One word might sum up Xcel Energy Inc.'s mantra for its first clean heat plan to lower greenhouse gas emissions linked to its Colorado gas utility.

"Options, options, options," Steve Martz, Xcel's vice president for integrated planning, said at the LDC Gas Forums Rockies and West conference in Denver on Aug. 17.

Earlier in August, Xcel's Centennial State subsidiary, Public Service Co. of Colorado, proposed a portfolio of decarbonization strategies to achieve the state's clean heat standard. The standard requires gas utilities to reduce emissions 22% from 2015 levels by 2030.

Xcel's preferred plan included strategies explicitly approved by enabling legislation — building electrification, renewable natural gas (RNG) and green hydrogen. The plan also featured carbon offsets and gas that is certified as responsibly sourced, two pathways not named in the law (23A-0392EG).

Xcel included strategies beyond the clean heat resources named in Colorado Senate Bill 21-264 because, in the early years of the program, it will be difficult to achieve near-term emissions reduction targets within the budget outlined by the law, according to analysis by Energy and Environmental Economics Inc. (E3) commissioned by Xcel.

"What we found is that, first off, there's no one solution that does it all" at a low-enough cost, Martz said.

Budget is difficult to meet

Under SB 21-264, the target cost for clean heat plans is about $34 million per year, or $170 million for a five-year plan.

But the E3 analysis found that for Xcel's inaugural 2024-2028 clean heat plan, a portfolio that hews to a $34 million annual budget would fall short of achieving the 2030 emission reductions target. A plan that put Xcel on track to meet the target using only clean heat resources named in the law would cost about $227 million per year, E3 projected.

A portfolio comprising solely building electrification and energy efficiency measures would be most expensive, at an average of $472 million per year, according to the analysis.

Xcel's preferred plan, dubbed Clean Heat Plus, would also exceed the annual budget target, costing an estimated $163 million per year, or $816 million for the five-year period. But in the company's view, it struck the best balance between achieving policy goals and maintaining affordability, while preserving a role for Xcel's 23,500 miles of distribution mains and 2,000 miles of transmission pipes in Colorado.

"It doesn't have to be mutually exclusive," Martz said. "It doesn't have to be electrification only. It doesn't have to be stranded assets."

Emission reduction strategies

Under Clean Heat Plus, building electrification would deliver the largest emissions reduction over the five-year period, Xcel said. Building electrification is critical because 97% of Xcel's baseline emissions covered in the clean heat statute came from the sale and combustion of gas, according to the company. Home heating in residences accounted for 68% of total covered emissions, Xcel said.

The relatively low cost of carbon offsets and certified gas purchases would help lower the plan's overall cost while generating the second- and third-largest emissions reduction, respectively, the analysis found. Carbon offsets typically involve investments in carbon sinks such as reforestation. Certified gas, also known as responsibly sourced or differentiated gas, is verified to meet certain emission intensity thresholds and other environmental, social and governance standards.

As part of its net-zero-by-2050 plan for its gas utilities, Xcel aims to certify all of its gas purchases by 2030 at a methane intensity well below the national average.

The Clean Heat Plus plan would also rely on RNG and other methane recovery projects, low-carbon hydrogen uptake and demand-side management measures such as energy efficiency.

The company acknowledged that there are "very real questions" about the feasibility of the strategies, noting that it might not be able to achieve the pace, scale and costs modeled in the report. Xcel designed the Clean Heat Plus plan to be flexible and adapt to learnings, which will inform a longer-term emissions reduction path.

Investment in technological innovation will also be critical, the company said. Xcel proposed an additional $65 million in pilot projects to spur market transformation in support of its preferred strategies.

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