It may not be seen as a leader in renewable energy, but Colorado has quietly become one of the most ambitious states in the Lower 48 when it comes to modernizing its electric grid. It was the first state to adopt a Renewable Energy Standard for its electricity consumption by referendum. It also has the second-strictest 2020 targets of any state, mandating that investor-owned utilities generate 30% of their power from renewable sources -- and that 3% of that must come from distributed generation, such as rooftop solar.

Xcel Energy (NASDAQ:XEL), which owns one of two investor-owned utilities in the state, has already exceeded the 30% target. But it knows even more ambitious standards are coming in the not-too-distant future. That's why it's proposed an ambitious new power plan to the Colorado Public Utilities Commission (CPUC) that would allow the company to generate 55% of its power in the state from renewables by 2026. It would also double the company's current total solar capacity.

The new power plan has implications for all stakeholders, including shareholders. That's because Xcel Energy's Colorado subsidiary is responsible for 40% of its total rate base revenue and 39% of its annual earnings per share. A decision from the CPUC is expected by fall 2018. Here's what investors need to know.

A man installing rooftop solar panels.

Image source: Getty Images.

The Colorado power plan, explained

Xcel Energy is considered a top renewable energy stock today. It owns 6.7 gigawatts of wind power capacity, delivers 9% of the country's total wind power generation, and pays a 3.3% dividend. While it plans to further its leadership position in wind power, it wants to become a leader in the future of solar energy, too. Both should be possible -- and Colorado is an important proving ground.

A sliver of the American wind corridor, home to the country's most powerful wind potential, catches the eastern edges of Colorado, and that's all it needs. Xcel Energy's wind assets in the state operate at 45% capacity, well ahead of the national average of 36.7%. The state is also generously situated to capture some of the country's best solar potential. The company's solar assets in the state operate at 30% capacity, again better than the national average of 27%.

That (and improving technology for both wind and solar) makes Xcel Energy's ambitious Colorado Energy Plan quite possible at the technical level. It still needs regulatory approval to proceed, however. Here's what it has proposed to CPUC together with a group of stakeholders: 

  • Early retirement of two coal-fired power plants, the 325-MW Comanche 1 power plant in 2022 and the 335-MW Comanche 2 power plant in 2025.
  • Adding up to 1,000 MW of wind power, 700 MW of solar power, and 700 MW of natural gas and/or energy storage.
  • The utility will take a 50% stake in the renewable assets and 75% in the natural gas, storage, and renewable plus storage assets.
  • Accelerated depreciation of early retirement coal assets. This would represent a cost to the state and utility customers.
  • Reduction of the Renewable Energy Standard rider from 2% to 1% in 2021 or 2022. The rider has added 2% to customer utility bills to pay for state-funded programs helping utilities to comply with the standard. Reducing the rider would offset the cost of the accelerated depreciation above.

Let's break that down further. The first three points concern grid reliability and commitment to the state's long-term Renewable Energy Standard, while the last two concern financial aspects for the regulated utility and its pledge to keep customers' utility bills stable.

So how has the proposal been received to date? When Xcel Energy's utility first presented its portfolio to CPUC, the state authority balked at the idea that 2,400 MW of new power generation was needed after retiring the coal assets. It asked the utility to come back with portfolios totalling 750 MW and 1,100 MW, well below the net additions of up to 1,740 MW in the original proposal. Investors have yet to learn the generation mix of the two smaller proposals, but lower installed capacities could impact the rates (and revenues) achieved over time.

CPUC also asked the utility to submit a scenario that didn't reduce the Renewable Energy Standard rider to pay for the accelerated depreciation of the coal assets. On one hand, it makes sense that Colorado wouldn't want to halve the money flowing into programs aimed at bolstering renewable energy in the state. On the other hand, regulators and voters may want to consider the value provided by taking coal power plants offline sooner than expected.

As far as investors are concerned, it means Xcel Energy's Colorado Energy Plan could end up being a lot smaller and a little more expensive than originally envisioned. Although no decisions have been finalized just yet, one thing investors do know is that the CPUC rebuttal pushed back the decision timeframe from "summer 2018" to "fall 2018" in investor presentations. The additional uncertainty has kept the stock constrained around $45 per share this year, and delayed the most important near-term catalyst for the company.

Solar panels and a sunset.

Image source: Getty Images.

Should investors remain optimistic?

Uncertainty is never good for a stock, and right now Xcel Energy's Colorado Energy Plan faces multiple sources of it.

The back and forth between the utility and regulators is par for the course, so this in and of itself isn't a huge concern for shareholders yet. But the CPUC request for smaller portfolios could impact revenues generated in the future, while disallowing the accelerated depreciation mechanism proposed could make the Colorado Power Plan more expensive for Xcel Energy.

Right now investors don't know whether or not Xcel Energy will be able to add its most ambitious dose of renewable energy to the grid, but even the smaller portfolios should include a healthy amount of renewable energy. More information will be handed down soon, as the utility expects to file an updated proposal by the end of May. One thing is certain: This is the most important near-term catalyst for the stock, so investors will want to pay close attention to upcoming events.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.