since each petroleum product needs to be stored individually, some ENERGY POLICY & CONSERVATION REPORT 2000 $/Gallon (1998 dollars) Figure 14: Real Prices for Petroleum Products in Minnesota, Distillate Fuel Liquid Petroleum Gases Jet Fuel (All Types) Motor Gasoline Source: EIA, 1998 data is preliminary Minnesota Department of Commerce

15 MINNESOTA DATA PAGE 15 supply shortages result from simple logistical problems associated with coordinating production and storage to meet current and future demand. Higher than expected demand for a particular product can also create temporary shortages that lead to higher prices. Very cold weather increases the heating use of propane products and very wet or very dry weather increases the agricultural use of petroleum products. Activity in the commodities market can further influence price changes. Spikes or sudden drops in prices are sometimes the markets response to perceptions of future supply and demand imbalances. Thus, data trends become more important information for planning than specific numbers on specific dates. NON-MONETARY COSTS OF ENERGY Consumers who wish to make fully informed choices about their energy consumption should also consider the non-monetary costs that their energy consumption incurs. For example, different energy production results in different levels of pollution and other environmental impacts. These issues are considered in more detail in the key energy issues that follow this data chapter. WHERE DO MINNESOTANS GET THEIR ENERGY? OVERALL In 1998, it required a total of 1,419 trillion Btus of primary fuel inputs to produce all of the energy consumed in Minnesota. This number is greater than the total consumption figure because it also includes the losses that occur in the production and transmission of electricity. Figure 15 shows the types of fuel inputs used to produce the energy consumed in Minnesota. This figure does not include fuel used to generate the electricity purchased for Minnesota consumption from marketers or utilities without Minnesota service territory. Petroleum Natural Gas Coal Biomass Nuclear Hydro Wind/Solar/Geothermal 14 3 Figure 15: Total Inputs Used to Produce All Energy Consumed in Minnesota, Trillion Btus Sources: REIS, EIA Note: Biomass includes wood and RDF (refuse-derived fuel), which is fuel generated by burning waste ELECTRICITY There are three distinct aspects to the delivery of electricity. First, electricity is produced at generating stations that are usually located in relatively remote areas, using a variety of fuels. Currently in Minnesota most generation is owned by public utilities, but independent power producers own a growing amount. As will be further explained in the Changing Energy Industry section, federal regulators have taken steps to allow for a wholesale market for electric generation, but currently in Minnesota, generation remains state regulated. Electric energy is delivered from the generating stations to load centers (areas where much electricity is used, like cities) via high-voltage transmission lines. The national grid of electric transmission lines is regulated by the Federal Energy Regulatory Commission (FERC). While some large industrial users receive electricity directly from transmission lines, most consumers are served by lowervoltage distribution lines, which carry electricity from the transmission lines to homes and businesses. Currently, each electric utility has exclusive rights to serve all consumers in a predetermined geographic area. Three types of utilities serve electric consumers in Minnesota. Investorowned utilities (IOUs) are rate-regulated by the state and are allowed to recover all prudently incurred costs of providing electricity to consumers. Distribution cooperative utilities are member/consumer-owned and are regulated by their elected boards. Distribution cooperatives, in turn, are served by Generation and Transmission

16 PAGE 16 cooperative utilities that procure and transmit power for their member distribution cooperatives. Municipal utilities serve many municipalities and are governed by city officials. Municipal utilities can either own generation or contract through a Joint Action Agency or other utility. Figure 16 illustrates what portion of the state each utility type serves. (Private refers to electricity generated by private companies for their own use.) Over 175 utility-owned generating plants serve Minnesota s electric load. These range anywhere from large coalfired plants with multiple units, each having a capacity of several hundred megawatts, to backup diesel generators with well below one megawatt of capacity. More information on each of these generators can be found in Tables 17 and 18 in the Utility Data Book. All generating plants are characterized as base load, intermediate, or peaking plants, depending on how often they operate. Base load plants are those that operate more than 50 percent of the year. Typically, they operate 24 hours a day, seven days a week for months at a time. Examples of base load plants are nuclear power stations, coal-fired steam boilers, biomass-fired generators, run-of-river hydro stations, and natural gas-fired combined cycle units. Peaking plants are those that operate less than 20 percent of the year, sometimes only a few hours each year. They operate only when the demand for electricity is at its peak, which usually occurs during the hottest days of summer. Examples of peaking plants are combustion turbines using either fuel oil or natural gas. In addition, utilities use load management (customers reducing their demand for electricity) to reduce their peak demand. ENERGY POLICY & CONSERVATION REPORT 2000 MINNESOTA DATA Figure 16: Percentage of Customers and Load Served by Different Utility Types in 1998 % total total % total Type of Entity # customers customers GWh GWh IOU, regulated 1,309,382 59% 39, % Cooperative 601,943 27% 9, % Municipal 310,374 14% 7, % Private 10 <1% 2, % Figure 17: 1998 Electric Generation to Serve Minnesota by Fuel Input (Megawatt Hours) Private Utility Industrial Qualifying Total Fuel Type Generation 1 Generation 2 Facilities (MWh) Coal 38,671, ,743, ,415,525.2 Nuclear 8,747, ,747,435.3 Hydro 1,072, , , ,286,323.0 Natural Gas 635, , ,639.8 RDF 3 463, , , ,399.5 Wood 205, , ,183.3 Fuel Oil #2 166, ,492.8 Wind/Solar , ,004.7 Cogeneration **** **** Fuel Oil #6 6, , ,723.5 Waste Oil Utility Generation includes generation owned by the utilities, generation purchased from Qualifying Facilities, and generation purchased under the wind mandate associated with the Prairie Island legislation. Generation purchased in contracts from marketers and utilities without Minnesota service territory are not included in this data, since the fuel source is not always known in such contracts. 2 The private industrial category is electricity generated by private companies for their own consumption. 3 RDF stands for refuse-derived fuel such as garbage incineration. ****The specific private cogeneration data is proprietary. Intermediate plants are those that operate between 20 and 50 percent of the year. They begin operation during the "shoulder periods" when more electricity is demanded than base load units alone can supply as well as during peak periods. Intermediate plants often use the same technology as base load plants, but cannot operate year round due to age, fuel costs, or other constraints. Energy conservation can be the equivalent of any type of supply plant, depending on when the energy is being conserved. Finally, wind and solar plants do not neatly fit the traditional definitions because they cannot be run on demand. However, they are often considered base load plants. Source: REIS Source: REIS Figure 17 shows the amounts of electricity supplied by the different fuel inputs in descending order. Electric generation inevitably involves trade-offs. In planning for future electric needs, utilities, consumers and regulators need to consider the relative costs of generation sources and costs of transmitting energy to consumers, as well as the non-monetary impacts, such as pollution and other environmental effects, resulting from different types of fuels used for electric generation. Some of these tradeoffs are discussed further in the Energy Reliability section. Minnesota Department of Commerce

17 MINNESOTA DATA PAGE 17 NATURAL GAS The natural gas industry is also comprised of three segments: natural gas supply production, transportation and local distribution. The production of the natural gas supply is completely deregulated (as explained further in the Changing Energy Industry section). The natural gas supply areas serving Minnesota are located in Canada and the southern and western U.S. Natural gas is transported from the production areas to local distribution companies through an international grid of large pipelines. These transportation pipelines are regulated by FERC. The three main interstate pipelines that provide transportation capacity to Minnesota customers are the Northern Natural Gas Company (Northern) pipeline, which provides approximately 90 percent of the total natural gas transportation capacity used by Minnesota customers; the Viking Gas Transmission Company (Viking) pipeline, which provides approximately 7 percent of the total; and the Great Lakes Gas Transmission Company (Great Lakes) pipeline, which provides 3 percent of the natural gas used in the state. The open access system of interstate pipelines allows suppliers and buyers to bargain independently with one another. Northern transports gas from the Hugoton basin which is located primarily in the Kansas and Oklahoma area, as well as the Permian, Anadarko, and Gulf Coast basins which are all located in Texas. Viking and Great Lakes pipelines have gathering facilities in the Alberta basin (in Canada). The final step in delivering natural gas to customers is completed by the companies that develop the smaller pipeline infrastructure from the large interstate pipelines to the customers. These are called Local Distribution Companies, or LDCs. There are six investor-owned LDCs in Minnesota that are regulated by the state, and 31 municipal LDCs that are under city control. There are also a few privately-owned LDCs that do not serve enough customers to meet the threshold for state regulation. Unlike electricity, natural gas companies do not have pre-assigned service territories. However, once an LDC has established the infrastructure to serve an area, in order to avoid duplication of facilities, it effectively becomes the exclusive LDC for that area (In some rare instances, LDCs compete for customers in the same area.) Currently only about 60 percent of the citizens of Minnesota have natural gas service available to them. The high capital costs of developing the infrastructure to deliver natural gas to low density populations located long distances from major pipelines hinders further development. Figure 18 illustrates what portion of Minnesota s gas consumers each type of gas utility serves. PETROLEUM The United States imports more than half of its petroleum resources, either in the form of crude oil or refined products. U.S. crude oil imports have risen from 44 percent of new supply in 1990 to 58 percent in U.S. finished, or refined, product imports have remained fairly steady in the 1990s at about 6 percent of total demand. Most petroleum products enter and leave Minnesota by pipeline. Some are transported by barge, rail, ship, or truck. All but a small portion of the United States imported Canadian crude oil and liquid petroleum gases (LPG) pass through Minnesota on their way to other parts of the Midwest, Eastern Canada, and New England. Refined petroleum products are available in Minnesota through area refineries or via pipelines. Electric utility and other industrial customers then use barge, rail or trucks to transport the finished products to their individual locations. Smaller volume customers, such as farms, homes, and gas stations, receive their petroleum products via truck delivery. Figure 18: Percentage of customers and volume served by natural gas utilities (1998) % of Total Total % Total Type of Entity # Customers Customers Mcf Mcf IOU, regulated 1,220,777 95% 286,789,861 94% Municipal 6,941 5% 18,033,566 6% Private, unregulated 2,894 1% 344,312 <1% Source: REIS

18 PAGE 18 MINNESOTA DATA WHAT DO WE EXPECT FOR THE FUTURE? ELECTRICITY The consumption of electricity in Minnesota is expected to continue to increase at an average rate of about 2 percent annually over the next few years, based on the combined projections of all utilities serving Minnesota customers. There is not excess generating capacity available to meet this increasing demand. Thus, in the near future, significant new generation will be necessary to serve the electric needs of the state and the region. Prices in the wholesale market have already begun to rise during peak demand periods. As electric demand in Minnesota and the region approach the total available capacity, prices are likely to continue to rise. Such higher prices reflect the capital costs of investing in new generation and would result regardless of whether the industry is regulated or operating in a free market environment. The higher prices may, in turn, result in less demand, but would not significantly reduce the 2 percent annual growth in the next ten years. Based on the electric generation currently planned and being constructed, the fuel mix for electric generation will change somewhat in the coming years. Both of the electric peaking plants under construction use natural gas as the input fuel. There are also plans for significant increases to the levels of wind generation in the state. However, relative to the total amount of electricity consumed in the state, these changes will have only a minor impact on the overall mix (shown for 1998 in Figure 17). NATURAL GAS The largest increase in the consumption of natural gas in the next few years will come from the electric generation sector. (This trend is only starting to be evident, as shown in Figure 4, which includes data through 1998.) As the new natural gas fired peaking plants come online, consumption of natural gas in Minnesota will significantly increase. Natural gas consumption in the residential and commercial sectors will remain steady in the case of continued mild winters or will increase significantly in the case of a severe winter. The industrial sector will likely continue to have increased consumption of natural gas until current pipeline capacity is fully utilized. Despite the existence of adequate natural gas supplies for the foreseeable future, gas production levels have not yet geared up to meet the new levels of demand. As with electricity, infrastructure capacity is a major factor in the future consumption and price of natural gas. Currently, the largest pipeline, Northern, is fully utilized in the winter season. After the two planned electric peakers are built, Northern has estimated that it will have comfortably the capacity for only one to two additional peaking plants, depending on where they would be located on the system. The Great Lakes pipeline has available capacity for any increased natural gas consumption that would occur in the northern half of Minnesota. And on the Viking pipeline, additional construction would be necessary for any increases in year-round capacity. Once demand increases beyond the current available pipeline capacity, it would require significant new investment in infrastructure. At first, that new investment would be charged only to the customers using the new pipeline capacity. However, the pipeline could then file a rate case with FERC. If the pipeline demonstrates that the expansion has benefits for the entire system then the new investment costs would be incorporated into the overall rates and the price charged to all customers would reflect the increased costs. Currently, the early impacts of increased demand are being felt. During the Summer of 2000 natural gas prices experienced a rather significant increase. Several factors influenced this price change. Low gas prices during the past few years have not encouraged increased exploration and drilling of new natural gas reserves. Despite the existence of adequate natural gas supplies for the foreseeable future, gas production levels have not yet geared up to meet the new levels of demand. Natural gas prices often follow oil prices. Natural gas prices have been quite low during the late 1990s, but in the summer of 2000 were at their highest levels in over a decade. Also, since natural gas futures are actively traded on the New York Mercantile Exchange the commodity market sometimes exacerbates price increases through active trading. Finally, the new and large demand for natural gas from new electric peaking plants (both in state and around the nation) powered by natural ENERGY POLICY & CONSERVATION REPORT 2000 Minnesota Department of Commerce

19 MINNESOTA DATA PAGE 19 gas is impacting the natural gas market. It is expected that the level of production will grow sufficiently to meet the market but, in the meantime, consumers may continue to see some increased price growing pains. PETROLEUM Residential, commercial and industrial use of petroleum products for non-transportation purposes has been steady or declining in the past several years and that trend is expected to continue. The transportation sector, which consumes nearly two-thirds of all petroleum products, has shown steadily increasing levels of consumption. This increase will likely continue until prices increase significantly which could then dampen the demand for petroleum. One factor that impacts the price of petroleum products is the availability of supply. Crude oil is necessary for the production of petroleum products. The world currently uses approximately 27,010 million barrels of crude oil per year. Scientists estimate that ongoing natural processes create new crude oil at the rate of 7 million barrels per year. The transportation sector...consumes nearly two-thirds of all petroleum products These numbers indicate an eventual depletion of the available crude oil, although it may be possible to find or manufacture new sources and substitutes for these products. As with natural gas and electricity, the available infrastructure also has a large impact on petroleum prices. Currently, demand is beginning to exceed oceanshipping capacity and is approaching the capacity of some pipelines. Furthermore, the cost of developing new crude oil wells is increasing. New wells are in less accessible locations. Higher prices for petroleum, however, allow development of lower grades of crude that were previously too costly to produce. Three other trends may impact the price of petroleum products. First, in the 1990s, crude oil and refined petroleum product, like natural gas, became publicly traded commodities on world mercantile exchanges. During times of actual or perceived supply disruptions or shortages, prices now fluctuate more erratically. Second, nearly every major international oil company and most independent marketers are forming E commerce sites to trade commodities independently. Their effect on energy prices and supply will depend largely on which sites survive. Third, petroleum refiners have significantly changed their operations in the 1990s. They have reduced refining costs by moving toward just-in-time production. Storage is now more in the control of independent terminal operators and pipeline operators.

