Opinion: Energy-Rich Texas Should Love the Climate Bill

As you might expect, Texas’ two Republican senators aren’t fans of the anti-inflation law. Yet few states can gain as much from it as they can.

Texas is known as an oil state but, more accurately, an energy state. Yes, it is the country’s largest oil (and gas) producer and the top refiner. It is also among the top 10 states for coal mining. And Texas produces more electricity from coal than any other state — in fact, more electricity, period. Yet Texas is the largest state for wind power production – 16 years running – and ports like Corpus Christi are important entry points for importing turbines. In utility-scale solar power, Texas ranks second and is quickly catching up to California.

In conjunction with Enersection, a Houston-based energy-data visualization firm, I recently analyzed where clean technologies are deployed in the United States. Our main finding: Republican politicians’ vocal aversion to renewable energy is at odds with the fact that much of it is installed in red locales. Texas is a prime example.

Of the nation’s top 10 congressional districts for operating and planned wind, solar and battery capacity, four are in Texas, more than any other state and, including the No. 1 district, 19th in Texas. All represent Republicans. While they may not be likely when the House votes on the IRA, their state could benefit on several fronts — mainly by galvanizing existing trends and opportunities.

Federal investment and production tax credits are critical to the expansion of wind and solar energy across the United States. New tax credits are more generous and flexible; For example, solar developers can now use a production tax credit previously available only for wind projects. The maximum $26 per megawatt-hour credit — provided developers meet labor and wage requirements — is huge compared to current Texas electricity futures prices of about $48 per megawatt-hour in 2024.

What’s more, renewables were already growing like weeds in Texas due to the state’s deregulated electricity market, open land, growing electricity demand, high wind speeds and abundant sunlight. Wind generation surpassed coal-fired power generation a few years ago. Solar power, which has been slow to get going, combines well with wind to kick in during listless lunchtimes on hot days, which has put a strain on the grid this summer.

As of July, the grid operator, the Electric Reliability Council of Texas, or ERCOT, counted planned solar and wind projects equivalent to three times the installed base. Most of that will not end up being built. But analysts at CreditSights think that even if only 30% is realized — the upper end of the range in previous years — wind and solar could supply about half of the state’s expected peak demand by 2025, up from just 23% last summer.( 1 )

Now add the battery. Again, the rationale for building these in Texas already exists, given the large spread in peak and off-peak electricity prices. ERCOT’s project queue has 69 GW of battery capacity versus an installed base of less than 2 GW (and peak demand near 80 GW). In extending a 30% tax credit to single battery projects regardless of whether they use renewable energy, the IRA should ensure that more are lined up. It would encourage large electricity consumers, such as industrial plants, to install their own batteries as insurance against blackouts like February 2021. If fully adopted, massive increases in renewables and storage will likely force more coal-fired capacity shutdowns and, as CreditSites points out, reduce reliance on gas-fired peaker plants.

Realizing its full benefits, however, means building more transmission lines, connecting remote renewable projects within the state to the state’s demand centers and, if Texas can overcome its libertarian impulses, connecting its own grid to nearby networks. Wholesale electricity prices in sparsely populated West Texas have averaged 14% lower than in Houston over the past five years — a classic arbitrage that could stem new transmission. Meanwhile, Berkeley Lab released a study of the potential cost of new transmission projects across the country, based on the spread of electricity prices between neighboring areas. A glance at this map tells you where the most value can be found.

Transmission incentives for IRAs are relatively small, less than $3 billion in explicit funding and up to $15.5 billion if you look at other, broader subsidies. Again, however, with the strong economic case that exists for new cables, any help could mean the difference between realizing or losing an opportunity. Also, last year’s bipartisan Infrastructure Investment and Jobs Act provided funding for the grid.

Also important here is the proposed enabling legislation that Senator Joe Manchin called for to support the IRA. Among other things, it will identify 25 strategic energy projects aimed at “reducing energy costs, improving energy reliability, decarbonization potential, and promoting energy trade with our allies.” The transmission of wind and solar booms in Texas’ own cities, and perhaps in other states, easily meets the first three of these criteria. A fourth may also apply, given the potential to displace domestic gas demand that could be redirected to exports.

In addition to addressing energy supply, strengthening Texas’ power grid and lowering bills means addressing demand. The state scores poorly on energy efficiency, especially when it comes to electric home heating. Reducing that load on the grid by just 10% would be equivalent to adding the extra capacity of three nuclear reactors over the winter, and wouldn’t cost nearly as much (see this). The IRA’s $9 billion fund to cover rebates for things like heat-pump water heaters and air-conditioning systems and other efficient appliances isn’t huge. Again, however, more efficiency in a state with the nation’s sixth-highest average monthly bill and a clearly struggling grid is a no-brainer anyway. Even a small nudge can help.

A counterargument to all of this is that, by subsidizing energy that displaces fossil fuels, the IRA simultaneously hurts Texas’ traditional oil and gas industry (and coal, too). This is outdated thinking on several fronts.

First, all Texas industries will benefit from a grid that includes more renewables, batteries and transmission, which will increase resilience and reduce costs and carbon.

Second, even in a decarbonizing world, Texas’ low-cost resources, world-class infrastructure, efficiency and concentration of export capacity mean its oil and gas production will last much longer than other states and countries.

Third, and in addition, being able to boast lower carbon intensity and reduced methane emissions due to a green grid — due to IRA-enacted penalties — will give Texas oil and gas exports a competitive edge.

Fourth, expanded subsidies for carbon capture and hydrogen encourage nascent, and still uneconomic, decarbonization technologies that align more closely with oil majors’ existing businesses than renewables. Darren Woods, chief executive of Exxon Mobil Corp., cautiously welcomed the proposed legislation in a recent earnings call.

After all, Texas will be a magnet for investment not only in green energy infrastructure but also in manufacturing spurred by the IRA’s home-grown system. Increased discounts on electric vehicles, for example, will boost emerging EV and battery hubs around Austin, where, symbolically, Tesla Inc.’s new headquarters is now less than a three-hour drive from Exxon in Houston. 

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© 2012-2022 Cynthia and George Mitchell Foundation.