At its core, the debate now before Minnesota regulators over Xcel Energy’s virtual power plant (VPP) program resembles hundreds of others that have played out between monopoly utilities and competitive companies for decades.
But time and technology have changed its contours.
Once, it was about who owned and controlled power plants, then renewables, then microgrids. Today, it’s about virtual power plants.
Xcel Energy is seeking permission from the Minnesota Public Utilities Commission to develop a $153-$430 million battery-based virtual power plant to serve the wholesale market (Docket 25-378).
Independent developers and advocacy groups fear that, if approved, the Minnesota program will create a model that other utilities nationwide may follow, undercutting competition in the distributed energy market.
- “The private market creates cost savings, innovation, technology improvements, all of those things,” said Shannon Anderson, distributed power plant policy director for Solar United Neighbors, a non-profit advocacy group. “Here, you have a monopoly utility that has no competition. So they don’t have the same sort of market drivers to reduce costs, to innovate, and to create improvements for customers.”
- John Farrell, co-director of the Institute for Local Self-Reliance, described the Xcel VPP program as a “five-year monopoly guarantee” in Minnesota that shuts competitors out. “There’s no market, otherwise, for other firms to come in and offer similar services.”
- Christopher Villarreal, of the free-market think tank R Street, said Xcel would be leveraging a market advantage only utilities have — access to data.
The program causing this stir is called Capacity*Connect, modeled after “distributed capacity procurement,” the brainchild of SparkFund, a private company that has been promoting the idea nationwide and is acting as Xcel’s partner in the Minnesota program.
This approach differs in many ways from the third-party virtual power plants often in the news. Privately driven, they typically begin with customers — households, businesses and communities — that install batteries, solar panels, electric vehicles, or other assets. As asset owners, the customers enjoy two key benefits. First, they get paid for their market participation in the virtual power plant. Second when they are not participating, they can use the asset for their own purposes, such as generating on-site energy, using batteries for backup during outages, or driving an electric vehicle.
A Test Case
In contrast, Capacity*Connect gives Xcel ownership of the batteries. Even when placed on customer sites, the batteries are used only to serve the bulk power system — the customers do not use them for backup power.
Xcel is seeking approval to test the idea by installing 50 to 200 MW of batteries in a program that runs through 2028. It hopes to recover costs through a renewable energy rider on customers’ bills. As of mid-February, the commission proceeding had attracted over 100 filings from the utility, supporters and critics.
In addition to describing the program as a monopoly overreach, critics take aim at Capacity*Connect on several other fronts, including its costs, slow rollout and failure to capture the full value of the batteries.
Costs
The estimated price tag for the program is $2,150 per kW for 200 MW of deployed batteries. In comparison, Xcel’s Advanced VPP program in Colorado will cost $624/kW for 125 MW, according to comments filed by the Coalition for Community Solar Access, the Minnesota Solar Energy Industries Association, and the Solar Energy Industries Association.
The group also said that the program “shifts the entirety of the financial risk” to ratepayers. “In other words, ratepayers underwrite the infrastructure; the utility captures the guaranteed return. This is the opposite of how risk is allocated in market-driven VPPs and competitive FTM [front of the meter] storage models that rely on private capital rather than the rate base.”
Speed
The utility plans to phase in the program from 2026 to 2031. After completing the 50-200 MW phase, it hopes to use lessons learned to implement as many as 500 MW of batteries, and then, in a possible final phase, even more. Critics argue that third parties that frequently create VPPs can form them more quickly. The Department of Energy says that a basic VPP can be created in less than six months in its 2025 VPP liftoff report.
Farrell said speed isn’t “the nature of monopoly regulation. They [utilities] are not designed for quick. That just really isn’t in the business model.”
By contrast, third-party providers that specialize in virtual power plants “know how it works” and can quickly assess costs and jump in, while “Xcel is starting from scratch, essentially, having never done it before.”
Capturing Full Battery Value
Then there is what is known as the battery “value stack.” Batteries are often described as an energy Swiss Army Knife because they can provide so many different services — from backup power to voltage support and power quality.
How Xcel prioritizes the value stack of the batteries “will materially shape, and in some cases limit, the total value customers can realize from Capacity*Connect,” wrote Cooperative Energy Futures, Environmental Law and Policy Center, Institute for Local Self-Reliance, Solar United Neighbors and Vote Solar in comments before the commission.
The current plan prioritizes the use of the batteries in the MISO wholesale market. The group contends it should instead prioritize how the batteries can serve the grid — to increase hosting capacity for distributed energy, reduce local peaks, defer grid upgrades, increase reliability and relieve transmission constraints. While the group is not against the utility using the batteries in the wholesale market, it said that Xcel has “other, potentially more cost-effective tools for procuring bulk-system capacity from storage resources that do not require customer siting or the operational constraints that come with using distribution-connected, customer-sited assets as wholesale market resources. In other words, Xcel can obtain bulk-system storage through more direct utility planning and procurement pathways.”
