As coal plants begin to retire across the country, one Minnesota coal plant has used this opportunity to create new jobs, improve local economic development, and generate clean energy that will replace the electricity once provided by coal. The Sherburne County Generating Station in Minnesota — informally known as Sherco — was able to overcome the growing electricity demand that has caused some utilities to postpone retirements of other coal plants, and an interconnection queue process that delays new clean energy projects by a median of five years, to transition into the hub of a local clean economy.

The Sherco repowering was made possible by incentives from the Inflation Reduction Act (IRA), a fast-track around interconnection queues, early and meaningful community engagement, and regulators and advocates who pushed for a just and clean future. It provides a nation-leading model for how stakeholders can work together to transition away from coal while protecting ratepayers, maintaining utilities’ financial outlook, and ensuring the legacy workforce and new workers alike succeed.

Sherco, like many coal plants, has historically been a major power source and a critical contributor to local tax bases and job creation, with its three units providing 2,400 megawatts (MW) of electricity, hundreds of jobs, and 77 percent of annual tax revenue to the city of Becker. But by 2015, it was clear that Sherco was no longer the most cost-effective option to provide electricity in the long run. Xcel, the utility company that operated Sherco, initially proposed to build a natural gas combined cycle plant to replace the coal plant, citing the need for dispatchable generation that could provide a similar grid role, workforce, and tax base to coal.

However, the Minnesota Public Utilities Commission (PUC), the regulatory body overseeing these decisions, informed by intervenor concerns around costs and risks, had the foresight to postpone an immediate decision and to instead look at a broader suite of options to meet emerging grid and community needs. And when a decision was due, rigorous modeling from a coalition of clean energy organizations showed how a clean energy portfolio more heavily reliant on renewables and battery storage would be less expensive than the proposed gas plant. In addition, thousands of comments submitted by the public opposed the proposed gas plant. Against this public pressure and unfavorable modeling results, Xcel admitted that the record no longer supported a new combined cycle plant, proposing instead to build a portfolio heavily reliant on solar, storage, and wind, with the commission approving these new plans in 2022.

Xcel has begun to build these new clean energy resources while working with Sherco employees and the local community to ensure a smooth transition. The first of three Sherco units retired last year, and the first tranche of replacement solar will come online by the end of this year. Overall, 710 MW of solar and a 10 MW/1,000 megawatt-hour (MWh) Form Energy iron-air battery system will replace the retired Sherco 2, all built on- or near-site and utilizing the existing interconnection rights. Xcel has also developed a worker transition plan to train Sherco employees for new roles within or outside of the company and is actively developing an economic development plan with the city and county to attract new industry.

Furthermore, clean energy advocates, buoyed by state law that requires 100 percent clean energy by 2040, have been largely successful in reducing the amount of new gas plants that will be built. Xcel has received initial approval for a 170-mile transmission line that is scheduled to operate by 2027, where thousands of megawatts of energy can connect and utilize the interconnection rights of Sherco 1 and 3 upon their retirements.

Xcel initially proposed two peaking gas plants to meet some of these replacement resource needs, but clean energy advocates successfully convinced the commission to instead approve 800 MW of generic firm resources, opening up the procurement process to portfolios of carbon-free resources. Xcel recently settled this decision with stakeholders, and the proposal now includes only one new peaking gas plant, the extension of two existing peaking gas plants, and multiple storage, solar-plus-storage, and wind-plus-storage projects to serve these firm resource needs instead, including an additional 300 MW on-site battery at Sherco.

The retirement of Sherco provides a model example for how utilities, regulators, advocates, communities, and labor can work together to transition from coal to clean energy while protecting ratepayers, maintaining utilities’ financial outlook, and ensuring that the legacy workforce and new workers succeed. In Minnesota, four key factors enabled such a transition:

• Federal funding from the IRA and the Bipartisan Infrastructure Law (BIL) provided strong incentives toward clean energy.
• The generator replacement process created a fast-track to interconnection queue delays.
• Early collaboration with the community and labor helped gain widespread buy-in for Sherco’s retirement and future.
• A forward-looking PUC aimed to advance climate and social goals in addition to its core responsibilities around affordability and reliability.

Federal Funding: A Clean Energy Supercharger

While solar proved to be the cheapest option in the alternative IRP model runs, the pandemic and subsequent supply chain shocks, along with the potential for tariffs on the majority of incoming solar panels, threatened to derail the Sherco solar projects. Fortunately, the IRA provided a strong hedge to these risks and reduced costs significantly by extending and broadening the scope of existing tax credits like the production tax credit (PTC) and the investment tax credit (ITC), as well as making them more efficient for regulated utilities to use through provisions around transferability and normalization opt-outs.