20 PAGE 20 MINNESOTA DATA Electric Utilities that serve customers in Minnesota Allete (formerly Minnesota Power) Alliant Energy Interstate Power Company Northwestern Wisconsin Electric Company Otter Tail Power Company Xcel Energy (was Northern States Power Company) Generation & Transmission Cooperatives: Basin Electric Power Association (Bismarck, North Dakota) Dairyland Power Co-op (LaCrosse, Wisconsin) East River Electric Power Cooperative (Madison, South Dakota) Great River Energy (Elk River, Minnesota) L&O Power Co-op (Rock Rapids, Iowa) Minnkota Power (Grand Forks, North Dakota) Distribution Cooperatives: Agralite Electric Cooperative Arrowhead Electric Cooperative Beltrami Electric Cooperative BENCO Electric Brown County Rural Electric Association Clearwater-Polk Electric Cooperative Connexus Energy Co-op Light & Power Crow Wing Power Dakota Electric Association East Central Energy Federated Rural Electric Association Freeborn-Mower Co-op Services Goodhue County Cooperative Electric Association Head of the Lakes Electric Cooperative Heartland Power Cooperative Itasca- Mantrap Cooperative Electric Association Kandiyohi Power Company Lake Country Power Lake Region Cooperative Electric Association Lyon-Lincoln Electric Cooperative McLeod Cooperative Power Association Meeker Cooperative Light and Power Association Mille Lacs Electric Cooperative Minnesota Valley Co-op Light & Power Association Minnesota Valley Electric Cooperative Nobles Electric Cooperative North Itasca Electric Cooperative North Star Electric Cooperative PKM Electric Cooperative People s Co-op Services Red Lake Electric Cooperative Red River Valley Cooperative Power Association Redwood Electric Cooperative Renville-Sibley Cooperative Power Association Roseau Electric Cooperative Runestone Electric Association Sioux Valley-Southwestern Electric Cooperative South Central Electric Association Stearns Cooperative Electric Association Steele-Waseca Cooperative Electric Todd-Wadena Electric Cooperative Traverse Electric Cooperative Tri-County Electric Cooperative Wild Rice Electric Cooperative Wright-Hennepin Cooperative Electric Association ENERGY POLICY & CONSERVATION REPORT 2000 Municipal Utilities: Ada Adrian Aitkin Alexandria Alpha Alvarado Anoka Arlington Austin Bagley Barnesville Baudette Benson Bigelow Biwabik Blooming Prairie Blue Earth Brainerd Breckenridge Brewster Brownton Buffalo Buhl Caledonia Ceylon Chaska Darwin Delano Detroit Lakes Dundee Dunnell East Grand Forks Eitzen Elbow Lake Elk River Ely Fairfax Fairmont Fosston Gilbert Glencoe Grand Marais Grand Rapids Granite Falls Grove City Halstad Harmony Hawley Henning Hibbing Hutchinson Jackson Janesville Kandiyohi Kasota Kasson Keewatin Kenyon Lake City Lake Crystal Lake Park Lakefield Lanesboro Le Sueur *The Department monitors these companies to ensure that they meet the criteria to be small utilities that do not require regulation. Litchfield Luverne Mabel Madelia Madison Marshall Melrose Moorhead Moose Lake Mora Mountain Iron Mountain Lake Nashwauk New Prague New Ulm Newfolden Nielsville North Branch North St. Paul Olivia Ortonville Owatonna Peterson Pierz Preston Princeton Proctor Randall Redwood Falls Rochester Roseau Round Lake Runestone Rushford Rushmore Sauk Centre Shakopee Shelly Sleepy Eye Spring Grove Spring Valley Springfield St. Charles St. James St. Peter Staples Stephen Thief River Falls Truman Two Harbors Tyler Virginia Wadena Warren Warroad Waseca Wells Westbrook Whalan Willmar Windom Winthrop Worthington Minnesota Department of Commerce

21 PAGE 21 Minnesota Joint Action Agencies Central Minnesota Municipal Power Agency Heartland Consumers Power District Minnesota Municipal Power Agency Missouri River Energy Services Northern Municipal Power Agency Southern Minnesota Municipal Power Agency Natural Gas LDCs serving Minnesota Investor-owned (regulated by state) Alliant Energy Interstate Power Company Great Plains Natural Gas Company Northern States Power Company Gas Reliant Energy Minnegasco Utilicorp United People s Natural Gas Utilicorp United Northern Minnesota Utilities Western Natural Gas Municipal Utilities (regulated by city goverment): Argyle Hutchinson Austin Lake Park Bagley Morgan Circle Pines New Ulm Clarissa New York Mills Clearbrook Owatonna Cohasset Perham Duluth Randall Eagle Bend Round Lake Fairfax Stephen Fosston Two Harbors Goodhue Tyler Hallock Virginia Hawley Warren Henning Westbrook Hibbing Small privately-owned companies (unregulated)*: Community Utilities Co., Inc. Gorham s Inc. Greater Minnesota Gas, Inc. Northwest Natural Gas LLC Northwest Natural Gas of Cottonwood County LLC Northwest Natural Gas of Murray Northwest Natural Gas of LLC Crude oil refineries that produce petroleum products for Minnesota consumption BP-AMOCO units in Mandan, North Dakota and Whiting, Indiana Koch Petroleum Group s refinery at Pine Bend, Minnesota Marathon/Ashland Petroleum in St Paul Park, Minnesota Murphy Oil USA s refinery in Superior, Wisconsin. Three pipelines deliver finished petroleum products to Minnesota BP-AMOCO pipeline from Indiana to North Dakota A small Canadian pipeline in Northern Minnesota Williams Brothers pipeline from Tulsa, Oklahoma to Minneapolis/St. Paul and other areas of the state

22 KEY ISSUES: INTRODUCTION PAGE 23 Key Issues The beginning of the 21st century has brought a renewed interest in energy policy. Minnesota and the rest of the country face many challenges including the restructuring of the energy industry, the continuing growth in demand for energy, and tight energy supplies. Energy is not only needed for our survival, it is necessary for the economy to flourish. Our demand for energy, especially electricity, continues to grow. However, the infrastructure that supplies our energy has seen relatively few improvements in the last decade. How we chart a course to meet the increased demand in a way that no one is left behind is therefore critical. We have many challenges ahead. These challenges create opportunities to substantially improve the energy system. The following sections review the key energy issues that must be examined to develop an overall energy policy framework. The Changing Energy Industry section explains the significance of recent events occurring in the industry. Following that background, the Reliability section examines the present challenges to maintaining and improving energy reliability. The next section discusses Conservation which is the cornerstone of this report. Finally, the sections on Energy and the Environment, Renewable and other Modern Energy Technologies, and Energy Affordability, review these critical policy issues to identify opportunities to make substantial and lasting progress in these arenas.

23 KEY ISSUE: CHANGING INDUSTRY PAGE 25 Changing Industry

24 KEY ISSUE: CHANGING INDUSTRY PAGE 27 THE CHANGING ENERGY INDUSTRY Energy production is changing across the nation. Increasingly, energy is being produced and sold under market forces rather than cost-plus regulation. The days of vertically-integrated monopolies in the electric power industry are waning. In the future, individual utilities will likely not own and control all three components of the industry the power plants, the transmission lines, and distribution lines as they do today. CHANGES IN THE NATURAL GAS INDUSTRY Many of these changes have already occurred in the natural gas industry. Prior to the mid-1970s, some gas utilities were also vertically integrated. Utilities owned production fields or rights, an interstate pipeline to transport the gas to the markets and the distribution facilities to provide the product to retail customers. Natural gas commodity prices were also regulated by the federal government, rather than open to market influences. Price controls tended to inhibit the growth in gas exploration and production, which was a contributing factor in the collapse of the oil and natural gas markets in the mid-1970s. The federal government responded to the oil and gas crisis of the 1970s with the Natural Gas Policy Act of This new law began the drastic process of deregulating natural gas prices and breaking up vertical monopolies in order to open natural gas services to market forces. This process took many years and many specific actions by the Federal Energy Regulatory Commission (FERC), which has authority over interstate electric and natural gas transactions and facilities. Specifically, in the 1980s, FERC passed Order 500, which lifted price controls for natural gas, and Orders 316 and 436, which mandated that: production facilities be completely deregulated; transportation facilities (interstate pipelines) be separated from distribution functions and remain under the sole jurisdiction of the FERC; and distribution facilities be operated independently from transportation functions and fall under the jurisdictions of the states in which the distribution companies operate. These natural gas deregulation and restructuring efforts were fine-tuned in the 1990s through FERC Orders 636 (1992) and 637 (2000). Order 636 completed the unbundling of natural gas supplies from interstate pipeline services, ensuring an open market for gas sales and purchases. Order 637 further reduced price regulation by lifting some remaining price caps on transportation services and permitting interstate pipelines to employ a variety of pricing mechanisms to meet market demand. Today in the United States, state regulated local natural gas distribution companies (and large gas end-use customers) purchase natural gas from unregulated gas producers on an open market and transport the gas through an open grid-system of federally regulated interstate pipelines to the ultimate retail customer. The industry experienced some price fluctuations during the transition, which prompted the creation of a natural gas commodity futures market and various financial tools to mitigate large price changes. Congress laid the foundation for changes leading to increased competition in the wholesale generation market. Today s open market wholesale natural gas system appears to be more efficiently operated and priced than it was before deregulation and restructuring. A similar deregulation and restructuring process is beginning in the electric industry. BASIS FOR CHANGE FEDERAL ACTION AFFECTING THE ELECTRIC INDUSTRY Achieving more diversity in electric power sources, especially renewable sources of generation, led Congress in 1978 to enact the Public Utilities Regulatory Policies Act (PURPA). The law required utilities to purchase power from cogeneration and small power producers. Not only did the act encourage renewable energy development, it also resulted in expansion of non-utility generation facilities and laid the foundation for changes leading to increased competition in the wholesale generation market. In the 1990s, actions by Congress and the FERC accelerated the move to competition in the wholesale market.

