The Curious Case of the Texas Wind Industry

By Chris Head | Originally publishes at Americans for Energy Leadership

In January, Cape Wind attained what appeared to be the final permits needed to break ground on the long-awaited wind farm. For the past 10 years, the Massachusetts-based Cape Wind project has faced political and legal pressure from advocacy groups and residents who have lobbied hard against the 130 turbine offshore wind farm. In that same amount of time, almost 10,000 MW of onshore wind capacity has been installed in, of all places, Texas.

By 2010 Texas had become the undisputed leader of wind energy in the United States, a fact that flies in the face of conventional logic. How is a state steeped in oil and gas, and run by climate-change denying politicians, spearheading some of the largest renewable energy developments in the US? The answer could provide some insights into how renewable energy can flourish in states where environmental and climate concerns aren’t necessarily the main drivers of energy policy.

Oil, Money, and Politics

The Texas economy is valued at $1.2 trillion, putting it on roughly the same GDP level as India, Russia, and Spain. The State's economy also produces, and consumes, more electricity than any other state in the country. The vast majority of this electricity comes from fossil fuels, making Texas the largest CO2 emitting state in the United States, which until 2006 was the largest emitter of CO2 in the world.

Fossil fuels are intrinsic to the politics and economy of Texas. According to the EIA, in 2009 Texas was the leading crude oil-producing state in the U.S., and its 27 refineries account for more than ¼ of total U.S. refining capacity. In 2008, the oil and gas industry contributed 16.5% of Texas’ Gross State Product, while employing over 360,000 people.

Oil and natural gas companies such as ConocoPhillips, Exxon-Mobil, and Halliburton are headquartered in Texas, and these companies have enjoyed substantial support from politicians such as Governor Rick Perry, who has been an unapologetic ally of the coal, oil, and natural gas industries throughout his decade-long tenure. Indeed, Governor Perry has long been one of the most prominent anti-environmental politicians in the country. And yet, Governor Perry has overseen one of the greatest renewable energy success stories in the United States.

Wind energy accounted for almost 8% of Texas electricity in 2010, up from 3% in 2007. Texas is home to over 30 grid-scale wind farms (each with a nameplate capacity of at least 120 MW) for a total installed capacity of around 9,700 MW. The EIA reports that this is more than 25% of total installed wind capacity in the United States, and almost three times as much capacity as Iowa, the second-ranked state.

There are multiple reasons why Texas is winning the wind race in the US. True, the state is home to some of the best wind resources in the world. But as the stalled Cape Wind project has shown, strong winds do not necessarily translate to grid-sale renewable energy projects. Political, technical, and regulatory barriers all must be overcome for any significant grid scale renewable electricity rollout. Texas has managed to create a favorable policy environment by streamlining regulatory processes, tapping into rural development concerns, and supporting transmission and distribution projects, all of which allow investors to confidently sink money into utility-scale electricity generation projects.

Along the way, the Texas wind industry is establishing best practices not just for wind, but for all renewable intermittent electricity generation sources. Says Peter Behr of the New York Times,

“the lessons learned from the Texas wind power story are also writing the first chapters for new energy policies that will be required when the climate threat becomes a political reality. Grid operators who want to know how much wind or solar power the grid can handle look first to Texas for answers.”

Texas’ ability to formulate a comprehensive policy framework has been essential to supporting the deployment of grid-scale wind farms. Below are specific aspects to this framework, many of which could be replicated in areas of the country where wind generation rollouts face political and logistical hurdles.

Solving the Transmission Dilemma

The process of developing major transmission and distribution (T&D) projects for renewable electricity generation has proven problematic across the US. The main problem is the inherent paradox in which developers need transmission lines to build wind farms, but investors won’t build transmission lines unless they are confident that these lines will carry electricity. As these concerns started to arise in the early 2000s, the Texas legislature responded with a bill which called for the development of Competitive Renewable Energy Zones, or CREZs. These zones are the optimal areas for an electric transmission infrastructure that can move electricity from wind farms to major demand centers.

