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Analysis | Energy-Rich Texas Should Love the Climate Bill

Analysis | Energy-Rich Texas Should Love the Climate Bill

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As you might expect, Texas’ two Republican senators aren’t fans of the Inflation Reduction Act. Yet few states stand to gain as much from it as theirs does.

Texas is known as an oil state but is more accurately an energy state. Yes, it is the biggest producer of oil (and gas) in the country, as well as the top refiner. It is also in the top 10 states for coal mining. And Texas produces more electricity from coal than any other state — indeed, more electricity, period. Yet Texas is also the biggest state for wind power generation — for 16 years running — and ports such as Corpus Christi are critical entry points for turbine imports. In utility-scale solar power, Texas ranks number two and is catching up to California fast. 

In conjunction with Enersection, a Houston-based energy-data visualization firm, I recently analyzed where clean technology gets deployed in the US. Our main finding: Republican politicians’ vocal antipathy toward renewable energy is at odds with the fact that the vast majority of it is sited in red locales. Texas is a prime example.

Of the top 10 congressional districts in the country for operating and planned wind, solar and battery capacity, four are in Texas, more than in any other state and including the No. 1 district, Texas’ 19th. All are represented by Republicans. Despite their likely nays when the House votes on the IRA, their state stands to benefit on several fronts — mainly by galvanizing existing trends and opportunities.

Federal investment and production tax credits have been crucial to the expansion of wind and solar power across the US. The new tax credits are more generous and flexible; for example, solar developers can now utilize 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 with current Texas electricity futures prices for 2024 of about $48 per megawatt-hour.

What’s more, renewables were already growing like weeds in Texas, due to the state’s deregulated power market, open land, growing electricity demand, high wind speeds and abundance of sunshine. Wind generation overtook coal-fired power generation a couple of years ago. Solar energy, which was slower to get going, pairs well with wind by stepping in during listless lunchtimes on hot days, which have contributed to strains 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 won’t end up getting built. But analysts at CreditSights posit that even if only 30% is realized — the upper end of the range in prior years — wind and solar could be supplying roughly half of the state’s projected peak demand by 2025, up from just 23% last summer.(1)

Now add in batteries. Again, the rationale for building these in Texas exists already, given big spreads in peak and off-peak power prices. There are 69 gigawatts of battery capacity in ERCOT’s project queue versus an installed base of less than 2 gigawatts (and peak demand nearing 80 gigawatts). In extending a 30% tax credit to stand-alone battery projects regardless of whether they use renewable energy, the IRA should ensure that more of the queue actually gets built. It should also encourage large power customers, such as industrial plants, to install their own batteries as insurance against blackouts such as those of February 2021. Taken altogether, massive increases in renewables and storage would probably force further closures of coal-fired capacity and, as CreditSights points out, reduce reliance on gas-fired peaker plants.

Realizing the full benefits of this, however, means also building more transmission lines, both to connect remote renewables projects with demand centers within the state and, if Texas can overcome its libertarian impulse, to link its own grid with surrounding networks. Wholesale power prices in sparsely populated West Texas have averaged 14% less than in Houston over the past five years — a classic arbitrage that new transmission could close. Meanwhile, Berkeley Lab just published a study of the potential value of new transmission projects across the country, based on observed electricity price spreads between neighboring areas. One glance at this map tells you where the most value could be found.

The IRA’s transmission incentives are relatively small, at less than $3 billion of explicit funding and up to $15.5 billion if you squint at some other, broader subsidies. Again, however, given the strong existing economic case for new wires, any help could mean the difference between an opportunity being realized or lost. In addition, last year’s bipartisan Infrastructure Investment and Jobs Act provided funds for the grid.

The mooted permitting legislation that Senator Joe Manchin demanded for backing the IRA is also important here. Among other things, this would identify 25 strategic energy projects aimed at “reducing energy costs, improving energy reliability, decarbonization potential, and promoting energy trade with our allies.” Transmission hooking up a wind and solar boom in Texas to its own cities and perhaps other states easily meets the first three of these criteria. Given the potential to displace domestic gas demand that could be redirected to exports, the fourth might also apply.

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

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

First, all Texas industries would benefit from a grid featuring more renewables, batteries and transmission, which would boost resilience and reduce costs and carbon. Second, even in a decarbonizing world, Texas’ concentration of low-cost resources, world-class infrastructure, skills and export capacity means its oil and gas production will endure far longer than in other states and countries. Third, and adding to that, being able to boast lower carbon intensity due to a greener grid and reduced methane emissions — owing to an IRA-legislated penalty — would give Texas’ oil and gas exports a competitive edge. Fourth, expanded subsidies for carbon capture and hydrogen offer a boost to nascent, and as yet uneconomical, decarbonization technologies that align more closely than renewables with oil majors’ existing businesses. There’s a reason that Darren Woods, Exxon Mobil Corp.’s chief executive, gave the proposed legislation a cautious welcome on a recent earnings call.

Above all, Texas would be a magnet for investment in not just greener energy infrastructure but also the manufacturing encouraged by the IRA’s domestic-content measures. Expanded rebates on electric vehicles, for example, will boost the emerging EV and battery hub around Austin, where, in telling symbolism, Tesla Inc.’s new headquarters is now less than a three-hour drive from Exxon’s in Houston. For all the tribal rhetoric in Washington, the transition’s facts on the ground in Texas are already plain to see.

More from Bloomberg Opinion:

• Whatever Happened to the US EV Supply Chain?: Anjani Trivedi

• Manchin’s Shock Gives Clean Tech a Welcome Jolt: Liam Denning

• Industrial Spending Should Boom. But Will It?: Brooke Sutherland

(1) “HY Power: Texas Renewables Deep Dive,” by Andrew DeVries, Joseph Sushil and Nick Moglia, CreditSights, June 23, 2022.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Wall Street Journal’s Heard on the Street column and a reporter for the Financial Times’s Lex column.

More stories like this are available on bloomberg.com/opinion

#Analysis #EnergyRich #Texas #Love #Climate #Bill

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