25 PAGE 28 ENERGY POLICY ACT The 1992 Energy Policy Act (EPAct) dealt with a multitude of energy policies and issues from energy efficiency standards to renewable energy development to nuclear power. It also included three provisions affecting competition by: authorizing operation of independently-owned generation facilities to sell into the wholesale market, authorizing foreign utilities to participate in the U.S. electricity wholesale market, and enhancing FERC s authority to open the interstate transmission system to wholesale generators on a non-discriminatory basis. As early as 1988, FERC began granting utilities the authority to price their wholesale generation at market-based rates. By requiring these utilities to open their transmission systems to competing suppliers, FERC found it could facilitate competition. Granting access on a case-by-case basis, however, did not resolve discrimination issues because of the time it took to process open access petitions resulting in limited use of utilities transmission systems by competing suppliers. In 1994, FERC decided that the best way to mitigate discrimination and thereby enhance competition was to require utilities seeking market-based rate authority to file open access transmission tariffs that allowed suppliers comparable access to their transmission systems. FERC ORDERS 888 AND 889 In 1996, acting on the authority granted to it by EPAct, the Federal Energy Regulatory Commission issued rules designed to further ensure open access ENERGY POLICY & CONSERVATION REPORT 2000 to the nation s transmission system. Known as Orders 888 and 889, the rules require all public utilities that own, control, or operate transmission facilities to file tariffs (schedules of rates) for non-discriminatory open access services. Under these tariffs Consistent with the nationwide trend, the number of Minnesota utility mergers continues to increase. wholesale generators have the same access to transmission systems as the operating utility. The Orders also require these transmission utilities to separate (unbundle) transmission from generating marketing functions and communications. The utilities are permitted to recover from the other wholesale power suppliers the costs associated with providing open access. FERC ORDER 2000 Going a step further to ensure open, non-discriminatory access to transmission, FERC in December 1999 issued Order This order provides an incentive for utilities that own and operate a transmission system to establish an independent regional transmission organization (RTO) to control and administer transmission. Although FERC doesn t require all utilities to participate in an RTO, it will, on a case-bycase basis, consider requiring RTO participation as a condition for approving mergers and acquisitions, removing wholesale price caps, and remedying a discrimination complaint. FERC also, on a case-by-case basis, will consider KEY ISSUE: CHANGING INDUSTRY offering financial incentives for participation in an RTO, such as allowing an increased rate-of-return on equity for transmission facilities. FERC Order 2000 also sets out the specific characteristics and functions that an RTO must have and perform before it is authorized. IMPACT OF CHANGES ON MINNESOTA MERGERS AND ACQUISITIONS The nationwide convergence among electric, natural gas and to a lesser extent petroleum and telecommunications industries is occurring at a rapid pace, spurred principally by the anticipation of market changes due to the deregulation of natural gas and electricity. Also playing a role in eliminating potential barriers between the industries are advances in generation technology and the continuing development of natural gas as the fuel of choice for electric power generation. Consistent with the nationwide trend, the number of Minnesota utility mergers continues to increase. Since the Department issued its last Energy Policy and Conservation Report in 1996 Reliant Energy Resources Corp., formerly NorAm Energy Corp., (including Reliant Energy Minnegasco, formerly Minnegasco) was purchased by Reliant Energy, Inc., formerly Houston Industries Inc., (its main subsidiary provided electric service in the Houston, Texas area). Northern States Power received final regulatory approvals to merge with New Centuries Energies, Inc. (headquartered in Denver) in August, The merger formed a public utility holding company named Xcel Energy Inc. Under the proposed merger, a Minnesota Department of Commerce

26 KEY ISSUE: CHANGING INDUSTRY PAGE 29 service company named Xcel Energy Services would also be formed, which would perform all corporate functions such as accounting and human resources. Xcel Energy, formerly Northern States Power Co., purchased Black Mountain Gas Co. (including a small Arizona natural gas utility), Natrogas, Inc. (Western Gas Utilities, Inc. s parent) and merged with New Century Energies, Inc., (including electric and gas utility service in Colorado, Texas, New Mexico, Wyoming, Kansas and Oklahoma). Utilicorp United Inc. is in the process of merging with two small electric companies: St. Joseph Light & Power Company and Empire District Electric Company. Interstate Power Company merged with WPL Holdings, Inc. and IES Industries, Inc. on April 21, 1998 to form Alliant Energy, with three wholly-owned utility subsidiaries: Interstate, WPL and IES. Alliant serves electric and natural-gas customers in Minnesota, Iowa, Illinois and Wisconsin. Presently, Alliant is proposing to merge its subsidiaries Interstate and IES to form Interstate Power and Light Company. MDU Resources Group, Inc., and Great Plains Energy Corp, which includes its subsidiary Great Plains Gas Co., are merging. Most utilities merge to become better positioned for competition in a restructured industry. Projected merger savings from combining personnel and facilities have often resulted in rate freezes and rate reductions for ratepayers. Another trend is that utility holding companies are investing significant amounts in foreign utility companies. Both trends are somewhat related. They are driven by two major general developments: economic globalization and the emergence of competitive energy markets. These two developments encourage utilities to strengthen their market positions to better compete in the local energy market and in the global economy. THE DEVELOPING WHOLESALE ELECTRIC MARKET More players, new alliances. Minnesota utilities increasingly are turning to buying electric supplies from wholesale generators rather than constructing their own power plants. At the same time, new participants are entering the wholesale market. Several large industrial customers are beginning to sell energy on the wholesale market from their own back-up generators or cogeneration systems. Also, as a tool to reduce demand during peaks of high demand and high market prices, several utilities are allowing large customers to sell on the wholesale market the energy they would normally have used during these peak times. The utilities ($/kwh) are exploring allowing smaller customers to do the same. Other changes include the alliance between Great River Energy, a generation and transmission cooperative utility, and Allete (formerly Minnesota Power), an investor-owned utility. One purpose of the alliance is more efficient use of the wholesale market. An independent company plans to build a natural gas-fired peaking power plant in southern Minnesota which, when completed, will be sold to Great River Energy. Price volatility. A result of FERC Order 888, which removed wholesale price caps for utilities that voluntarily filed open access tariffs, was an increasingly volatile wholesale power market that affected Minnesota s utilities. These fluctuations reflect the changing rates of electricity during peak and off-peak periods. The volatility becomes greater as capacity and transmission shortages and bottlenecks increase. Figure 1 illustrates how each utility s fuel costs have varied from month-to-month. Beginning in 1997, fuels costs for Xcel Energy (formerly Northern States Power) and Otter Tail Power show increasingly wide swings. Figure 1: Retail Service Fuel Costs ($/kwh) for Minnesota s Four Largest Electric Utilities, Jan-96 Mar-96 May-96 Jul-96 Sep-96 Nov-96 Jan-97 Mar-97 May-97 Alliant Energy Interstate Power Company Jul-97 Sep-97 Nov-97 Allete (formerly Minnesota Power) Jan-98 Mar-98 May-98 Jul-98 Xcel Energy (formerly NSP) Sep-98 Nov-98 Jan-99 Mar-99 May-99 Ottertail Power Company Jul-99 Sep-99 Nov-99

27 PAGE 30 In response to these fluctuations, Xcel Energy has sought and the Department has endorsed approval for measures that are intended to reduce the impact of fluctuating prices on retail customers. These include: experimenting with small amounts of futures and options to hedge against price volatility; more real-time pricing in the fuel cost adjustments on customer bills, a demand-side management tool that allows large customers to benefit financially from reducing loads during peak hours; and KEY ISSUE: CHANGING INDUSTRY increased operation of Savers Switch programs, an additional demand-side management tool that decreases customers bills and reduces use at peak periods. ENSURING RELIABILITY AND FAIR AND OPEN TRANSMISSION Growing competition in the electric industry has focused attention on two critical requirements of the electric industry: fair and open access to transmission, and reliability. Fair and open transmission. As noted above, the FERC Order 2000 encourages utilities to join RTOs. The final rule requires all public utilities that own, operate or control interstate electric transmission to file, by October 15, 2000, a proposal for joining an RTO, or, alternatively, a description of any efforts made by the utility to participate in an RTO, the reasons for not participating, any obstacles to participation, and any plans for further work toward participation. The RTOs are expected to be operational by Dec. 15, RTO membership remains voluntary and will operate with FERC oversight. Reliability. Ensuring reliability of the North American electric system has been the responsibility of the North American Electric Reliability Council (NERC) since 1968, when it was created largely as a result of a 1965 widespread power failure in the northeastern United States. NERC establishes standards of operation for owners and operators of the electric transmission system. It is composed of ten regional reliability councils that all follow the NERC standard operating reliability criteria, as ENERGY POLICY & CONSERVATION REPORT 2000 well as any additional criteria the regional council and its members see fit. Although it is a voluntary organization, every utility in the United States, and some in Canada, belong to a NERC regional reliability council. In August 1997, NERC assembled a reliability panel to recommend the best ways to ensure the continued reliability of the electric transmission system in a competitive and restructured industry. The panel s report concluded that a competitive electric industry, combined with an open-access transmission system, required a new organization with the technical competence, impartiality, and authority to enforce reliability standards. In response to this recommendation, efforts are underway to form a new organization, the North American Electric Reliability Organization. Because of growth in competition and structural and other changes in the industry, NERC now sees the need to transform from a voluntary system to one that is mandatory, with the backing and support of U.S. and Canadian governments. The mission of the proposed North American Electric Reliability Organization would be to develop, promote, and enforce standards for a reliable bulk electric system. Authority to implement and enforce compliance with reliability standards would be delegated to regional reliability organizations. Federal legislation is required to create the new organization. Recently proposed legislation would establish the organization as a reliability standardsetting, monitoring, and enforcement entity. FERC would oversee the standards. This legislation would transform regional reliability requirements from voluntary to mandatory, and provide for the establishment of a consistent reliability standard with which utilities must comply. Efforts in Minnesota to form reliability and RTO organizations. In Minnesota, efforts to assure both reliability and open transmission are resulting in formation of new organizations and transformation of existing organizations. All Minnesota electric utilities belong to the Mid Continent Area Power Pool (MAPP), one of the ten regional reliability councils of NERC. MAPP members also include utilities in North and South Dakota, Montana, Wisconsin, Iowa, Nebraska, and the Canadian province of Manitoba. MAPP has been responsible for serving as a system security coordinator by monitoring and assessing reliability in the region, as well as scheduling transactions and coordinating restoration procedures with the region should a blackout occur. MAPP also sets and enforces reliability standards. Minnesota Department of Commerce

28 KEY ISSUE: CHANGING INDUSTRY PAGE 31 Reacting to the above actions of FERC and NERC affecting transmission and reliability, MAPP is moving to transfer some of its operational functions to an RTO, in this case the recently formed Midwest Independent Transmission System Operator, Inc. (Midwest ISO). (Independent System Operator is similar to an RTO). MAPP recently agreed to sell substantially all of its assets to the Midwest ISO. The next step in the transformation process is to meet all the terms and conditions outlined in the MAPP/Midwest ISO Asset Purchase Agreement. The most important requirement is that MAPP members representing two-thirds of MAPP load must join the Midwest ISO. The Midwest ISO is expected to begin initial operations in June 2001 and be fully operational by the end of Formation of an ISO or RTO will not remove the need for a regional reliability organization. Although MAPP intends to transfer its operational and scheduling functions to the Midwest ISO, it will continue to manage and enforce reliability standards and procedures. MAPP has signed a memorandum of understanding with its neighboring regional reliability council to the east, the Mid-American Interconnected Network. The two groups plan to merge, meeting the requirements for becoming an affiliated regional reliability organization under the proposed North American Electric Reliability Organization. Responsibilities of the newly formed regional organization will include auditing reliability standards, operating reserve requirements, and enforcing compliance with reliability standards. ELECTRIC INDUSTRY RESTRUCTURING Nearly every state in America, as well as the United States Congress, is implementing or considering implementing competition at the wholesale or retail levels in the electric energy system. Some states have authorized retail competition, either by legislative action or by regulatory order. In Minnesota, legislative action would be required before retail competition could be implemented in this state. The agitation for changes stems from a combination of technological advances and pressure from large industrial and commercial customers. By the end of year 2000, 23 states plus the District of Columbia have passed final legislation ordering retail competition to be implemented. These states include: Arizona, Arkansas, California, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Virginia, and West Virginia. In addition, the state regulatory commission in New York issued final orders ordering retail competition. The regulatory commission in Vermont also issued a final order, but legislative approval is required before retail competition may proceed. ACTIVITIES IN THE U.S. CONGRESS For several years, various proposals for electric industry restructuring legislation have been before Congress. None has been enacted. Recently the focus has shifted from restructuring to reliability of the energy system because of serious potential and actual reliability problems and tremendous price spikes across the nation. Congress is presently discussing potential action to address reliability problems such as brown outs and black outs and responses to escalating natural gas, heating fuel, and oil prices. ACTIVITIES IN MINNESOTA Beginning in 1995, various groups and agencies have studied whether and how to restructure regulation of the energy industry in Minnesota. In 1995, the Minnesota Public Utilities Commission adopted principles under which restructuring ought to occur and established a working group to analyze the issues and report back to the Commission. The group consisted of representatives of large consumers, small consumers, low-income consumers, utilities, power marketers, environmental groups, and regulators. The group issued a number of reports and recommendations to the Commission, many of which are available at In progressively detailed legislation enacted in 1997 and 1998, the Minnesota Legislature charged its own Legislative Electric Energy Task Force (LEETF) to review issues related to restructuring regulation of the electric energy industry. The task force consists of members of the Legislature and has met many times and issued a number of reports on various issues. Starting in 1995, the Energy Division of the Department of Commerce, when it was still the Department of Public Service, has been actively studying restructuring issues as well. When the Ventura Administration took office, future energy policy became part of the Governor s Big Plan and the Division intensified its analysis beginning with articulating four basic energy principles:

29 PAGE 32 Energy Security: Energy services to Minnesota customers must be reliable based on adequate supply and distribution that relies on diverse production and/or generation sources, efficient operation of the system, efficient consumption based on maximum conservation, and adequate contingency planning. Universal Service: All Minnesota energy consumers must have access to a reasonable level of affordable energy services. Environmental Protection: Energy services to Minnesota consumers must be designed, operated, managed, and utilized to minimize adverse environmental effects to the greatest extent feasible and prudent. Economic Efficiency: Minnesota consumers should be able to choose energy services and energy providers in a competitive market, to the extent that the market can ensure universal, reliable, and environmentally sound service where prices reflect costs over the long term. The next step began in the summer of The Division established work groups to focus on the primary issue areas in the restructuring debate. Well over 600 people were invited to participate, representing consumers, regulated and unregulated energy service providers, environmental groups, state agencies, and legislators. Attendance over the three to four months that these groups met was excellent. Discussion was spirited, focused, and culminated in a set of excellent working documents that lay out the issues and discuss the pros and cons of a myriad of potential approaches. Demand for energy in Minnesota will shortly overwhelm supply. Demand over the past decade has grown by about twice the amount it was projected to grow. KEY ISSUE: CHANGING INDUSTRY Once the work groups completed their tasks, Division staff intensified their analysis and internal discussion of the various issues. Staff became increasingly and strongly convinced that the single greatest potential issue for Minnesota is making sure that the system is reliable now and into the future. Demand for energy in Minnesota will shortly overwhelm supply. Demand over the past decade has grown by about twice the amount it was projected to grow. No significant new capacity has been added to the electric system in more than twenty years and very little is planned to be in production before the shortfall is expected sometime in the 2006 to 2009 time period. Additionally the electric transmission system, where infrastructure improvements also have not kept pace with greater demand partly due to federal action to require access to substantially more transactions across the system, is being operated close to or at capacity much of the time. Finally, the present fuel of choice for new or refurbished electric generation is natural gas. Natural gas supply could be seriously stressed without infrastructure improvements. It will not be effective to give energy consumers their choice of energy suppliers if those suppliers cannot get the energy or cannot transport it if they can get it. During the spring and summer of 2000, Division staff developed a draft plan to reshape state energy policy and energy industry regulation that focuses on clarifying and simplifying the public role of the state and the private role of energy service providers in ensuring reliability of the system into the future. The draft plan is entitled Keeping the Lights On Securing Minnesota s Energy Future and is available at Beginning in September and running through October, 2000, more than 15 public meetings were held to discuss the plan and receive comments. The Department will revise its plan and present a proposal to the legislature in ENERGY POLICY & CONSERVATION REPORT 2000 Minnesota Department of Commerce

30 KEY ISSUE: RELIABILITY PAGE 33 Policy on Reliability The energy system in Minnesota must maintain and improve reliability for the long term. The Energy Division, in concert with other state agencies and interested persons, will seek to preserve and enhance the reliability of the energy system in Minnesota through: comprehensive energy resource planning; maximum energy conservation and efficient energy use; clarifying and streamlining generation and transmission siting processes; promoting modern energy technology; and promoting robust competition in the wholesale market for energy.