In July of 2008, the Public Utilities Commission selected a $4.93 billion transmission package capable of transporting 18,456 MW of new power from West Texas and the Panhandle to metropolitan areas. According to analyst Will Furgeson, “If the CREZ implementation is a successful antidote to transmission constraints, the plan could provide a model that might be duplicated across the nation.” The CREZ bill is an example of comprehensive infrastructure appropriation bill that attempts to solve the transmission dilemma in one fell swoop - compared to the on-again/off-again nature of federal production tax credits - which provides wind investors with greater incentives to sink costs into grid-scale developments. This also appears to be a good investment for taxpayers, as the one-time $5 billion transmission line investment is expected to save Texas consumers more than $3.4 billion a year on electricity costs and more than $1.5 billion a year on fuel costs.

Importance of Renewable Portfolio Standards

In 1999, Texas passed a modest renewable portfolio standard that was tucked into a much larger bill that deregulated the state’s electricity sector. The RPS was met four years ahead of schedule, so in 2005, Governor Perry signed a much more ambitious RPS which called for 5,880 MW of renewable generation by 2015 and 10,000 MW by 2025. Remarkably, this goal will be met over a decade ahead of schedule, as Texas has already reached 9,700 MW of installed wind capacity. According to the Environmental Defense Fund’s Jim Marston, “Wind is working so well that [Texas] doesn’t even have to continue to have mandates.”

At first, volatile fossil fuel prices were arguably the greatest driver for wind energy development, rather than the RPS -in 2000. Wind operators responded to a sudden natural gas price spike by offering long term fixed price contracts to customers, boosting the nascent wind industry.

Regardless of what the spark was, the RPS did push officials to take critical steps to integrate renewable electricity generation into the regulatory structure of state government. Some of the main impediments to the growth of grid-scale renewable energy generation projects are rooted in conflicts between government agencies and private stakeholders over pricing, land-use, grid usage, T&D infrastructure, and permits. With an RPS in place, Texas was obligated to formulate policies which could address those issues. At least 26 states have passed an RPS, which is a good first step to building a comprehensive grid-scale renewable generation policy.

Getting Grid Operators and Regulators on Board

The regulatory landscape in Texas has been just as valuable as the natural landscape in cultivating the most successful wind industry in the US in just a little over 10 years. Texas has a key regulatory advantage over other states in the country in that power providers and utilities operate almost exclusively within Texas borders. By contrast,

“federal policy on transmission is hogtied by regional conflicts over who pays for long-distance transmission lines for renewable energy.” Will Furgeson adds, “The lack of oversight from multiple state governments allows for a greater degree of adaptability for the industry. Wind developers can usually expect much shorter project timelines in Texas, due to the state’s permissive regulatory policies and business friendly environment.”

The key player for electricity regulation is ERCOT, the state grid operator, which handles more wind power than any other grid operator in the US. Each day, ERCOT orders the next day’s power for the state based on historic data and weather forecasting tools. ERCOT uses an open access policy for purchasing its electricity from generators, which means they will first purchase and dispatch the lowest cost electricity generation. Since wind turbines use a fuel source that is essentially free, wind operators can produce electricity at a low marginal cost, and thus they can sell power at competitive prices with natural gas, coal, and nuclear generated electricity. Federal production tax credits for wind energy, currently 2.2 cents/kWh, also help lower costs.

Solving the Intermittency Problem

The intermittency challenges facing a grid that gets 8% of its electricity from wind energy are substantial. ERCOT has taken measures to help alleviate intermittency problems and stabilize the grid, notably through its load demand program. Similar to demand-response companies such as EnerNOC, ERCOT signs contracts with major power consumers stipulating that, in the case of a rapid drop in wind-generated power, ERCOT will pay these companies to immediately reduce electricity demand and shift the excess power to the grid within minutes, averting a blackout. ERCOT has also switched from zonal to nodal pricing, a move that improves grid reliability, increases market efficiency, and enables transparency of wholesale energy prices. Nodal pricing improves marketing and operations efficiencies through “more granular pricing and scheduling of energy services,” leading to projected consumer savings of over $5.5 billion over the next decade.

Texas wind generators, regulators, and grid operators are already challenging some long-held assumptions about wind power. For example, grid operators around the world have expressed concern about the supposed cap of 20% electricity from intermittent sources that can be integrated into existing grid systems. Yet, according to an Austin utility manager, the 20% grid intermittency problem “isn’t nearly as intractable as it looked 10 years ago.” Common assumptions regarding intermittent energy sources can be challenged when utilities and power providers have a financial incentive to increase efficiency and cultivate in-house innovation. Other states are already looking to Texas as an example of how to structure their wind industry rollouts.

