Energy-rich Texas should love the climate bill

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As you might expect, Texas’ two Republican senators are not fans of the Inflation Reduction Act. Yet few states can get as much out of it as theirs.

Texas is known as an oil state, but is more accurately an energy state. Yes, it is the largest producer of oil (and gas) in the country, as well as the best refinery. It is also in the top 10 states for coal mining. And Texas produces more electricity from coal than any other state — well, more electricity, period. Yet Texas is also the top state for wind power generation — for 16 consecutive years — and ports like Corpus Christi are critical entry points for turbine imports. In utility-scale solar, Texas is second and quickly catching up with California.

In conjunction with Enersection, a Houston-based energy data visualization company, I recently analyzed where clean technology is being deployed in the United States. Our key finding: Republican politicians’ vocal antipathy toward renewable energy is at odds with the fact that the vast majority of it is located in red localities. Texas is a good 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’ 19. All are represented by Republicans. Despite their likely no when Parliament votes on the IRA, their state stands to benefit on several fronts – mainly by encouraging existing trends and opportunities.

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

Also, renewable energy was already growing like a weed in Texas due to the state’s deregulated electricity market, open land, growing demand for electricity, high wind speeds and abundance of sunshine. Wind generation overtook coal-fired power generation a few years ago. Solar power, which has been slower to get going, goes well with wind by stepping in during sluggish lunchtimes on hot days, which has contributed to grid loads this summer.

As of July, the grid operator, the Electric Reliability Council of Texas, or ERCOT, counted planned solar and wind projects equal to three times the installed base. Most of it doesn’t end up being built. But analysts at CreditSights argue 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 projected peak load by 2025, up from just 23% last summer.(1)

Now add batteries. Again, the rationale for building these in Texas already exists, given wide ranges in peak and low voltage prices. There is 69 gigawatts of battery capacity in ERCOT’s project queue versus an installed base of less than 2 gigawatts (and peak load approaching 80 gigawatts). By 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 electricity customers, such as industrial plants, to install their own batteries as insurance against blackouts like those in February 2021. Overall, massive increases in renewables and storage will likely force further shutdowns of coal-fired capacity and, as CreditSights points out , reduce dependence on gas-fired peak plants.

However, realizing the full benefits of this also means building more transmission lines, both to connect remote renewable energy projects to demand centers in the state and, if Texas can overcome its libertarian impulse, to connect its own grid to surrounding networks. Wholesale energy prices in sparsely populated West Texas have averaged 14% less than 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. A glance at this map tells you where the greatest value could be found.

IRA pass-through incentives are relatively small, with less than $3 billion in explicit funding and up to $15.5 billion if you squint at some other, broader subsidies. But again, given the strong existing economic case for new lines, 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 funding for the grid.

The proposed authorization bill that Senator Joe Manchin required to support 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, which connects 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 diverted to exports, the fourth may also apply.

In addition to addressing energy supply, strengthening Texas’ power grid and reducing bills means addressing demand. The state scores poorly on energy efficiency, particularly with regard to electric home heating. Reducing this load on the grid by just 10% would be equivalent to adding three nuclear reactors’ extra capacity in winter, and it wouldn’t cost nearly as much (see this). The IRA’s $9 billion in funding to cover rebates for things like heat pump water heaters and air conditioners and other efficient appliances isn’t huge. Again, 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 little push could help.

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

First, all Texas industries would benefit from a grid with more renewables, batteries and transmission, which would increase resilience and reduce costs and carbon. Second, Texas’ concentration of cheap resources, world-class infrastructure, skills, and export capacity means that even in a decarbonizing world, its oil and gas production will last much longer than that of other states and countries. Third, and in addition, being able to boast lower carbon intensity due to a greener grid and reduced methane emissions—due to an IRA statutory penalty—would give Texas oil and gas exports a competitive advantage. Fourth, expanded subsidies for carbon capture and hydrogen provide a boost to nascent, and as yet uneconomic, decarbonization technologies that fit more closely than renewables with oil companies’ existing businesses. There’s a reason 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 not only in greener energy infrastructure, but also in the manufacturing encouraged by the IRA’s domestic measures. Expanded discounts on electric vehicles, for example, will boost the new EV and battery hub around Austin, where Tesla Inc.’s new headquarters are now less than a three-hour drive from Exxon’s in Houston. For all the tribal rhetoric in Washington, the facts of the transition on the ground in Texas are already plain to see.

More from Bloomberg Opinion:

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

• Manchin’s jab gives Clean Tech a welcome boost: Liam Denning

• Industrial expenditure should increase. But will it?: Brooke Sutherland

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

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

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

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