Furthermore, because the solar and Form Energy battery will be located on the site of the retiring Sherco coal plants, these resources qualify for the new energy community tax credit bonus established by the IRA, which increases the value of the PTC by 10 percent and the ITC by 10 percentage points. For the Form Energy battery in particular — a relatively nascent clean energy technology — in addition to the ITC, a $35 million grant from the Department of Energy’s Office of Clean Energy Deployment (OCED) that was funded by the BIL and a $10 million private grant from Breakthrough Energy Catalyst helped reduce the costs for ratepayers and enabled this pilot project.

Generator Replacement: Transferring Interconnection Rights from Coal to Clean

With Sherco, Xcel was able to replace the coal plant so quickly by transferring the interconnection rights to the new solar and battery projects via the generator replacement process, which can cut the interconnection time from an average of five years to under one year. In addition to reducing the time and costs associated with the interconnection queue, this will help Xcel transition its generation fleet toward clean energy quickly and cost-effectively. Sherco 2 will not only reuse the existing interconnection and transmission rights for the new clean energy, but it will also become a synchronous condenser, which will help provide grid stability as renewable energy increases.

Early Engagement Leads to Community Buy-In

While the closure of the Sherco coal plant faced initial skepticism from the local host communities, Xcel’s early announcement of Sherco’s retirement, nearly a decade ahead of the first unit’s closure, has allowed the city of Becker and county of Sherburne and affected workers to start proactively planning for a post-coal future and facilitate new economic drivers. The on-site solar and storage will provide tax revenues and jobs to the local community, although this will not fully replace those provided by the coal plant. To help spur further economic development, Xcel also sold some of its local land to a metal recycling company and a trucking company and collaborated with Becker on its master planning effort, which seeks to attract even more development through setting aside space for an industrial park and manufacturing space on Xcel property near Sherco.

Xcel has ensured that existing Sherco employees will be set up for success, whether they want to do a similar job or transition to something new. The utility has pledged to not lay off any employees at Sherco, transitioning workers to other units when Sherco 1 and 2 retire. This has been accompanied by identifying opportunities nearby at other Xcel plants, having transition conversations with employees about future career opportunities, and providing upskilling and reskilling opportunities so that by the time Sherco 3 retires in 2030, all employees are able to successfully transition to other employment opportunities, whether that is within Xcel or at another company.

Finally, Xcel is looking to train and expand its future workforce for future clean energy jobs. On the new solar and iron-air storage projects, Xcel has committed to use union labor, providing over 400 union construction jobs that provide higher pay and apprenticeship programs for newer workers and over $350 million in local economic benefits. Furthermore, Xcel is attempting to increase the diversity of its workforce and focus on outreach to people of color, women, and veterans through its Power Up program, which seeks to put its participants in union apprenticeships or other energy-related construction jobs. IRA provisions also help encourage this, since prevailing wage and apprenticeship requirements must be met to receive the full ITC or PTC.

Regulatory oversight from a PUC with climate-aligned and community-focused mandates

While solar proved to be the most cost-effective option for replacing Sherco 2, and the IRA helped provide strong monetary incentive that further reduce the cost of clean energy technologies, state policies have also played a driving role to align the PUC with decarbonization and social goals. The most impactful was Senate File 4 passed last year, which established a 100 percent carbon-free electricity standard by 2040. In addition to ensuring the PUC’s decisions follow this standard, this law requires the PUC to maximize the benefits from the creation of high-paying jobs; the recognition of workers to unionize; the ability for workers to have access to transition; reductions in air pollution; and affordability, especially for low-income ratepayers. These new mandates help modernize the PUC and align its mission around equitable decarbonization and local economic development, in addition to its traditional goals of affordability and reliability.

Even before these formal mandates were in place, the Minnesota PUC has been thoughtful in its decisions to go beyond just affordable and reliable service. After the onset of the COVID-19 pandemic, the PUC opened a docket to evaluate how utilities could assist in boosting Minnesota’s economic recovery from the pandemic, which ultimately initiated or accelerated clean energy investments in the state, including investments in Minnesota-built solar panels, electric vehicle programs, and the Sherco solar project itself. Furthermore, with the passage of multiple pieces of federal legislation that included incentives for clean energy, the PUC ordered Xcel to maximize the benefits to ratepayers from the IRA and the BIL.

Sherco’s successful transition has been a collective effort driven by local environmental advocates, regulators, and affected communities and the local workforce. Broadly, we have four recommendations for how this can be replicated across the country:

• Use interconnection fast-tracks to bring new clean energy online quickly.
• Incorporate the full suite of new clean energy incentives from the IRA.
• Leverage planning dockets as a venue to work with technical experts in modeling new possibilities to make the most of the existing grid.
• Partner with communities, labor representatives, and local and state agencies early and often.

1. Use interconnection queue fast-tracks to bring new clean energy online quickly and highlight missed opportunities.

Regulators should ensure that utilities are fully maximizing the ability to use the generator replacement and surplus interconnection service processes to bring new clean energy online quickly, with advocates highlighting deficiencies in the process when necessary. With the interconnection queue currently taking an average of five years to process new requests, these fast-tracks can help ensure coal retirements proceed on schedule and displace the need for new gas plants.

