WEC Energy bets on solar, wind and natural gas. So, what about coal?

Signaling the early stages of a historic transition, WEC Energy Group, the parent company of We Energies and Wisconsin Public Service, last month announced its first large investment in solar power.

Once the darlings only of the green-energy crowd, solar and wind projects now have become the least expensive way for utilities to add new power generation. As a result, they're changing how utilities plan to operate in the coming decade.

“The technology keeps getting better and better — and, the most important thing, cheaper,” said Gary Radloff, who retired this year as director of energy policy analysis for the Midwest at the Wisconsin Energy Institute, a research center at the University of Wisconsin-Madison.

Wisconsin Public Service, the subsidiary of WEC Energy Group that operates in northeastern Wisconsin, and Madison Gas and Electric plan to invest a total of $390 million to buy 300 megawatts of generating capacity — enough electricity for more than 70,000 residential customers — in two solar power projects.

We Energies is expected eventually to buy the remaining 150 megawatts in one of the two projects.

The investments are part of WEC’s long-term plan for electricity from the sun, wind and natural gas to make up a larger share of its generating capacity in the next decade.

Natural gas, now in abundant supply, will be an important part of that mix: Natural gas power plants can be built for a fraction of the cost of coal-fired plants and are less costly to operate and maintain.

But solar power, which is better suited overall for Wisconsin than wind power owing to weather patterns and other factors, is certain to make up a growing share of the state’s power generation in the coming decades.

The cost is roughly half of what it was four years ago, said Dan Krueger, senior vice president of wholesale energy and fuels for WEC Energy.

Advances in technology, economies of scale in manufacturing and installation, and federal subsidies have contributed to the lower cost, according to the most recent cost-of-energy analysis by Lazard Ltd., an investment bank.

“It was always that renewables were clean but expensive,” said Steve Kihm, principal and chief economist of Seventhwave, a nonprofit research organization in Madison that receives financial support from utilities. “Now they are clean and inexpensive.”

The transition could help keep electricity rates in check because solar and wind projects don’t have fuel costs and are cheaper to operate than coal plants.

But it also is taking place at a time when the demand for electricity from utilities is expected to be flat and could even decline as energy efficiency improves, and that will bring challenges.

For example, We Energies shut down the 1,190-megawatt coal-fired power plant in Pleasant Prairie this year, and though the plant will no longer generate electricity, customers could be paying off the utility’s investment in the plant for decades.

We Energies had yet to recover $681.3 million of that so-called "stranded" investment in the plant's two units as of Dec. 31. 

One of the units was expected to run until 2040, the other until 2045. We Energies also will earn a return, currently 10.2 percent, on its remaining investment in the plant each year.

That means a small portion of customers’ bills could be paying for the Pleasant Prairie power plant for roughly the next 26 years.

The same scenario could play out for the Presque Isle Power Plant in Marquette, Mich. We Energies plans to shut down the plant in 2020. The plant had a book value of $191.4 million as of Dec. 31, with an estimated 86% of the investment allocated to We Energies customers.

The utility will earn a return on its remaining investment in that plant, too, until the full amount is recovered.

“The stranded asset piece is a big, big issue for us,” said Martin Day, administrator of the Division of Energy Regulation at the Wisconsin Public Service Commission.

But Day also said that WEC’s investment in the plants was justified when they were built, and the company’s stockholders deserve to be reimbursed for their investment.

WEC plans to shut down two older and smaller plants owned by WPS: the J.P. Pulliam Power Plant, with units built in 1958 and 1964, in Green Bay, and Unit 4, built in 1969, of the Edgewater Power in Sheboygan.

Those plants had a combined book value of $57.9 million as of Dec. 31.

In all, WEC plans to shut down more than 1,800 megawatts of coal generation by 2020.

“This is indicative of what we are seeing across the country,” Day said.

At the same time, WEC will earn a return on any new investments in solar, wind and natural gas projects.