31 KEY ISSUE: RELIABILITY PAGE 35 RELIABILITY Reliable energy is critical for the way we live today energy has become essential for work, leisure, and social interaction. Unfortunately, the assurance of the state s continued energy reliability is becoming fragile due to energy production and delivery constraints. These constraints are examples of the two basic components of reliability: adequacy of supply and system security. Adequacy of supply refers to the need for the overall system to be able to provide the aggregate energy requirements of all customers at all times. System security is the ability for the overall system to withstand sudden distrubances such as electrical short circuits or unanticipated loss of system resources. ENERGY SUPPLY ELECTRIC SUPPLY CONSTRAINTS The increasing competition in the wholesale electricity marketplace since 1996 has occurred simultaneously with a significant decrease in the amount of extra available power on the grid. This surplus power (called generating capacity or reserve margin capacity) has been declining nationwide during the late 1990s. The situation in the MAPP region of the upper Midwest is strained to the point that the projected amount of reserve generating capacity available in the summer peak demand season is projected to be at or below the minimum that is considered acceptable for reliable operations in the near future. The North American Electric Reliability Council (NERC) predicted that the MAPP region could have a deficit as large as 5400 MW by the summer of This lack of available generating capacity is not unique to our region. The Council has identified the possibility of shortages in other regions of the U.S. during the summer peak season (the East Coast, California and the Southwest). Similarly, the Secretary of the Department of Energy has warned that even these projections may understate the shortage risks depending on weather extremes. In Minnesota there have been only three major generating plant additions permitted in the last ten years. These have all been peaking facilities, plants used only in times of highest demand (usually in the hottest time of the summer.) No base load plants (which are generally large facilities that serve the steady level of ongoing electric demand) have been proposed for construction and none have been built since the 1980s. Currently, in the rate-regulated utility environment in Minnesota, planning for needed new resources in the power supply system is done through what is called Integrated Resource Planning. Each state-regulated electric utility in this state is required to file a plan for approval on a biennial basis that projects the future resource needs over a fifteen year planning horizon. New generation resources as well as tools to reduce and manage demand for electricity are analyzed together to develop a plan for meeting the utility customers needs. As the market changes, such planning will remain important. However, a new approach to capacity planning will be increasingly necessary to match the changing environment in which utilities operate. POTENTIAL ELECTRIC SUPPLY SOLUTIONS Increased competition in the electric wholesale industry over the last four years has created a new source of supply side resources for the utilities. Now it is possible for utilities to include power purchased from the wholesale market as an option in making decisions for the best (in terms of price and reliability) electric generation resource. For one utility in the state, a competitive bidding strategy has been approved as a means to procure new resources required to satisfy the electricity needs of its customers. Programs to reduce or control the demand for electricity help manage supply problems. Since such energy conservation measures require little lead-time for implementation, they are being aggressively pursued. For example, methods are being considered for charging consumers market-based prices for energy used during high-priced peak times. This type of pricing is expected to show customers that conserving energy is in their own best interest, helping mitigate the spike in demand that occurs when temperatures get hot in the summer. Reducing demand will lessen reliability problems to a certain extent. However, since Minnesota s and the region s need for energy continues to grow, eventually new generation resources must be built. This raises additional questions regarding the fuel source for such resources.

32 PAGE 36 GENERATION AND FUEL SOURCE CONSTRAINTS All three new peaking plants are natural gas fired facilities that have relied on the summer surplus of natural gas pipeline capacity, available since most consumer furnaces are not being used. This use of natural gas represents a change in the type of electric generation being built. Further evidence of this shift is Xcel Energy s proposed conversion of one of the units at the Black Dog Power Plant (located on the Minnesota River in Burnsville, Minn.) from coal to natural gas. This new reliance upon natural gas has the benefit of substantially lower adverse environmental impacts and increased efficiency in the use of pipeline capacity. There are, however, a limited number of these facilities that can be added to the existing natural gas pipeline infrastructure without significant upgrades to the pipeline system. In addition, this large, relatively new use for natural gas by electric generation is currently increasing national natural gas prices. It is becoming clear that each potential fuel source for additional electric generation has its associated difficulties. The trend has been to shift away from coal partly because of emissions and other environmental concerns. Additional nuclear facilities seem unlikely at the present time because of the serious unresolved issue of spent fuel disposal as well as concerns about relicensing existing plants. Most of the available hydroelectric sites in the Midwest are developed to the extent it is physically and economically possible. Although wind is rapidly becoming the low cost option, it is still limited by the natural availability of wind resources. It is important to develop new technologies as well as more efficient and environmentally friendly applications of existing technologies in order to resolve the strain on our state s and nation s electric generating capacity. POTENTIAL FUEL SOURCE SOLUTIONS New innovations like small gas turbines, fuel cells, grid connected photovoltaic systems, bioenergy, and wind turbines are emerging technological developments in the field of electric generation. These new technologies are creating opportunities for efficiency improvements as well as allowing for the distribution of generation resources in small capacity increments located at or near the end use loads. The renewable technologies offer non-fuel based (wind and solar) and renewable fuel based (e.g. hydrogen and ethanol) alternatives to the traditional fossil fuel electricity production technologies. While distributed generation (placing small generators at or near the demand for electricity) represents an opportunity for innovative power supply solutions, it also creates challenges for traditional power system planning processes. Historically generation has been added in large megawatt increments at a single point on the power grid such as a large coal-fired or nuclear power plant. The new smaller-scale energy generation technology as well as changes in the marketplace will require new ways of planning to successfully meet future power needs. To encourage construction of new energy technology, it will be necessary to streamline the planning and permitting process, facilitate interconnections, address tax issues and other initiatives. ENERGY DELIVERY KEY ISSUE: RELIABILITY NATURAL GAS TRANSPORTATION CONSTRAINTS Despite its many resources, Minnesota does not have any natural deposits of natural gas. Therefore, all of the natural gas products used in the state must be imported through interstate pipelines from natural gas-bearing regions in Canada and the southern and western parts of the United States. The basic frameworks of the three interstate pipelines were built between the 1940 s and the 1960 s, although there have been major expansions over time. Demand for natural gas has used up the available capacity (or space in the pipeline) for the winter heating season particularly on the Northern Natural pipeline, which delivers over 80 percent of the natural gas consumed in Minnesota. Also, as discussed previously, with the electric industry turning to natural gas for electric generation, available summer (non-heating season) capacity is being rapidly used up as well. The pipeline infrastructure has no room to accommodate further growth without extensive and expensive construction upgrades to the facilities. Such construction is often controversial. Local citizens and governmental bodies oppose having many miles of ground, vegetation and habitat dug up. Pipeline companies try to avoid major disruptions by determining the most constrained parts of their system and then upgrading only small sections of pipe and facilities at a time to mitigate the worst bottlenecks. This strategy will be effective only for the short term. In the near future, Minnesota will need some major pipeline upgrades to continue meeting the ever-growing demand for the fuel of choice, natural gas. ENERGY POLICY & CONSERVATION REPORT 2000 Minnesota Department of Commerce

33 KEY ISSUE: RELIABILITY PAGE 37 NATURAL GAS DELIVERY SOLUTIONS Since interstate natural gas pipelines fall under interstate commerce, they are regulated by FERC rather than by the states. Even though the state does not directly regulate interstate pipelines, Minnesota can and does influence pipeline actions. The Department actively represents the interests of Minnesota citizens in requests made by the pipelines to FERC. In the future, the Department s public interest analysis and advocacy will prove even more important in ensuring the availability of natural gas for Minnesota s ever-growing needs. Additionally, the Department continues to promote natural gas conservation programs that are intended to reduce demand and assist in efficiently using current pipeline capacity. Conservation efforts work to efficiently use pipeline capacity during the non-winter peaking period and to reduce overall demand during the winter heating peak period. ELECTRIC TRANSMISSION CONSTRAINTS Increased activity in the wholesale electricity market has also resulted in Minnesota s system of electric transmission lines being used in a manner that was not foreseen by the original system designers. Traditionally, the generators and consumers of electricity are not located in the same place. In order for the power to be delivered from the place of generation to the place of consumption, preferred transmission line pathways developed. These preferred pathways are often delivering the maximum level of power that those power lines can safely and reliably carry, creating constraints or bottlenecks on certain parts of the transmission system. Having constraints between power buyers and sellers limit the amount of energy purchases and sales that can occur on the system which, in turn, leads to higher energy costs. Even more importantly, such transmission constraints can and do threaten system reliability. Operation of many major transmission lines into and out of Minnesota is pushing limits of reliability Operation of many major transmission lines into and out of Minnesota is pushing limits of reliability. For example, the major transmission lines from Minnesota into Wisconsin currently operate at reliability limits during summer peak times to satisfy power requirements in that region. Transmission capacity is also constrained in southwestern Minnesota along the Buffalo Ridge (near Benson and Pipestone). This constraint limits further development of wind power since any new electric generation in that area would require construction of additional transmission facilities to move power to consumers. Transmission constraints in Minnesota also have more far-reaching effects. Because of the way that power flows on the electric grid, the use of power lines in this state can impact power flow levels on power lines located long distances from here. Similarly, transactions occurring in other parts of the country affect the flow of electricity on power lines in Minnesota. POTENTIAL ELECTRIC TRANSMISSION SOLUTIONS One way to alleviate the constraints on the power system would be to construct additional transmission lines and facilities and upgrade existing power lines. Construction of additional electric generation resources in strategic locations can also act to reduce the strains on transmission lines at heavily used locations. Recent advances in generation technology have made the use of relatively small-scale generation facilities, located at or near the customer s usage location, another potential method for providing transmission system congestion relief. Other solutions that can be implemented more quickly include various methods of providing incentives for changes in electricity demand. Reduced consumption of electricity is the least costly, most effective and efficient tool that all electricity consumers can practice to manage or reduce the demand for the use of transmission facilities. Pricing methods that reflect the higher costs of heavily used transmission facilities to the electric consumers would help motivate consumers to reduce demand in those areas. These demand side efforts to manage power grid loading levels can be put in place quickly, and offer another means to manage the reliability related impacts associated with transmission constraints. Finally, regional transmission organizations (RTO), independent groups that oversee operation and planning in specified regions of the power grid, can be an efficient structural framework to manage the current capacity constraint problems that limit the use of the power grid and create reliability challenges. RTOs are expected to develop transmission prices and services that will create market-based incentives for transmission system users and relieve constraints. RTOs are also expected to develop a plan for transmission infrastructure development, and determine the cost recovery mechanism for that infrastructure investment. For these

34 PAGE 38 reasons, FERC is urging companies to join RTOs (as described in the Changing Energy Industry section). Currently, all companies that own or use electric generation and transmission facilities in Minnesota, North Dakota, South Dakota, Nebraska, Iowa, Missouri, Manitoba and parts of Wisconsin and Montana belong to a regional reliability council. This council, the Mid American Power Pool (MAPP), works primarily to ensure electric system reliability. As explained in the Changing Energy Industry section, MAPP is currently in a state of flux because of federal government actions. The management structure of the entire nationwide power system is in a time of transition. The FERC initiatives on Independent System Operator (ISO) and RTO formation are spawning new organizations for operational management of the grid system. Competitive developments in the wholesale electricity market are challenging the way that the reliability of the grid traditionally has been managed. These changes have created an incentive for the national organization that oversees reliability to redefine itself into a new organization with mandatory compliance authority. Our regional reliability council, MAPP, is adapting to the changing federal environment by creating a new Regional Reliability Organization (RRO) that will manage electric reliability consistent with the new federal direction. Both the Minnesota Department of Commerce and Minnesota Public Utilities Commission recently provided comments on the new RRO formation in the form of a statement from a Midwest State Commissions Collaborative on Reliability. This collaborative was formed as a result of the regional regulatory agencies wishing to speak with a common voice in the development of these new management structures. The Department will continue to engage in these discussions, utilizing regional collaboration as available, to protect the public s interest. Active participation in regional efforts such as the collaborative is one way that the Department will work to continue to ensure that the reliability of the electric system remains a top priority. KEY ISSUE: RELIABILITY C ONCLUSION Minnesota and the region are at a crossroads: The demand for energy continues to increase but the power generating facilities and transmission infrastructure used to deliver power are already being used to their maximum potential. In order to preserve stable, reliable and attractively-priced energy resources, the energy companies, government and other affected parties must work together to adjust energy planning, management, and governance to maximize energy conservation and enable emerging energy fuel sources and generation technologies to be developed and needed infrastructure enhancements to be built. ENERGY POLICY & CONSERVATION REPORT 2000 Minnesota Department of Commerce

35 KEY ISSUE: CONSERVATION PAGE 39 Policy on Conservation Energy conservation is vital for Minnesota s energy future. The Energy Division will seek to improve the efficiency and effectiveness of energy conservation efforts by: ensuring that entities that are charged with implementing and evaluating energy savings programs do not also promote consumption of the energy that needs to be conserved; encouraging energy service providers to recognize the business and system value of effective load management and energy efficiency and to implement and/or improve their efforts in these areas; encouraging the marketplace to recognize the economic value of conservation with the goal of privatizing aspects of conservation that the market can and will accomplish; and analyzing conservation activities and programs to determine which ones are most effective and promoting and improving those efforts.