The surplus interconnection process allows for additional resources to be connected at the same point of interconnection as existing resources. This process is most optimal for existing peaker plants that do not run very often, and can take as little as six months, providing immediate clean energy that can displace more expensive and polluting fossil generation. The generator replacement process, which Xcel utilized for Sherco, is also an excellent option for retiring fossil plants. Generator replacement allows the ability to “transfer” the interconnection rights of a retiring plant to new resources, allowing for a retiring coal plant to be quickly replaced by a suite of clean energy options, as is being done with Sherco.

When fully utilizing IRA incentives, RMI analysis found that “clean repowering” could cost-effectively lead to the buildout of 250 GW of economic clean energy resources using these interconnection processes and IRA incentives. This would save ratepayers $12 billion while reducing baseline electricity emissions by 25 percent.

2. Incorporate the full suite of benefits for clean energy from the IRA.

Regulators should also ensure that utilities are fully maximizing the incentives available under the IRA, especially in the planning process, with advocates highlighting deficiencies in the process when necessary. The IRA has provided massive incentives for clean energy, and advocates and regulators should ensure these benefits are maximized. Not only has it expanded the scope of the PTC and ITC to all carbon-free technologies, but it also extended these tax credits through 2031, providing long-term certainty to projects being developed in the future. The IRA has also made it easier for utilities to monetize these tax credits and pass these savings onto ratepayers.

Furthermore, the IRA established the Energy Infrastructure Reinvestment Program (EIR), which provides low-cost financing for energy projects that reutilize or repurpose energy infrastructure. This financing could be used to build new clean energy and reduce ratepayer bills while still maintaining utility financial health. Finally, as seen with the Form Energy and Xcel partnership, additional federal grants and private funding sources may be available, and utilities should proactively apply for these funding sources when applicable. When capacity expansion models do not fully account for these incentives, models may select less clean energy than is cost-effective.

3. Leverage planning dockets as the main venue to make the most of the existing grid and consider working with technical experts to demonstrate the technical and economic feasibility of clean repowering.

Advocates should consider working with experts to use models compatible with the utility’s own modeling tools to analyze alternative portfolios. This can help put intervenors on a more even playing field with utilities and dispute past decisions on the grounds of new incentives from the IRA, as these tax credits, bonus adders, and loan programs could increase the amount of economic clean energy that should be built, as well as lead to earlier retirement decisions for coal plants and reduce the need for new gas plants.

Furthermore, utilities will sometimes put exogenous limits on how much clean energy can be connected to their system each year or will include long delays for when new clean energy can be built due to interconnection queue delays. Intervenors can challenge these assumptions if utilities are not fully utilizing the surplus interconnection and generator replacement processes. These opportunities can be highlighted in modeling by removing interconnection delay assumptions, applying the energy community tax credit bonus to clean resources that can be built on- or near-site, and applying lower transmission interconnection cost assumptions due to the reutilization of existing interconnection rights and infrastructure. Furthermore, using the same capacity expansion model that the utility uses to analyze alternative portfolios can help ensure an apples-to-apples comparison and negate any arguments that could be made against model rigor or differences.

4. Engage with and incorporate feedback from communities and labor, early and often, and partner with local and state agencies focused on the transition.

Utilities should proactively work with host communities and labor representatives to not only help avert localized opposition, but also gain crucial support for transition opportunities. Laying out retirement plans early can allow local cities and counties time to plan and iterate economic development plans to transition to a post-coal future, as well as leave time to develop transition plans for current plant employees to retain employment and retrain for other fields of work. Committing to using union labor and setting up apprenticeship and training programs that will target workers outside the traditional utility space provides new opportunities and careers for a new generation of utility workers and ensures that clean energy projects meet the prevailing wage and apprenticeship requirements required by the IRA tax credits. In fact, utilities that develop comprehensive community benefits plans can not only ensure that local needs are being met, but also turn risks into business strengths.

Some plants, including Sherco, may benefit from relatively close proximity to major metropolitan areas, but more targeted approaches may be required for plants in more rural areas. To that end, some states have established specific offices to help address the energy transition. For example, Minnesota’s Energy Transition Office has been heavily involved in the Sherco retirement process since its inception in 2021. Utilities should look to proactively partner with local economic development offices and state transition agencies to increase capacity and potential funding for the energy transition.

Sherco provides an ideal example to utilities, regulators, advocates, and fossil communities across the country for how to take advantage of federal incentives and interconnection fast-tracks to collaborate and turn old coal plants into hubs for new clean investments and local economic development while preparing for the future energy transition. Sherco’s clean repowering took a great deal of collaboration among competing interests, and its success shows not only what is possible, but also provides lessons for how to replicate this outcome across the country. As electricity load grows for the first time in decades, stakeholders can work together to implement climate-friendly solutions that protect ratepayers, benefit the local workforce, and align utilities toward a clean energy future.