Turning Local Politics into an Asset Rather Than Liability

Technical and regulatory problems are not the only hurdles which must be overcome for renewable energy generation projects. Local politics and ‘not-in-my-backyard’ arguments are enough to sink promising wind and solar projects, even if such a project is financially and technically feasible.

In many areas of Texas, developers have been able to spread the message that wind farms can provide significant benefits for rural communities, which in turn has helped green-light numerous wind farms. In the dry, arid regions of West Texas and the Panhandle, large ranches that previously supported few crops or little livestock are faced with a new, potentially lucrative option. Some wind developers are willing to pay landowners hundreds of dollars a year for every wind turbine placed on their property. Since a wind turbine only occupies between 3-8% of the area leased by developers (wind turbines must be spread out to operate effectively), a farm or ranch can still be productive with other activities while generating revenue from turbines. In Texas, leases for wind farms are generally granted for 30 – 50 years, which means that landowners can depend on wind turbines to generate income for decades.

According to Clifford Krauss of the New York Times, “it has dawned on many Texans that wind power, whatever its other pros and cons, represents a potent new strategy for rural economic development.” Property values are doubling in some wind-rich counties, and tax revenue from wind developments provide local governments with tangible benefits from renewable energy. The Papalote Creek wind farm on the Gulf Coast is set to top the gas industry as the largest local taxpayer, only 2 years after the project’s completion. It is expected to pay 1/3 of the district’s entire tax bill by 2011.

Wind energy proponents across the country should pay careful attention to the specific stakeholders who will be affected by both generation and transmission projects. While opposition will continue for most large electricity projects, anticipating opposition and working with stakeholders to alleviate their concerns can help mitigate a local political backlash.

Leveraging Environmentalist Pockets in Conservative States

In many parts of Texas, wind energy’s low-carbon characteristics play second fiddle to rural economic development and a diversified energy portfolio. But in some pockets of Texas, clean energy proponents have pushed utilities to integrate clean energy generation into their electricity mix. Austin’s GreenChoice program, for example, allows consumers to pay a premium for renewable-generated electricity. GreenChoice has been the most successful utility sponsored voluntary pricing program in the US for the last 8 years, exemplifying how the purchasing power of environmentally conscious consumers can support renewable energy when such policies might not be feasible at the state level.

In Texas, environmental concerns (especially among urban populations) can effectively be tapped to support clean energy, as some consumers will voluntarily choose renewable premiums for renewable-generated electricity. Similar programs in San Antonio and El Paso are meeting consumer’s demand for clean energy as well.

Conclusion

If renewable electricity generation can thrive in Texas, it can happen anywhere. But implementing major energy generation projects involves more than competitive pricing and a RPS mandate. As Massachusetts has experienced with its Cape Wind project, an environmentally progressive populace means little without the support and facilitation of public utilities, grid operators, and legislatures. Indeed, once the decision has been made to construct a new wind or solar farm, a myriad of challenges remain before such a project actually starts producing electricity. Texas has taken a nuts and bolts approach to developing a comprehensive wind energy policy, addressing such disparate though essential areas such as local politics, publicly funded infrastructure projects, and nodal pricing.

The Texas case also provides hints into the future of renewable energy in conservative and/or rural states, and may help to shift the clean energy dialogue to a more productive route. Overall, looking at clean energy technologies through the lens of an economic driver, rather than costly mandated CO2-reduction measures, adds incentives for a wider variety of stakeholders while providing financial incentives for best practices. As AEL’s Teryn Norris and Daniel Goldfarb recently posted, President Obama adopted a similar strategy in his State of the Union address, calling for significant investments in the clean energy economy while neglecting to mention the word ‘climate.’ Such investments are a popular idea among many folks across the ideological spectrum, which might provide the critical leverage needed for grid-scale renewable energy projects in both red and blue states.

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Chris Head is a Contributor in AEL’s New Energy Leaders Project and his work will be regularly featured on the website. The views expressed are those of the author and do not necessarily reflect the position of AEL.