Its presentations to investors project a total of $1.6 billion in spending on new generation through 2022, roughly $700 million more than has been announced publicly so far.

Yet little if any growth is projected in the demand for electricity.

“You aren’t building these plants to meet new demand," Day said, "because demand is flat."

The company must win approval from state regulators for any new investments. But electric utilities have an inherent incentive to invest in new generation and other projects on which they can earn a return.

“Utilities have been paid over the years to build, build, build,” Radloff said.

WEC has said that it can invest in new sources of power without raising rates because the projects will have lower costs.

It estimates that for every dollar in savings from operating and maintenance costs, it can invest $8 in generation and transmission with no effect on rates.

WEC also proposed and won state approval to freeze We Energies and WPS rates until at least 2020, and We Energies has not had a significant rate increase since 2014.

But the company’s plans to invest in new generation — while its customers continue to pay off plants that are shut down — worries consumer advocates.

 “Should we have to pay twice?” asked Tom Content, executive director of the Citizens Utility Board of Wisconsin. “That’s the concern that we continue to hold.”

The question for regulators is whether the cost savings from new investment in solar and wind projects as well as natural gas plants will more than offset the cost of shutting down older power plants.

"There’s this trade-off we have to balance,” Day said.

The transition to generating more electricity from solar, wind and natural gas could benefit customers by enabling utilities to add generating capacity in small increments, as opposed to building large coal-fired power plants.

For decades, utilities focused on building larger, more efficient power plants because the economies of scale could lower costs.

But the expansions also brought risks.

The long lead time to design and build a large power plant meant that the plants had to be built to meet demand that may never materialize.

The Elm Road Generating Station in Oak Creek is an example.

The power plant was approved by the PSC in 2003, and construction began in 2005, immediately after the late Sam Johnson, at the time chairman emeritus of S.C. Johnson & Son Co., and environmental groups lost an appeal challenging the project.

By the time the generating units came on line in 2010 and 2011 at a cost of $2.3 billion, projections for the demand for power had changed.

The Elm Road Generating Station proved to be unneeded, saddling We Energies with so much excess generating capacity that it could shut down the larger Pleasant Prairie power plant and still meet the demand for power.

Forecasting power demand has always been tricky, and it could be even more so in the coming decade.

Increased energy efficiency and the spread of rooftop solar panels, particularly in commercial buildings, are expected to keep a check on the growth in demand.

Batteries to store power from solar and wind projects also are falling in cost and becoming more feasible. That would enable utilities to store electricity on windy and sunny days. Utilities in California and Arizona, for instance, recently announced plans for large battery storage projects.

“It’s coming, and it’s coming faster than a lot of people expect,” Content said.

Other technologies that enable utilities to manage the peak demand for power also could reduce the need for new generation.

Utilities still will need a mix of generation, including coal and gas plants that provide a reliable source of power.

But coal, once the least-expensive source of electricity excluding hydroelectric power, now is on the margins. Natural gas is expected to provide new "base load" capacity — power that is readily available at any time — instead of coal.

So We Energies’ Elm Road Generating Station in Oak Creek could be one of the last large coal-fired power plants built in the United States.

For now, WEC doesn’t lack for investments on which it can earn a return.

In addition to its planned spending on solar projects, it intends to invest $11.8 billion from 2018 through 2022 in capital projects, with replacing pipelines for Peoples Gas and new transmission and distribution lines accounting for much of that spending.

WEC also plans to invest $424 million in wind projects in Illinois and Nebraska that will sell power to other companies.

WEC, which has a stellar record of earnings growth, projects that the investments will enable it to increase earnings 5 percent to 7 percent in coming years. Wall Street analysts applauded the planned spending.

The move to renewable energy sources and other new technologies will force tradition-bound utilities to become more nimble, said Radloff, the former Wisconsin Energy Institute policy analyst.

"It is just going to continue to dramatically change this sector," he said. "Utilities really are just now starting to understand how they can use all these technologies to manage supply-demand in ways they never did in the past."