Colorado PUC approves unprecedented spending for energy efficiency and electrification in Xcel Energy Clean Heat Plan — but now the hard work begins

July 3, 2024 | Justin Brant, Utility Program Director

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In a recent landmark decision, the Colorado Public Utilities Commission (PUC) approved $430 million in additional funding for beneficial electrification (BE) and energy efficiency through 2027 in Xcel Energy’s first-ever Clean Heat Plan. When combined with the funding the PUC previously approved for these resources, Xcel Energy will now have the money needed to decarbonize its gas utility in Colorado by helping customers use less energy and switch to clean electric options for heating, hot water, and cooking. However, approving the funding is just the first step. Now comes the hard part: transforming markets for heating, cooling, and hot water in Colorado from gas appliances to clean electric alternatives.

What is a Clean Heat Plan?

In 2021, the Colorado legislature passed a requirement for gas utilities in the state to reduce greenhouse gas (GHG) emissions by 4% by 2025 and by 22% by 2030, from a 2015 baseline.

To show that they are meeting these targets, gas utilities must file “Clean Heat Plans” (CHPs) with the PUC. A CHP may include a mix of supply-side resources that replace traditional gas and demand-side resources, which reduce the gas customers use. Together, these are called “clean heat resources,” and include: 

• Energy efficiency programs, reducing energy usage in homes and businesses.
• Recovered methane or renewable natural gas, including the gas that is captured at landfills and water purification facilities.
• Green hydrogen, where water is converted to hydrogen through electrolysis using renewable energy.
• BE, replacing appliances that use fossil fuels with clean electric alternatives.

Xcel Energy, the largest gas utility in Colorado, filed its inaugural CHP in August 2023, and it was approved by the Commission in June 2024. This first CHP covers the years 2024-27. These early years are essential to put the utility on track to meet the ambitious GHG reduction requirements. In 2026, Xcel will file its next CHP, which will focus on ensuring compliance with the 2030 target.

Xcel’s Clean Heat Plan

Based on the advocacy of the Southwest Energy Efficiency Project (SWEEP) and other groups, the Colorado PUC approved a CHP that is primarily focused on energy efficiency and BE, rejecting investments in green hydrogen and certified natural gas (certified natural gas is fossil gas that may be produced with lower than the national average leakage rates) proposed by Xcel entirely, while approving a $10 million budget for investments in renewable natural gas. This portfolio of resources was largely consistent with modeling conducted by SWEEP on how Xcel can meet its 2030 decarbonization goals. The PUC found that BE and energy efficiency are the lowest cost decarbonization resources for a gas utility and are the only clean heat resources that can reduce capital investments in the gas system over time, ensuring that Colorado can meet its GHG emissions reduction requirements at the lowest possible cost. Cumulatively, this investment will jump-start Colorado’s transition to clean heating technologies, while also avoiding up to 778,000 tons of GHG emissions in 2027. As shown in the graph below, this first CHP will significantly reduce emissions, but to reach the 2030 GHG emissions reduction target, Xcel will need to ramp up BE and energy efficiency even faster after 2027.

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Cumulative GHG emissions reductions from Xcel Clean Heat Plan (tCO2e)

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What this means for building electrification and energy efficiency in Colorado

Xcel Energy provides both gas and electric service to approximately 1.1 million Coloradans, with an additional 480,000 electric-only customers and 420,000 gas-only customers. Thus, Xcel provides gas utility service to roughly 70% of the homes and businesses in the state that use gas. The large size of the utility presents a major opportunity to decarbonize buildings in Colorado with the approval of these resources.

In addition to the monies for gas energy efficiency and BE approved in the CHP, the Commission has previously already approved an additional $215 million in spending on these resources through the 2023 Demand-Side Management (DSM) and BE Strategic Issues proceeding back in May of 2023. As shown in the table below, Xcel now has $644 million to invest in energy efficiency and BE over the next three-and-a-half years. This is an unprecedented level of investment that has the potential to transform the market for these clean energy resources in Colorado.

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Approved gas energy efficiency and BE spending ($ millions)

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On top of the Xcel funding, Colorado is also poised to receive an additional $140 million to support energy efficiency and electrification through the Home Energy Rebate program approved in the Inflation Reduction Act. At this point, Colorado has submitted its application for these monies and is waiting for approval from the U.S. Department of Energy to begin implementing programs.

However, ramping up programs to transform the market will not be easy. According to Xcel’s modeling in its CHP, the utility will need to ramp up its programs to electrify the heating in at least 38,000 single family homes and 6,000 multifamily units in 2027 to achieve the emissions reductions approved by the PUC. Electrification of water heating is even more aggressive, with over 60,000 heat pump water heaters (HPWHs) to be installed in 2027.

To put these numbers into perspective, Xcel issued about 2,500 rebates for heat pumps in 2023 and 154 rebates for HPWHs. While the utility has seen exponential growth in recent years to reach these levels of participation, participation will have to more than double each year to get to the needed levels by 2027 and continue to increase at a similar rate until 2030, if we are to have any chance of meeting the emissions reductions targets.

To reach these levels of electrification, we will not be able to rely on a business as usual approach by simply trying to inject more money into the utility’s existing programs — we need to transform them. Thankfully, we have already begun to make changes to Xcel’s programs to support this massive increase. In a recent settlement in Xcel 2024-25 DSM and BE Plan, SWEEP and partners secured important changes to heat pump qualifications and how heat pumps are rebated that should begin to move the market by making it easier for efficient heat pumps to qualify for rebates and increasing incentives for heat pumps that are the most efficient for heating, in addition to providing efficient cooling. In addition, we have also gotten commitments from the utility to move forward with neighborhood-scale pilot projects that will electrify buildings at scale, in order to bring down costs and focus significant resources and incentives on promoting all-electric new construction. In addition, Xcel also agreed to develop a Tariffed On-Bill Financing program to bring low-cost financing resources to customers to help pay for energy efficiency and electrification in homes and businesses.

However, while these changes and new pilot programs are exciting, in and of themselves they will likely not be enough on their own to meet the state’s important climate goals. This means scaling pilot programs quickly and thinking outside the box when it comes to program design. It also means developing financing programs that are large enough to meet the need. Additional collaboration with contractors and other interested parties will also be necessary to ensure we develop the infrastructure and clean energy resources needed to truly make Colorado a national leader in the gas transition.

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