Farrell said he doesn’t understand why the utility is placing the batteries where they could offer local benefits, but then not tapping into those benefits. “The physical infrastructure will be placed in a local way. It will be on customer property in communities where it would be very useful to the grid to have storage.”
The Counterargument: A Surprising Supporter
While Xcel’s program has detractors, it’s also attracted some strange bedfellows. Jigar Shah, a clean energy entrepreneur and a frequent utility critic, backs the Xcel Minnesota program.
In an Energy Changemakers Podcast, Shah said that Sparkfund had shopped the idea to several utilities before Xcel stepped up.
“I applaud Xcel Minnesota for wanting to be the first. You and I know that utilities have not been a hotbed of innovation,” said Shah, head of the Department of Energy’s (DOE) loan program during the Biden administration.
Shah sees the battle underway in Minnesota as a good sign — the industry is realizing the value of batteries in meeting demand,
“I think it’s wonderful that we have finally established that $50 billion worth of batteries is cheaper than the $550 billion that the utilities want to spend between now and 2029 to accommodate all this load growth their way,” he said. “We’re now fighting: Do we want the utilities to own the equipment, or do we want the private sector to own the equipment? That feels like extraordinary progress to me.”
Shah called the argument “poppycock” that the Xcel program will undercut competition in the VPP market.
“There are so many business models proliferating,” he said, noting that the DOE VPP liftoff report included 75 case studies. “Let a thousand flowers bloom, and if Xcel Minnesota doesn’t achieve the goal that we set out for them, then we will force them to switch to a different business model.”
Xcel Sees New Paradigm for Utilities
Xcel Energy comes to the debate from an entirely different perspective than the competitive players. While most distributed energy programs attempt to help individual customers, the utility says it wants to use the batteries to achieve system-wide improvements that would benefit all customers.
Capacity*Connect represents “a new paradigm in utilities’ use of distributed energy resources,” one that—based on its modeling—would “materially exceed benefits from distribution-only cases,” the utility said in a January 9 filing.
“The company’s foremost obligation is to ensure safe, reliable, affordable service for all customers, not to optimize outcomes for individuals or for-profit entities,” the utility said. “If we were to take all the recommendations of all parties, we would be tackling every possible use case for BESS with this phase of Capacity*Connect, which is neither practicable nor in the best interest of customers.”
Why Focus on One Battery Use
The utility argues that the batteries cannot be used for other purposes — such as customer resilience — at least initially, because they must be given priority dispatch to MISO at all times of the year. To do otherwise would erode the cost-benefit ratio.
While the program initially focuses on the wholesale market, the utility intends to explore using the batteries for other benefits — such as to serve the distribution grid — at later stages. It is unable to do so now because it lacks the “operational technology, process, or procedures in place today to co-optimize an asset in the MISO market and also dispatch it for other use cases.”
The utility emphasized several times in the filing that Capacity*Connect may appear simple in principle, but it is a complex undertaking.
“The approach is novel, and the implementation is complex and requires careful balancing of multiple factors from ensuring employee safety to minimizing costs, maximizing benefits of its participation in the MISO market,” the utility said.
Why Utility Ownership
Xcel argues that it can get the program up and running more quickly if it owns the batteries.
“Conducting a resource acquisition process for third-party-owned resources and developing the associated tariffs and/or contracts to allow for active management and (if allowed) meet market participation requirements would take time and necessitate a complete redevelopment of the program. While this is not an impossibility in the future, these assets can provide value to our customers now, and we should be allowed to deploy and own them to benefit our customers in the immediate term,” the utility wrote.
Other Opportunities for DER Companies
Xcel said that DER companies have “ample opportunities” to participate in other programs in Minnesota, including community solar, solar PV, and battery initiatives.
About 1.3 GW of distributed solar and storage now operates within its service territory, with another 1 GW in queue for development, most owned by third parties, the utility said. Late last year, Xcel issued a 4,100 MW solicitation to comply with Minnesota’s Distributed Solar Energy Standard. In addition, it intends to competitively solicit about 80% of the $340 million spent on Capacity*Connect, seeking equipment, engineering, construction and other elements of the project.
The utility also addressed criticism that it had taken on Sparkfund as a partner without competitive bidding and had not publicly reported the terms of Sparkfund’s payment. Xcel said it’s finalizing a commercial agreement with Sparkfund, and the payment is still under negotiation. Xcel conceived and developed Capacity*Connect in collaboration with Sparkfund, making it an appropriate partner, according to the utility.
What’s Next?
Critics of the program have asked the public utilities commission to consider testing other approaches that would allow competitors to bid to run Capacity*Connect. The Institute for Local Self-Reliance and Solar United Neighbors want Xcel to launch a 20-MW pilot using third-party-owned Capacity*Connect resources no later than July 1, 2027, and to use the data from that program to determine the best route forward.
The Minnesota Public Utilities Commission has not set a date to issue a decision on Xcel Energy’s petition, but a commission spokesperson said it will likely occur in the spring.
Check out more from the Energy Changemakers’ series on virtual power plant competition
Jigar Shah’s Surprising Stand on This Utility Program