36 KEY ISSUE: CONSERVATION PAGE 41 CONSERVATION Energy Conservation is a broad term, covering a variety of activities and strategies. Strictly defined, conserving or saving energy applies only to actions that cut energy use for example, turning down a thermostat or walking or biking to the store rather than taking the car. On the other hand, energy efficiency focuses on the most efficient use of energy and it may or may not lower overall energy use. For example, a company might install energy efficient equipment with the goal of increasing production. The company s energy use could stay the same or even rise, but the output per unit of energy used would increase. Other terms often included under energy conservation refer mainly to the efficient management of energy supply and delivery. Load management describes actions that seek to shift demand for electricity away from hours of the day or seasons of the year when demand normally is highest. Late afternoon on a hot summer day is normally a peak period, and supply and delivery systems can be strained to the point of power failures or brownouts. By reducing strain on the system, load management helps maintain reliability and prevent costly power failure. Demand Side Management, commonly referred to as DSM, covers an array of activities load management, conservation, and efficiency all designed to affect the timing and amount of energy used. In pre-dsm days, utilities and regulators focused on planning new supplies to meet energy demand (which has been steadily rising over the past several decades). With growing concern over the environmental and economic impacts of energy use, the focus has shifted to include both reductions in demand as well as increases in supply as ways to meet future energy needs. LEGISLATIVE FINDINGS AND ACTION... BASIS FOR STATE POLICY All of the above terms, under the general heading of conservation, are a major policy goal of the State of Minnesota as established by the legislature in Minnesota Statutes Chapter 216C. This Chapter gives the Department the responsibility for advancing conservation through an array of programs and activities, based on the legislature s finding that: continued growth in energy demand will cause severe social and economic dislocations, it is in the public interest to minimize the need for additional electric generating plants, and the state has a vital interest in providing for increased efficiency in energy use. Originally enacted in the 1970s in response to the energy crisis of that era, the statute and subsequent amendments continue to provide an excellent policy framework as we gain a better understanding of the negative impacts of rising energy use on the economy and on the environment. THE ENERGY NOT USED HELPING THE ENVIRONMENT, THE ECONOMY, RELIABILITY Global climate change, nitrogen-infused lakes and streams, and ozone pollution permeating the nation s cities are all headline-producing environmental problems associated with energy use. As worldwide temperatures rise, the world s scientific community is nearly united in its view that the global climate is changing as a result of increases in atmospheric gases mainly carbon dioxide (CO 2 ). These gases, producing what is called the greenhouse effect, absorb thermal radiation emitted by the earth and prevent its escape into the outer atmosphere. Traditional energy generation contributes greenhouse gas emission. There is widespread agreement that society should take cost effective measures to reduce CO 2 and other greenhouse gas emissions, helping to slow the pace of climate change and reduce the severity of its impacts.

37 PAGE 42 The impact of sulfur and nitrogen pollutants (both emitted by power plants) on lakes and soil in nearly all sections of the nation, particularly the northeast, has been well documented; and emissions from automobiles, power plants, and other sources combine with heat and sunlight to create severe ozone pollution in the nation s cities, with serious consequences for human health. Growing strains on the electric generation and transmission system are evident; the summer of 1999 brought power failures and brownouts in several areas of the nation. Again, conservation the energy not used becomes a valuable tool in reducing the strain, particularly at peak periods. Minnesota s natural gas pipeline capacity also is experiencing constraints. Conserving natural gas, especially during the heating season, helps reduce the need for new pipeline construction, with its attendant costs and potential environmental impact. As the global marketplace becomes ever more influential in the economic health of the nation, the importance of reducing energy costs to increase competitiveness assumes even greater priority for the nation s businesses. ADVANCING CONSERVATION THROUGH MANDATES, GRANTS, INFORMATION Reacting to the potential for conservation to solve or reduce these problems, both the federal and Minnesota state governments have acted to advance conservation, employing mandates, financial assistance, and other strategies to reach their goal. The Department of Commerce Energy Division has responsibility for a number of these efforts. ENERGY POLICY & CONSERVATION REPORT 2000 CONSERVATION IMPROVEMENT PROGRAM (CIP) Enacted by the legislature in 1982, CIP is the leading state conservation mandate. It requires Minnesota s electric and natural gas utilities to spend a percentage of their annual income on programs to encourage conservation among all their customers residential, commercial, and industrial, with specific attention given to providing conservation opportunities for low-income residential users. CIP has had a substantial impact on energy use, and its effectiveness was recognized in 2000 by the American Council for an Energy Efficient Economy. The Council ranked Minnesota s utility energy efficiency program among the top six in the nation, based on data collected by the Federal Energy Information Agency. Under CIP, investor-owned utilities (IOUs) submit their conservation projects to the Department for approval. In the four years (1996 through 1999) since the last Energy Policy and Conservation Report to the legislature, electric IOUs have spent $187.5 million on CIP, for an average of $46.8 million a year. Gas IOUs have spent $47 million, or an average of $11.7 million a year. Four-year energy savings from these KEY ISSUE: CONSERVATION...the American Council for an Energy Efficient Economy ranked Minnesota s utility energy efficiency program among the top six in the nation... programs totaled 1.3 billion kilowatt-hours of electricity (an average of 325 million kwh per year) and 4.3 billion cubic feet of natural gas (a yearly average of 1 billion cubic feet). The magnitude of these savings is better understood by noting that the average annual electric CIP savings are sufficient to provide the electric needs of more than 41,000 residential customers yearly. CIP has also lowered the peak demand for both fuels: an average of 128,000 kilowatts per year over the past four years, and an average of 10.7 million cubic feet of natural gas per year. In addition, the projects are highly cost-effective. On average, a $1 investment in both natural gas and electric CIP investments results in a benefit of $3.50. In addition to serving all customer classes, CIP projects should be cost-effective that is, the cost of the project must not exceed the cost of the energy saved. Types of projects that have proved effective include: For residential electric consumers: discounts and rebates on efficient lighting and central air conditioning, as well as evaluations of home energy use. For residential gas consumers: rebates on insulation and efficient furnaces and water heaters. For commercial electric consumers: rebates on purchase of more efficient lighting and refrigeration equipment. For industrial electric customers: rebates on purchase of more efficient motors and industrial processes. For commercial and industrial gas customers: rebates for increasing insulation and purchasing more efficient space heating and cooling equipment, as Minnesota Department of Commerce

38 KEY ISSUE: CONSERVATION PAGE 43 well as free evaluations of energy use and ways to conserve. Minnesota s rural electric cooperatives are also required to invest a percentage of their revenue on conservation programs and submit an annual report on the projects to the Department. The seven generation and transmission electric cooperatives, and their 45 distribution cooperatives, reported spending $18.4 million on conservation in Education, rebates for efficient lighting and other efficiency improvements, and load management measures are among the most common types of projects. Of Minnesota s 127 municipal electric utilities, only the 87 that generate all or a part of their electric power are required to spend a portion of their revenue on conservation and report on these programs annually. The remaining 40 electric utilities are required simply to submit annual reports on their gross earnings and electric power provider. In 1998, municipal electric utilities spent $7.5 million on conservation, more than double the amount required by law. This included expenditures by the 87 utilities required to invest in conservation as well as seven utilities not bound by the conservation mandate. Education, rebates, and load management programs are among the most common. Of Minnesota s seven municipal natural gas utilities, four met the income threshold of $5 million that requires them to spend 0.5 percent of that revenue on conservation. Expenditures in 1998 totaled $823,551, three times the amount required. Education, rebates, and programs for low-income customers and renters are among the most common. BUILDING ENERGY USE Another state conservation mandate this one targeting building construction was made a Department responsibility by the Legislature in Department experts monitor developments in efficient construction and periodically revise rules to upgrade energy construction codes to meet the high energy efficiency standards appropriate for our cold climate. In 1995, the Department began a major effort to improve the energy efficiency in residential and commercial buildings by incorporating basic principles of building science into the energy code to resolve issues of excess moisture and poor indoor air quality. Supported by U.S. DOE grants totaling over $800,000, the Department has conducted and continues to conduct an extensive public and builder education and training program in the new energy code standards and construction techniques for healthier, more durable and energy efficient buildings. Through its curriculum development, instructor training, and classes conducted in all areas of the state, the Department has reached the majority of the state s 10,000 licensed residential building contractors. The Department, in cooperation with the U.S. DOE, also developed MNcheck (residential) and COMcheckMN (commercial), computer software programs to help designers and builders builders determine if their building plans meet the energy code requirements. Through CIP, the Department has worked with investor-owned utilities to demonstrate energy-efficient housing construction and educate builders and others in these construction techniques as the energy code rules were put into place. More than 600 of these high quality homes have been built, demonstrating the value of incorporating building science principles into construction details. In 1999, the Department co-sponsored an energyefficient housing construction project in southeastern Minnesota that reached a wide audience of home buyers, realtors, technical school students, and the entire building industry in that area. The new residential energy code became effective in April As a result of recent action by the legislature, future changes to the energy code will be adopted by the Building Codes and Standards Division in the Department of Administration. The Department will work closely with the Building Codes and Standards Division to ensure that energy efficiency continues to be a primary element in the code. NATIONAL ENVIRONMENTAL COMPETITIVENESS THROUGH ENERGY, ENVIRONMENT, AND ECONOMICS (NICE3) The Department of Commerce seeks funds to support research, demonstration, and other projects that advance conservation. A current example is the $500,000 NICE3 grant that the Department received from the U.S. DOE to support commercial-scale demonstration of a taconite processing technology. The technology produces higher yields and a higher grade iron ore than the process now used, and annually would save the taconite industry 170 gigawatt-hours of electricity and reduce chemical use by 1,700 tons. It would help Minnesota s iron ores remain competitive in a global market. The project is being conducted by the 5 R Research, Inc. and Evtac Mining Company, an Iron Range mining company. The Department led

39 PAGE 44 the application process, and the grant was one of only eight selected by the U.S. DOE from 52 applicants nationwide. The Energy Information Center provides accurate, unbiased information on energy conservation and renewable energy to the public, giving people the information they need to make informed decisions regarding their own energy use. Staff respond to questions called into the Center s toll free phone line (more than 9,000 calls this past year) or sent to the Center by mail or . Publications on energy conservation, including a series of 17 titles on how to save energy at home, have been developed by the Department. This year the Department also developed a series on renewable energy technologies. The Department markets these publications at trade shows, the State Fair, and other meetings, as well as through articles on conservation topics sent monthly to the statewide news media. The publications also have been reproduced on CD- ROMS and posted on the Department s web page. Approximately 200,000 publications and 40,000 CD-ROMS are distributed annually. Another educational tool The Telltale House has been purchased by the Department. The miniaturized plexiglass house demonstrates the interaction of energy and ventilation systems in the home and is displayed at meetings, shows, and other public gatherings. The Center also distributes information on the energy code, including MNCheck, the computer software program that builders use to determine whether their building plans meet code requirements. ENERGY POLICY & CONSERVATION REPORT 2000 CONSERVING ENERGY IN THE YEARS AHEAD A more competitive energy industry and new technologies affecting energy sources and delivery systems will have an impact on conservation and the methods used to advance conservation. CIP MANDATE Mandated energy efficiency programs such as CIP will continue to play an important role in energy saving, but changes will probably be needed in the way CIP is administered and in the incentives provided. Recognized as one of the nation s most effective conservation programs, Minnesota s CIP is starting for the first time in its nearly 20 year history to show a decline in both conservation spending and total energy savings for the investorowned electric utilities. Much of this decline is due to the inherent conflict in requiring a for-profit company to spend money to reduce sales, which results in reduced profits for the company. To counteract this disincentive, CIP has used financial incentives as a reward for efficient conservation investments. For many years utilities were paid lost margins the difference between the price of a kwh or MCf and the marginal cost of producing it as an incentive. Lost-margin recovery, however, was recently eliminated due to its high costs sometimes doubling the cost to ratepayers of energy conservation improvements and because it was not resulting in increased investments in energy conservation improvements. A large consortium of interested parties devised a new, lower-cost incentive that only rewards a utility for meeting and surpassing its statutory energy- and demand-savings goals in a cost-effective manner. The Commission approved this new incentive in KEY ISSUE: CONSERVATION Another major change is the new provision in Minnesota Statutes that allows the largest companies in Minnesota to opt-out of Minnesota s CIP. Of the twelve customers that petitioned for an exemption from CIP, 10 were granted. The exempted customers are five taconite mines, three paper mills, one steel mill, and one petroleum refinery. These exemptions will reduce CIP funds by about $3.5 million annually, an eight percent reduction in the annual CIP budget. Mandated energy efficiency programs such as CIP will continue to play an important role in energy saving... Because of these and other expected changes, the Department has begun looking at other models for administering mandated energy conservation programs. These include a Vermont plan for establishing an independent entity, called Efficiency Vermont, to implement conservation programs. The core programs identified as having the potential to achieve the most cost effective savings in Vermont over the next five years are those that target residential new construction, residential low-income consumers, energy-efficient products, commercial and industrial new construction and equipment replacement, and dairy farms. New York is another state that has established a non-utility based conservation program. A fund for conservation programs has been established with a systems benefits charge that all Minnesota Department of Commerce

