AI era: How data centres are transforming utility demand at Xcel Energy

Rebecca Sherlock:

Good morning and welcome to the First Sentier Global Listed Infrastructure Fireside Chat. I'm Rebecca Sherlock for those that don't know me, and I'm a portfolio manager for First Sentier Investors. And today I'm joined by Xcel Energy's CFO, Brian Van Abel.

Brian Van Abel:

Thanks, Rebecca. It's great to see you and be down here.

Rebecca Sherlock:

For those listeners that aren't that familiar with Xcel Energy, I thought maybe we could start with just a 60-second recap of the service territories that you serve and a little bit about the company.

Brian Van Abel:

Yeah, happy to. Yeah, Xcel Energy is one of the largest cap utilities in the United States. We're a fully regulated, vertically integrated utility. So we own transmission distribution and generation across an eight state footprint. We have about four million electric customers, two million natural gas customers. And we serve Minnesota, Wisconsin, North Dakota, South Dakota, Michigan, and then down South Colorado, Texas in New Mexico with four operating companies.

Rebecca Sherlock:

I mean, we hear a lot recently about data centres AI and how that's changing the need for electricity and power demand. Can you talk a little bit about how that's changed load growth in your service territory and the implications for both capital expenditure and your earnings?

Brian Van Abel:

Yeah, absolutely. It is a fascinating time in our industry. I've been CFO for six years now, and I remember when I stepped in to become CFO, we basically had no load growth. You're talking load growth, zero to 1%. Now over the next five years, we're talking about a 5% CAGR annual compound growth rate for our load growth. And 3% of that 5% is driven by data centres. We just had a recent announcement with a large data centre that Google's bringing to Minnesota.

Rebecca Sherlock:

Oh, hang on, that's my question later.

Brian Van Abel:

Oh. Well, we'll get to that later. Then I'll just talk about more macro. We see the trend accelerating. Just on our Q4 earnings call recently, prior to that, we had talked about executing on three gigawatts of data centre contracts. We doubled that. We expect to execute now on six gigawatts of data centre contracts by the end of 2027. We've already executed on a total of roughly two gigawatts of data centre contracts across five data centres. And so we plan to execute on four more gigawatts for the next two years. And that's exciting, right? It's load growth. It's earnings growth because we're going to serve those data centres with a heavy combination of renewables and storage and some gas backup for liability. So it helps drive earnings growth, but the other benefit is it provides an affordability benefit for our current customers. So it's really a win-win across the aisle when we think about it.

Rebecca Sherlock:

Yeah. Can you talk a little bit about the regulatory safeguards to protect some of these residential customers? Obviously, affordability is something that we're seeing a lot in the newspapers and a lot of people have this sense that they're paying for the Googles to come to the service territory. Maybe you could just give us a little insight into how that's working.

Brian Van Abel:

Yeah. I know that has become a little bit of a national narrative in the United States, but when we came up with a set of data centre principles a couple years ago when we first saw this coming down the pipeline is one of our principles was data centres will not be subsidised by our current customers. They'll actually provide a net benefit to our current customers is how we look at structuring the contracts. And so one way we handle that is something that we call an incremental cost test within a contract, where we prove to our regulators that the revenue we're bringing onto the system from the data centre will more than cover the cost to serve that data centre. And that's how you drive benefit to your current customers. There's other provisions in the contract, which is really important when you think about how large these data centres are, is we have 15 to 20 year terms, you have minimum charges in there.

You have exit and termination penalties in case they leave early because it's all about protecting your current customers and protecting our shareholders in terms of how large these contracts are with these data centres. But structured, right? It's a huge benefit for our current customers and when we think about the driving long-term growth.

Rebecca Sherlock:

And the Google data centre. So can you talk about your differentiated approach to that given that you do have a lot of renewable resource in the service territories that you operate in?

Brian Van Abel:

Yep. Happy to talk about it now. Yeah. Look, we're really excited about this announcement because it demonstrates to our policymakers, to our commissions, to our customers, how we really want to serve these data centres. And it goes back to one of the core principles of our company. We are the first investor-owned utility to announce a carbon-free target. We did that in 2018 to carbon-free by 2050. We continue on that transition, looking to shut down all of our coal plants by the end of 2030 across all of our service territories. And we want to make sure that we're serving these data centres that are aligned with that kind of clean energy story. And so if you look at our Google announcement, we're serving Google, this large scale data centre with 1,600 megawatts renewables and 300 megawatts of a new long duration battery storage technology, which is exciting because the contract will be structured.

So Google's paying for this new technology. So really demonstrating that we can bring these data centres online, serve them with a heavy penetration of renewables and ensure that we're delivering a clean energy solution to them and for our states, because that's what our states from a policy perspective are aligned with.

Rebecca Sherlock:

I mean, look, we've definitely seen a lot of corporates pull back on decarbonization targets and net-zero. Can you talk a little bit about how this new generation is not leading you to maybe stall a little bit in that pathway or does the pathway look a bit different? Can you just talk about that pathway to net-zero that you described before?

Brian Van Abel:

Yeah. I think as we talked about in 2018 when we came out with it, carbon free by 2050, we do need a new technology kind of beyond 2030. We're on track to shut down all our coal plants by 2030, end of 2030, which delivers a significant reduction overall carbon on our system. But from 2030 to 2050, we're looking for that what's that new technology to take the remaining source of carbon off of our system, whether it's this long duration battery technology that I talked about, it's 100-hour battery. Right now, your battery systems are these four hour lithium ion batteries. That can't replace the reliability that a gas combustion turbine brings to the system.

But if you have a 100-hour battery, four days of storage, that starts to help displace what may be needed for your gas combustion turbines. And so that's what we're focused on post 2030 is how do we continue to help enable new technologies to get us where we need to be and having a data centre to help fund some of that, pay for some of that new investment because new technology is expensive, right? You need to help derisk it, commercialise it. And so it's really a great partnership with Google to help kind of get us where we think we need to be from a technology perspective.

Rebecca Sherlock:

And obviously, outside of data centres, there's this CapEx budget that feels like it's increasing across many different levels. And one thing that I can't avoid talking to about you would be wildfires. So can you talk about where you've looked for best in class solutions, how your grid has changed, how you're evolving with these new weather patterns that we find ourselves in?

Brian Van Abel:

Yeah, I think that is one of the great things about our industry is we are very collaborative on industry issues such as wildfire. So we've spent a lot of time with the California utilities with their experience that they've had over a long period of time. And you take the best practises and learnings from everything they've done over the past decade and you can implement them quickly from enhanced power safety settings to practises around your public safety power shutoffs to water the Pano AI camera technology that we deploy to help with advanced detection of wildfire, not even potentially ours, but any wildfire in our communities to help with community safety, to using AI and fire prediction modelling with some of the softwares we're using internally. And so it's really been a great partnership with California utilities and just the industry in general is how do we prepare for the climate changes that is happening?

And it's not just a West Coast problem in the US. It's going to be an issue that the entire United States faces. And so we feel really proud and great about the steps we've taken over the past few years to really bring in those best practises and set ourselves up to a place where we are protecting our communities on a daily basis.

Rebecca Sherlock:

Yeah. Look, we're out of time, but thank you so much for joining me today. That's been great insights for our clients. And until next time.

Brian Van Abel:

Thank you very much, and it's great to see you and great to be down here.