40 KEY ISSUE: CONSERVATION PAGE 45 electric providers must pay. A total of $234.3 million is expected to be available over the first three years. Money will be used to offer incentives for improving building efficiency, developing new energy-efficient products and technologies, and assisting low-income residents with weatherization and other energy-saving measures. OTHER CONSERVATION PROGRAMS Building energy use and new developments in efficient construction as well as lighting and heating, air conditioning, and ventilating systems will continue to be monitored by the Department. The Department will work with the Department of Administration to incorporate these changes into the state building code, as well as providing information to the building industry and the public. Supporting research and demonstration projects that advance conservation in industries and areas of specific value to Minnesota will continue to be a priority. So, too, will providing consumers with reliable information on energy use and ways to conserve and improve efficiency. The importance of consumer choice in a more competitive energy industry may call for more vigorous efforts to market information materials, with particular attention given to effectively using the Internet.

41 KEY ISSUE: ENVIRONMENT PAGE 47 Policy on Energy and the Environment Minnesota s energy future must be built on the most cost effective, least environmentally damaging energy resources. The Energy Division, in coordination with other state agencies such as the Pollution Control Agency, the Environmental Quality Board, the Department of Natural Resources and the Department of Agriculture, the energy industry, environmental advocates, and other interested persons, will: actively promote energy conservation; actively promote modern energy technologies that are nonpolluting or less polluting; encourage continued improvements in traditional energy technologies that minimize environmental degradation; and encourage development and use of less polluting, renewable, and domestically available motor vehicle fuel sources such as ethanol and biodiesel.

42 KEY ISSUE: ENVIRONMENT PAGE 49 ENERGY AND THE ENVIRONMENT Energy is necessary to sustain life and enable a robust economy. Producing and consuming energy, however, is the source of most air pollution and a substantial portion of water pollution as well. 1 From drilling, mining, or the damming of rivers and streams to the refinement of fuels, transportation, combustion, water usage, and waste disposal, every stage of energy production and use alters the environment and poses serious risks to ecosystems and human health. Energy production and use is the largest single source of air pollution in Minnesota. 2 It is also a large source of hazardous wastes stored above ground or disposed of in landfills. Energy production and consumption in Minnesota includes: electric generation involvings combustion of large quantities of coal, natural gas, petroleum-based fuels (oil, fuel oil, propane, gasoline, diesel fuel), solid waste, and wood; electric generation utilizing the heat from enriched uranium; small amounts of electric generation using hydropower, wind, or solar energy; direct combustion of natural gas for on-site heating, cooling and cooking; refining petroleum fuels; and combustion of petroleum fuels and a very small amount of alcohol (made from agricultural crops) fuels to power motor vehicles. The challenge is to balance the need for energy with the need for healthy ecosystems that are critical for supporting the continued existence of healthy humans, animals, and plants. Further complicating the problem is the fact that air pollution does not respect state or national borders. Emissions from far away affect Minnesota and Minnesota emssions affect other states and nations. Energy production and consumption relies overwhelmingly on combustion of fuels and using heat from enriched uranium. Depending on the fuel that is burned, combustion forms and releases air pollutants that harm humans and animals by causing acute illnesses from short-term exposure or chronic illnesses from long-term exposure. These pollutants also affect ecosystems ranging from harm to vegetation to changing local and global climates. In addition, combustion of solid fuels such as coal and solid waste leaves behind large quantities of ash that contains toxic metals. In addition to combustion, the extracting, handling, and transporting of fuels and disposing of residues pose significant environmental risks, including: disrupting or destroying local ecosystems; exposing workers and others to acute and chronic illnesses; risking transportation accidents such as oil spills; leaching, spilling, exploding, or igniting materials in storage; and leaching, spilling, or emitting pollutants from disposal sites. Nuclear power, which does not burn fuel but uses the heat from radioactive materials, results in high-level radioactive waste that must be strictly held in quarantine from humans, animals, and vegetation for thousands of years. In addition, there is a slight potential for accidental release of radioactivity, which requires extraordinarily diligent operation and management of nuclear power generators and very careful transportation of radioactive materials. Human and animal exposure to radioactivity at high levels, even very brief exposure, results in acute illness usually leading to death and at low levels, over time, results in increased risks of various cancers. Exposure is possible at all stages in the process: uranium mining and enrichment, transportation and utilization of fuel, storage, transportation and disposal of waste. Coal-fired, natural gas-fired, and nuclear power plants all rely heavily on cool surface or ground water to keep machinery at operable temperatures. When the water is returned to the environment it is much warmer, which raises overall water temperatures and can disrupt aquatic ecosystems. Hydroelectric power systems usually rely on damming rivers or streams. Damming disrupts normal plant, fish, and animal life both upstream and downstream and can change the local climate of a region. Decaying organic matter in the shallow reservoirs releases global warming gases. In addition, the higher the waterfall, the more likely it will stir up pollutants that have become part of the sediment on the bottom of the streambed and make them

43 PAGE 50 KEY ISSUE: ENVIRONMENT Figure 1: Principal Sources of Environmental Impacts from Energy Production and Use* Geographical Time Period of Source of Impact Scope of Effect Effect or Recovery Media Source Principal Effect Sulfur dioxide (SO 2 ) Local, regional Medium-term Air coal combustion lung irritation, breathing difficulty, respiratory tract infection, acid rain Nitrogen dioxide (NO 2 ) Local, regional Medium-term Air coal combustion, lung damage, breathing diesel electric difficulty, respiratory tract generation infection, acid rain, ozone formation, regional haze, nutrient loading of aquatic systems Fine particles (PM2.5) Local, regional Medium-term Air coal combustion lung irritation and damage, bronchitis, regional haze Greenhouse gases (CO 2, Global Long-term Air fossil fuel climate change N 2 O, CH 4 ) combustion Butadiene, formaldehyde, Local Medium-term Air transportation human cancers toluene, benzene fuels Mercury (Hg) Local, regional, Long-term Air, water coal combustion, neurological damage global waste-to-energy Other particulate metals Local Medium-term Air, water coal combustion, human cancers, coal and WTE ash neurological and renal damage Dioxin Local Medium-term Air, food waste-to-energy human cancers, birth defects, liver damage, immune suppression Nuclear Waste Local, regional Long-term Water nuclear power human cancers *Other Toxic Release Inventory Chemicals listed in order of pounds released to the atmosphere as reported by Minnesota coal-fueled electric utilities in 1999 are: Hydrochloric Acid and Sulfuric Acid (in aerosol forms), Hydrogen Fluoride, Ammonia, Barium, Nickel, Manganese, Zinc, Copper, Chromium, Lead, 1,2,4-trimethylbenzene, N-hexane, and Antimony. available to fish and other aquatic organisms and on up the food chain to humans. Figure 1 above summarizes the principal source of environmental impacts from energy production and use. AIR QUALITY Federal and State Air Quality Programs are designed to reduce emissions of toxic chemicals as defined in the Federal Emergency Planning and Community Right to Know Act, which requires reporting on quantities of approximately 600 toxic chemicals that facilities release to the environment, and the Clean Air Act. The Clean Air Act focuses on Criteria Air Pollutants. These are listed as: sulfur dioxide (SO2), nitrogen oxides ENERGY POLICY & CONSERVATION REPORT 2000 (NOx), ozone (O3), fine particulates (PM10 microns and PM2.5 microns), carbon monoxide (CO), volatile organic compounds (VOCs), and lead. With the exception of VOCs and PM10, fossil fuel combustion during the production of energy is the principal source of emissions of criteria pollutants. These pollutants are regulated under: * ambient air quality standards set at minimum levels to protect human health; * vehicle emission standards; * a best achievable technology emission standard for new stationary sources of pollutants (such as power plants, waste combustors, or factories); * a three-tiered approach to acid rain control involving a national SO2 cap for electric utilities, controls on emissions of SO2 and NOx at specific designated electric generating plants; and firmlevel maximum allowable rates of emissions of SO2 and NOx per unit of fuel input. As more scientific knowledge is available about the effects of criteria pollutants on human health and the environment and as technology improves to control emissions or prevent them altogether, standards are becoming progressively tighter. In the near future, there will likely be stronger standards particularly for SO2 and NOx. In addition, the standards for Minnesota Department of Commerce

44 KEY ISSUE: ENVIRONMENT PAGE 51 new stationary sources also apply to substantial modifications of existing plants. U.S. EPA is presently seeking, through the courts, application of the new source standards on existing power plants that are undergoing substantial retooling. Most criteria pollutants come from two sources: electric power generation and transportation (primarily motor vehicles). ELECTRIC POWER GENERATION In Minnesota, electric power generation accounts for two-thirds of SO2 and lead emissions statewide, one-fifth of NOx, and most PM2.5 microns. Most emissions from electric generation are associated with coal combustion. Many of the coal-fired power plants in Minnesota are more than 25 years old, and some are 35 to 40 years old. With the exception of the acid rain requirements of the Clean Air Act, these plants are exempt from most of the pollution control requirements implemented over the last 20 years because they predate control efforts. It is likely that these plants will continue to operate well into the future. No timetable for plant retirements has been announced. Criteria pollutant emission rates from these plants is generally three times higher than the emission rates for new generating plants. MOTOR VEHICLES Nearly all of the energy used in transportation relies on liquid petroleum fuels used in internal combustion engines. Refined petroleum fuels are highly volatile. The use of these fuels results in evaporative emissions. Most air emissions from transportation, however, are combustion emissions (vehicle exhaust). The principal compounds formed by combustion in motor vehicles include: carbon monoxide (CO), nitrogen oxide (NOx), and various volatile organic compounds (VOCs). Emissions depend on fuel formulation, engine design, installed emission control technology, driving behavior, highway speeds and congestion, and climate. Roughly speaking, in Minnesota, motor vehicles account for about one-third of NOx emissions, twothirds of carbon monoxide emissions, and one-quarter of VOC emissions. In addition to these pollutants, motor vehicle exhaust also contains substantial levels of air toxics, which are of increasing concern. The U.S. EPA has established a proposed list of Mobile Source Air Toxics 3 and has begun to propose standards for some of them, notably benzene. Measures that will reduce air toxics emissions will also reduce criteria pollutants and greenhouse gases. In Minnesota, a substantial amount of work has been done on one air toxic, mercury, which is not as associated with motor vehicles as it is with coal and solid waste combustion (see below). During various periods in the past, the Twin Cities metropolitan area has violated the ambient air quality standard for CO and as a result has been classified as a nonattainment area under the Clean Air Act. In addition to the metropolitan vehicle emissions testing program that was abandoned in 2000, Henry Ford designed his original cars to be able to run on ethanol. oxygenates in the form of ethanol were added to the motor gasoline supply during winter months. The ethanol requirement has been expanded to all months and applies statewide. The typical fuel formulation in Minnesota involves a mixture of roughly 90 percent motor gasoline and 10 percent ethanol by volume. About 85 percent of the ethanol used for transportation in Minnesota was manufactured in Minnesota. Henry Ford designed his original cars to be able to run on ethanol. Car manufacturers are making cars today that can run either on gasoline or on a mixture of 85 percent ethanol and 15 percent gasoline. Oxygenates like ethanol cut most harmful vehicle emissions dramatically as compared with petroleum-based fuels. The transportation fleet in Minnesota is comprised of roughly 2 million passenger cars, 1.5 million light-duty trucks, 120,000 other trucks, and 15,000 buses. The roughly 3.5 million light-duty passenger vehicles use gasoline almost exclusively. Very few of these use diesel fuel. Less than one-half of the heavy-duty trucks registered in Minnesota use motor gasoline. The remainder uses diesel fuel, as do most buses in Minnesota. The average highway fuel economy of passenger cars in Minnesota is about 20.5 miles per gallon, while for light duty trucks it is about 17 miles per gallon. The age of the average passenger car registered in Minnesota is about 8.5 years and rising. See the transportation portion of

45 PAGE 52 the Renewables and Technology section for information on alternative fuel vehicles and their small but increasing role in Minnesota s fleet. Since the early 1970s, total emissions of criteria pollutants from transportation sources have dramatically declined under regulation. Recently, however, results are more mixed. Emissions of VOCs, fine particulates and CO continue to slowly decline from transportation sources. NOx emissions continue to slightly rise. In the long run, emission trends from fuel combustion will be determined by control technology in place and the demand for travel. Control technology is largely a matter of federal jurisdiction. The demand for travel is individual and is mostly a function of income. As income rises, the demand for travel tends to rise proportionally. Most forecasts suggest that demand for travel will increase by about 20 percent over the next 10 years. M ERCURY Mercury emissions are regulated at incinerators that burn solid waste, medical waste, and hazardous waste. Federal regulations from 1974 limit mercury emissions from sewage sludge incinerators, but the emission limits are so high that they have no practical effect. Otherwise, mercury emissions are not regulated under federal or state law. The principal sources of mercury emissions in Minnesota are coal combustion (40 percent), waste incineration and disposal (30 percent), and taconite processing (20 percent). More than one-half of a ton of mercury is emitted during energy production annually. Virtually every lake tested in Minnesota receives a restrictive fish consumption advisory due to small amounts of mercury that return to earth in rain and snow each year. For a small to medium sized lake, the amount of mercury that can fit inside a printed o is sufficient to require a fish consumption advisory. When ingested in its methylated form, mercury may cause neurological problems that lead to brain dysfunction. In its vaporized form in enclosed areas, it does the same thing when inhaled at sufficiently high concentrations. There have already been significant decreases in mercury emissions due to incinerator controls and elimination of mercury in many products. Through the processes of atmospheric transport, deposition, and reemission, mercury disperses far from the source of emissions. Atmospheric mercury, which is fairly benign because it is dilluted, is all eventually deposited to the earth s surface. A portion of it is converted by bacteria in water to methyl mercury, which is absorbed and retained by animals, and therefore bioaccumulates to concentrations in fish that may be toxic to fish-eating animals, including humans. Recent scientific findings suggest that in some lakes the addition of sulfur (in the form of sulfate) enhances the conversion of mercury to methyl mercury. Sulfur in the form of SO2 is emitted in large amounts by power plants. In the atmosphere, SO2 is converted to sulfate. Animals and humans that eat large predatory fish, such as mature walleye and northerns, are exposed the most to methyl mercury. The principal effects of human ingestion of excess methyl KEY ISSUE: ENVIRONMENT mercury are neurological, ranging from birth defects and learning disorders to loss of cognitive function. Exposure to mercury can also negatively affect wildlife, particularly loons and other birds that eat fish as their primary diet. Advisories to limit fish consumption have been issued by the Minnesota Department of Health for approximately 800 Minnesota lakes because of mercury contamination. Mercury, primarily from burning coal and waste, has been accumulating in the Minnesota environment for more than 100 years. Once released to the atmosphere, mercury is deposited to soils, oceans and lakes, from which it is reemitted back to the atmosphere, and then redeposited in a continuous cycle. In Minnesota, mercury moves to lakes through runoff or direct deposition. Mercury is removed from this continuous cycle only through sedimentation processes in inland lakes, river deltas and continental shelf areas of the world s oceans. Removal rates are perhaps measured in hundreds of years. The slow rate of mercury removal from the cycle ensures that current high levels of mercury available to fish, animals, and humans from the Minnesota environment may persist for hundreds of years, regardless of actions taken to limit current emissions. Continued emission of mercury as a result of coal combustion will add extra amounts of mercury to the amount already in the environment. Presently, no mercury control regime is in place. A reduction goal was reached in 1998 between representatives of Minnesota industry, state government, and environmental advocates establishing a state-wide emission reduction target of 70 percent from 1990 emission levels. This goal has been written into state law. Agreements with surround- ENERGY POLICY & CONSERVATION REPORT 2000 Minnesota Department of Commerce

46 KEY ISSUE: ENVIRONMENT PAGE 53 ing states on mercury controls have not been negotiated as yet. While the U.S. EPA is likely within the next five years to issue emission standards for coalfired power plants, none are currently in place at the national level. In order to reach the 2005 goal of 70 percent reduction, emission sources need to achieve average reductions of about 30 percent below 2000 levels. There have already been significant decreases due to incinerator controls and elimination of mercury in many products. GREENHOUSE GAS EMISSIONS Global warming results from the accumulation in the atmosphere of very longlived gases that act to absorb longwave radiation, trapping heat in the lower atmosphere and causing surface and atmospheric temperatures to increase. The results of increased surface heating are changes in rainfall patterns, evaporation, runoff, humidity, atmospheric circulation and temperature. These changes will occur across the surface of the earth, on and in all landmasses and oceans, and at all latitudes and longitudes. Some may be beneficial. Most will involve large departures from present conditions. Most scientists conclude that climate change will result in the loss of large parts of the natural ecosystem. Global warming results principally from the accumulation of carbon dioxide (CO2) in the atmosphere. Most CO2 emissions result from fossil fuel combustion. Presently there are no economically feasible systems for the capture and long-term disposal of the roughly 30 billion metric tons of CO2 produced annually through global fossil fuel usage. I believe that it is very likely that an international regulatory program will be developed to reduce greenhouse gas emissions in the next couple years. There is considerable uncertainty regarding what the reduction program will be and how it will affect the United States electric power industry. It depends on the amount of reduction required, the timetable for making reductions, and how much carbon trading and sequestration nations and greenhouse gas emitters can pursue to meet the reduction requirements. Despite the uncertainty, climate change and a regulatory program designed to reduce greenhouse gas emissions could have a significant effect on Minnesota. As a result, the Department of Commerce and Public Utilities Commission are working with Minnesota s electric power generators to encourage prudent forward-looking actions to lessen greenhouse gas emissions and the possible economic consequences of any emissions reduction regulatory program. This includes promoting energy conservation and efficiency, building renewable energy sources, especially wind and biomass, and developing greenhouse gas emission mitigation plans for Minnesota s electric power generators. Edward Garvey, Commissioner, Minnesota Public Utilities Commission National Association of Regulatory Commissioners (NARUC) delegate to the United Nations Framework Convention on Climate Change W ASTE-TO-ENERGY Minnesota currently burns about one quarter of its municipal solid waste in municipal waste combustors. Five of the state s ten municipal waste combustors generate electricity, producing about 620 million kwh per year. The remaining five produce steam for sale to co-located manufacturing facilities in Minnesota. The primary pollutants of concern related to waste-to-energy are polychlorinated dioxins, furans ( dioxins ) and mercury. Dioxin is a chemical contaminant, a chlorine byproduct of various chemical manufacturing processes that has no usefulness in itself but has been found to be biologically active at extremely low levels. It is an endocrine disruptor, and has been identified in human populations with delayed developmental milestones. It impairs immune functions and causes cancer in highly exposed populations. Because it is persistent and accumulates in biological tissues, the major route of human exposure is through food containing minute quantities of dioxins. According to U.S. EPA inventories, waste combustion accounts for most dioxins released to the environment. Recent federal and state regulations have significantly reduced combustion contributions, mostly by banning the use of small onsite incinerators. Because of the use of mercury in consumer products like batteries, fluorescent light bulbs, pigments and biocides, combustion of municipal solid waste results in the release of substantial amounts of mercury. Municipal solid waste contains four times more mercury than coal on a Btu basis, and releases to the air 4 times more mercury than coal per kilowatt (kwh) hour generated. There are many considerations in any decision to continue or not continue to

47 KEY ISSUE: RENEWABLE & MODERN TECHNOLOGIES PAGE 55 Policy on Renewable Energy and Technology Minnesota s energy resource mix in the future must become more diversified, partly by including a substantially larger percentage of renewable energy sources to ensure true diversity of energy sources. Other modern energy technologies, such as fuel cells and combined heat and power facilities, must be distributed throughout the system as they become cost effective to relieve strain on transmission and distribution infrastructure and to ensure greater reliability of the system. The Energy Division, in coordination with other state agencies, energy service providers, renewable energy developers, land owners, local government units, and other interested persons, will: actively promote optimum development of Minnesota s most abundant, cost effective domestic energy sources wind power; assess Minnesota s solar energy resource and promote cost effective development of solar power in the state; continue to monitor the potential for electric power from biomass to become cost effective; and promote distributed electric generation technologies that use less polluting and/or renewable fuels or other renewable energy sources.

48 KEY ISSUE: RENEWABLE & MODERN TECHNOLOGIES PAGE 57 RENEWABLE & MODERN ENERGY TECHNOLOGIES The earliest energy sources used by humans came directly from the sun, the wind, falling water, and bioenergy, such as wood, agricultural grain crops, and other organic matter. These energy sources are referred to as renewable because they can be reproduced or reused within a lifetime or less. Sunlight, wind, and water are available for converting to usable energy on a more or less constantly renewed basis, although the strength of the energy available will vary across time and location. Wood, agricultural crops, and other organic matter are renewable if they are replaced at a similar rate at which they are consumed for energy. In contrast, fossil fuels are regenerated on a geologic timescale of millions of years and, for all practical purposes, are not considered renewable. During the oil and natural gas crisis of the 1970s, policy attention was focused on energy sources other than imported petroleum fuels, particularly domestically available and renewable energy resources. Technology to capture energy from renewable resources grew considerably, but not as quickly as the drop in petroleum prices due to the military stabilization and increased discovery of petroleum supplies. Since then, there has been a slow but steady growth in the technologies needed to capture energy from renewable resources. A recent report ranked Minnesota third in the nation for renewable energy production. 1 Even so, energy from renewable sources remains a tiny, but growing, percentage of Minnesota s overall consumption. 2 For practical purposes, there are two categories of renewable energy sources the Energy Division promotes: Those that can be used to generate electricity and heat, including wind and solar energy and renewable fuels for electric generation; and Those that can be used to fuel or replace fuels for motor vehicles, including biofuels, alternative petroleum fuels, and future technologies. ELECTRICITY AND HEAT Renewable energy technologies that produce electricity and heat can be characterized by their intermittency of energy production. Wind and solar energy systems can produce energy only when the wind is blowing or the sun is shining. Technologies such as micro-turbine generators and fuel cells, which can use renewable fuels, but most often are fueled by natural gas, can operate continuously. Nearly all renewable energy technologies face substantial capital start-up costs, but they also feature: Flexibility in design size and installation location; No-cost or low-cost fuel and insulation from price volatility; Shorter construction times and the ability to add further capacity in the future; No or low pollution; Domestic energy sources that reduce dependency on foreign petroleum; Distributed generation, which is electricity generated and sited near end users, which reduces transmission line losses, boosts voltage support on the electric grid, and can offset the need for additional or upgraded transmission lines. WIND ENERGY In 1999, Minnesota produced approximately 800,000 MWh of wind electricity, 90 percent of which was generated by commercial-scale wind farms. The total represents roughly 1.5 percent of Minnesota s total electric use. Most of the wind energy development in Minnesota is the result of a 1994 statute that required Northern States Power to develop or purchase 425 megawatts of wind power and authorizes the Public Utilities Commission to require another 400 megawatts, which it since has done. 3 Electricity produced from wind energy is the fastest growing energy production method in the world, renewable or otherwise, having an overall growth rate in 1999 of 36 percent. 4 The wind industry is also maturing. It is offering electricity at prices competitive with combinedcycle natural gas turbines, the only other type of large electric generating facilities being built in United States. 5 Although wind power does not provide full-rated generating capacity, the costs of electricity produced by wind are insulated against inflation and market fluctuations found in the price of natural gas. As the market for wind

49 PAGE 58 KEY ISSUE: RENEWABLE & MODERN TECHNOLOGIES energy continues to expand, economies of scale in manufacturing and installation processes, as well as the development of storage technologies, will continue to drive the cost of wind energy down and decrease the intermittency of the resource. In addition, as the technology further matures, the ability to capture lower wind resources at market competitive prices will also emerge. Electricity produced from wind energy is the fastest growing energy production method in the world, renewable or otherwise, having an overall growth rate in 1999 of 36 percent. There are two kinds of wind facility operators in Minnesota, commercial operators and small power producers. Commercial wind facilities generally consist of large wind turbines, up to 1 MW each, arranged together in groups called wind farms. Currently, these turbines are primarily located in southwest Minnesota, where the wind resources are among the best in the country. As these resources are captured, the installation areas will expand to secondary wind resources north and east in the state. Small power producers are smaller turbines, less than 100 kw each, owned by private citizens or non-utility companies. These individuals or companies operate their wind turbines to offset their own electricity use and sell the excess back to their local utility under state and federal laws. 6 The Energy Division has operated the Wind Resource Assessment Program (WRAP) since 1984 to monitor and publicize wind resource data across the state. The program has determined the state s best wind resources and has made the data public, which has helped to create a viable and cost-effective Minnesota wind industry. The program continues to assess wind resources in other parts of the state that have not been well documented, including the southeast and northeast portions of the state. The Energy Division continues to identify and propose solutions to barriers to further wind development, including the simplification of the physical interconnection with the electric grid, simplification of interconnection agreements with utilities and net metering rules (how to get the power into the grid and paid for), expanding the size of facilities that qualify for interconnection requirements, improving weak transmission links with large wind farms, and working with the financial community to enable them to understand the potential risks and rewards of investing in wind energy development. SOLAR ENERGY Solar energy represents a technology with wide-spread potential applications and a growing niche market, which includes remote sites and small or intermittent loads. The total energy received from the sun each year exceeds our total energy use by many multiples. Current technology, however, can tap into only a very small portion of the potential. Solar energy has the greatest potential for decreased costs and increased efficiency, partly because of large photovoltaic initiatives by the federal government. Solar energy can be classified into three types: photovoltaics, active thermal, and passive thermal. Photovoltaics (PV) use advanced technologies to produce electricity directly from sunlight. Active solar thermal energy involves heating water using direct sunlight. Passive solar thermal energy involves heating buildings using direct sunlight. Solar energy has the greatest potential for decreased costs and increased efficiency... PV produce electricity directly from sunlight by stimulating the movement of electrons across a semiconductor material that has been specially manufactured. The most common semiconductor material is silicon, the same material used to make microchips, but others include gallium, cadmium, and indium. PV is a cost-effective alternative to the extension of utility lines in remote areas, but its life-cycle costs remain two to four times as expensive as grid-connected electric power sources. Costs are dropping rapidly as third generation manufacturing advances are realized and familiarity with PV increases. Building integrated systems, where PV cells are replacing standard building materials such as window glazing and roofing shingles, are the newest commercial application that combines the production of electricity with other building functions. Cost effective applications of solar thermal technologies are available to Minnesota homes and businesses. Energy from gas, oil, and electricity for heat can be offset and reduced by solar thermal collectors. For example, domestic electric hot water heaters operating during summer peak loads can be offset by using domestic solar hot water ENERGY POLICY & CONSERVATION REPORT 2000 Minnesota Department of Commerce

50 KEY ISSUE: RENEWABLE & MODERN TECHNOLOGIES PAGE 59 heaters. Outdoor ventilation air can be preheated F higher with transpired solar collectors, thus reducing natural gas and fuel oil use for schools and commercial businesses. Heating outdoor swimming pools with solar thermal covers saves percent of the total heating costs....the use of biodiesel can reduce many emissions, especially particulate matter, sulfur, hydrocarbons, and carbon monoxide. Passive solar strategies optimize existing building techniques to utilize the sun s energy. Some window glazings can reflect sunlight in the summer and reduce solar heat gain, while absorbing winter sunlight to increase heat gain. South- and west-facing walls on buildings can be used in new construction and substantial reconstruction of buildings to reduce space heating and daylighting needs by using the sun to do what was formerly mechanical or electrical. To complement the Wind Resource Assessment Program, the Energy Division has begun a Solar Resource Assessment Program to define the solar resources in Minnesota. Eight sites located around the state are gathering solar data, with resource maps expected to be available in BIODIESEL FOR ELECTRIC GENERATION Biodiesel is the vegetable oil equivalent of diesel fuel and can be made from soybeans or waste grease products, primarily from restaurants. It can be used as a blend of 20 percent biodiesel with 80 percent petroleum diesel (B20) with little or no engine modifications, or can be used as 100 percent biodiesel (B100) with modifications to engine valves, hoses, gaskets, and fuel filters. See the Transportation section below for biodiesel s use in motor vehicles. Diesel-powered electric generators are used for remote homes, temporary electric applications, and summer-peaking generators for commercial and industrial electric consumers in sizes ranging from a few kilowatts to a few megawatts. These generators represent a significant pollution source when operating on diesel fuel, and the use of biodiesel can reduce many emissions, especially particulate matter, sulfur, hydrocarbons, and carbon monoxide. Biodiesel does not currently reduce nitrogen oxide emissions, which are a component of smog formation. The Energy Division is working to promote biodiesel in appropriate applications. The Division recently demonstrated its use at the Taste of Minnesota in the summer of 2000 in the portable electric generators that power the event. The University of Minnesota s Center for Diesel Research is developing a plan to test the use of biodiesel in a large peaking generator and has applied for various funding sources to begin the project in the near future. BIOENERGY Bioenergy produces electricity from the combustion of energy crops, animal waste, and vegetable matter, using much the same technology as traditional combustion techniques. The feedstock is considered renewable when it is managed to ensure that it is replaced at a similar same rate it is used for energy. Feedstocks include animal wastes, waste wood, and a variety of fast-growing plants such as switchgrass, alfalfa, and hybrid poplar trees. A 1994 statute requires Xcel Energy, formerly Northern States Power, to develop or purchase 125 MW of electricity generated from biomass, but due to higher costs and technical difficulties, installations are behind schedule. As of 2000, the approved projects under this mandate are St. Paul District Heating s 25MW waste wood project and EPS/Beck s 50MW whole tree project. The 2000 legislative session passed changes to the mandate to allow burning poultry litter for energy to meet a portion of the mandate. As a result, FiberMinn has now proposed a 50MW poultry litter project. Just under one-fourth of the total biomass used to produce energy for consumption in Minnesota (See Figure 15 in the Data Section) is being used for electric generation. Of that, about 70 percent is mixed municipal solid waste or refuse derived fuel incineration and about 30 percent is wood waste. The biomass mandate discussed above offers new opportunities for biomass technologies. However, most new technologies are not yet online.

51 PAGE 60 BIOGAS Methane, a form of natural gas, can be considered a domestic, renewable resource when it is captured from biodegradation of organic wastes such as animal manures and solid waste in landfills. There is currently an anaerobic manure digestion demonstration project on a dairy farm near Princeton, Minn. to produce methane, which is then used to generate electricity. In addition to electricity production, odors are contained and the resulting digested material has enhanced fertilizing qualities. The technology is proven, but like many renewable technologies, anaerobic digesters are capital intensive. The extent to which no fuel costs can reliably offset the up front capital costs is yet to be determined in the long term. Methane that escapes from landfills offers a niche application for electricity production that would otherwise go untapped. Projects are generally cost effective, but have limited total capacity in the wider scheme of electricity generation. These applications will likely remain as localized generation sources for localized use. They may have some implications for distributed generation if they can be located near other large power users at points in the distribution grid that needs a power boost. FUEL CELLS Information about fuel cells is quickly filling energy policy headlines. Cost effective applications, however, are not on the short-term horizon. Advances in research, development, manufacturing, and maintenance likely will be realized rapidly in the coming years. For the time being, fuel cells are limited mostly to demonstration projects with joint funding from external sources. Fuel cells produce electricity and heat from a chemical reaction process, rather than combustion. Hydrogen powers the chemical reaction and is currently obtained by reformulating, or cracking, hydrogen atoms from gasoline, natural gas, or methanol. Ultimately, pure hydrogen will be obtained from renewable sources such as biological processes, renewable electrical production, including wind and solar, or biofuels. KEY ISSUE: RENEWABLE & MODERN TECHNOLOGIES Fuel cells can offer high-efficiency energy use, provided that both the electricity and the residual heat are utilized through cogeneration. Fuel cells also feature modular design, low emissions, and quiet operation, in addition to their potential as the distributed generation assets. They may, in the future, power everything from cell phones and residential homes to cars and industrial processes. Fuel cells for motor vehicles are discussed in the Transportation section below. T RANSPORTATION Cleaner and/or domestically producible fuels for motor vehicles play a role in Minnesota s renewable energy programs. These fuels offset the use of petroleum products and: reduce reliance on imported fuels; reduce environmental and health effects through decreased emissions; and develop local industries and jobs. The Energy Division is a partner in the Twin Cities Clean Cities Coalition, consisting of local companies, interest groups, and other state and local government agencies. The Coalition is seeking a Clean Cities designation for the Twin Cities metropolitan area from the U.S. Department of Energy under its Clean Cities program. Clean Cities is a voluntary program sponsored by the U.S. Department of Energy, which is designed to encourage the use of alternative fuel vehicles (AFVs), meaning vehicles fueled by alternatives to gasoline and diesel fuels. Once designated, the Coalition will act as the central coordinating entity for alternative fuels activities in Minnesota. The federal Energy Policy Act of 1992 mandates that motor vehicle fleets owned by the federal government, state governments, and fuel-providers purchase alternative fuel vehicles as a percentage of their new vehicles purchased. For mandated state fleets in 2001, 75 percent of new light-duty vehicle purchases must be alternative fuel vehicles. Four state agencies, including the Department of Commerce, held a joint-agency workshop in July of 2000 for all state fleet managers to clarify and update EPAct mandates. Due to climate, cost, and availability, there are four main alternative transportation fuels for use in Minnesota: biodiesel, ethanol, natural gas, and propane. Biodiesel and ethanol are renewable fuels and are produced from agricultural or waste feedstocks, while natural gas and propane are domestic petroleum resources. Additionally, there are other technologies that also reduce or eliminate the use of gasoline or diesel fuel that are generally included in the AFV category, but are considered alternative technology vehicles. ENERGY POLICY & CONSERVATION REPORT 2000 Minnesota Department of Commerce

52 KEY ISSUE: RENEWABLE & MODERN TECHNOLOGIES PAGE 61 BIOFUELS Biodiesel The recent passage of the 1998 amendment to Title III of the EPAct gives mandated fleets EPAct credits for using B20 (20 percent biodiesel, 80 percent regular diesel) or larger percentages of biodiesel. Under EPAct, burning 450 gallons of B100 is the equivalent of purchasing an alternative fuel vehicle. Biodiesel potentially represents a lowercost method of gaining EPAct credits in medium- and heavy-duty applications. Hennepin County operated four heavyduty maintenance trucks on B20 for snow plowing and road maintenance in The Energy Division has also received DOE funds for a B20 school bus demonstration project in the Twin Cities. The University of Minnesota s Center for Diesel Research has been testing B100 in a vehicle for their daily operations. Ethanol Ethanol is an alcohol fuel produced by the fermentation of organic matter, most commonly corn, but also cheese whey, potato waste, and brewery waste, at 15 ethanol production facilities in Minnesota, the most in the nation. Nearly all gasoline sold in Minnesota contains 10 percent ethanol, which is an oxygenate that reduces harmful air emissions. E85 fuel, a blend of 85 percent ethanol and 15 percent gasoline, requires the use of a flexible fuel vehicle (FFV). FFVs are being manufactured by most of the major vehicle manufacturers. 7 Ethanol or gasoline can be blended in any combination in an FFV, and many Minnesotans already unknowingly own FFVs. The Energy Division, in cooperation with other state agencies, private businesses, local governments, and non-profit agencies, will work to promote E85 utilization and awareness by the estimated 50,000 FFV owners in the state. By 2001, Minnesota will have close to 50 E85 fueling sites, which is also the most in the nation, making E85 as convenient as gasoline for some FFV owners. ALTERNATIVE PETROLEUM Natural gas Currently, there are more than 200 compressed natural gas (CNG) vehicles operating in Minnesota. Most of them are owned and operated by natural gas utilities, who have their own fueling sites. The Minnesota Valley Transit Authority has purchased five CNG transit buses that are in service. It has six more on order and has plans for facility improvements to fuel the buses. Pending funding approval, the transit authority will add a total of 31 additional CNG buses and a fueling facility in the future. For mandated state fleets in 2001, 75 percent of new light-duty vehicle purchases must be alternative fuel vehicles. Propane In Minnesota, there are an estimated 1500 liquefied petroleum gas (LPG or propane) vehicles and more than 100 fueling sites, mostly centrally located for fleet operation. Propane is another fuel that fleet owners and operators chose for cost and for operational and environmental efficiencies. FUTURE TRANSPORTATION TECHNOLOGIES Low-emission vehicles As emission control technology advances, traditional gasoline and diesel vehicles become much cleaner. Model year 2000 cars are up to ten times cleaner than those of Unfortunately, these emissions gains have been offset by the increase in the number of vehicles and the vehicle miles traveled. Low, ultra-low, and partial-zero emission vehicles (LEV, ULEV, and PZEV) are now available in California, and are making their way to the national market. PZEVs require ultra low sulfur gasoline (<10ppm) and feature closed-loop emissions controls that keep volatile organic compounds from entering the atmosphere. One Twin Cities metro area gasoline retailer offers low-sulfur gasoline that averages 60ppm, but which, while a major advance in reducing sulfur emissions in the Midwest, is still too high for use in these vehicles. Hybrid-electric vehicles Hybrid-electric vehicles (HEVs) have a gasoline combustion engine and a battery-powered electric engine in the same vehicle. They recently came into the retail market and provide double or triple the fuel economy of a conventional gasoline engine. Unlike electric vehicles, with limited range and poor cold climate operation, HEVs offer a transition vehicle between the gasoline combustion engine and future technologies. One manufacturer has announced plans to produce HEVs that run on ethanol. Fuel-cell vehicles Major automobile manufacturers are researching and developing vehicles powered by fuel cells. All demonstrations are in the prototype phase and are probably three to seven years from the commercial market, and 15 to 20 years from cost effective applications for the general public. Their ability to withstand Minnesota s climate for transportation purposes is unclear at this point.

53 KEY ISSUE: AFFORDABILITY PAGE 63 Policy on Energy Affordability To achieve and maintain true reliability, energy must be affordable for all Minnesotans. The Energy Division, in coordination with energy service providers, other state agencies, including the Department of Economic Security, and other interested persons, will: continue to provide the highest quality economic and financial analysis and advocacy before the Public Utilities Commission to ensure that regulated energy service providers continue to provide affordable energy to Minnesota consumers; develop energy policies to ensure that energy services are accessable and affordable to all Minnesotans; and participate in joint efforts to achieve coordination, efficient administration, and sufficient funding of financial and other energy assistance for low-income households to ensure that no one goes without critical energy services.