Texas Moves to Abolish Renewable Energy Mandates (but much damage has been done)

By Josiah Neeley -- April 29, 2015

“With Texas wind power capacity at more than double the state’s RPS minimum, repeal is unlikely to do much to change the profile of renewable energy in Texas. But repeal is still important, because it sends a clear signal that markets, not politics, should decide what kinds of energy Texans use.”

Texas has always been big on energy. The state’s long history of oil and gas production is well known. And on the electric generation side, Texas ranks first in the nation nuclear power and has the most installed wind capacity of any state.

While the willingness to develop our energy potential is unrivaled, the means has not always been the best. Like in other states, and the U.S. as a whole, Texas has periodically tried to prop up or hold back different forms of energy via special protections, subsidies, or mandates, rather than letting markets and the price system decide the best energy mix.

That’s why recent events at the state capitol are so interesting. Earlier this month, the Texas Senate voted to repeal the state’s Renewable Portfolio Standard, as well as some related subsidies to the wind industry. If passed by the House and signed into law, the move could signal a broader change in how lawmakers treat energy in the U.S.

How We Got Here

Texas first created its Renewable Portfolio Standard (RPS) as a sweetener to the 1999 legislation introduction of electrical competition. The initial mandate required the state’s competitive electric providers to cumulatively install 2,000 MW of new renewable energy capacity by 2009. Individual companies were responsible for a portion of the total proportionate to their overall share of the competitive electrical market, and could meet their requirement either directly (by building the capacity themselves) or indirectly (by purchasing credits from other producers).

Once in place, the RPS mandate inevitably grew (what Milton Friedman calls the tyranny of the status quo). In 2005, the Texas legislature expanded the RPS to require 10,000 MW of installed capacity from renewables by 2025.

The legislature also acted to deal with a geographical inconvenience: Most of Texas’ wind capacity was in the sparsely populated west, while our electrical demand is centered in urban areas hundreds of miles to the east. In response, the legislature created the Competitive Renewable Energy Zone (CREZ), to build a thousand miles of transmission line to link wind farms with urban demand (to solve the nowhere-to-somewhere problem).

These programs have been costly for Texas. Transmission lines under the CREZ program have cost nearly $7 billion, or $270 per Texan. The cost of transmission lines is socialized across all electrical consumers, and will start appearing on Texans’ utility bills in the near future. Costs of meeting the RPS have been lower, but still have been estimated at approximately $543 million since 2005. 

Blown Away

Yet upon close analysis, these programs appear to have achieved very little. Texas met the 10,000 MW target for installed renewable capacity in 2010, a full 15 years ahead of the deadline, suggesting that the RPS itself was not the major factor. And the CREZ lines are only now being competed.

If Texas’ RPS wasn’t responsible for the big increase in wind capacity, what was? Answer: federal subsidies. The federal Production Tax Credit, which provided up to $22 per MWh for renewable energy generation, dwarfed any effect of Texas’ RPS. The PTC was so generous that wind generators would often bid electricity onto the grid at a negative price (i.e. they pay you to take it) just to be eligible for the subsidy. Needless to say, this posed some serious challenges to the long-term reliability of the Texas electrical grid. It has also compromised the economics of conventional sources of power such as gas-fired power plants and even nuclear plants.

Texas’ RPS, more than realized, was an exercise in political symbolism. The costs were real, but the main benefit was that it allowed the state to take a share of credit for the expanding use of wind energy, as explained by Kenneth Anderson Jr. of the Texas Public Utility Commission in the appendix below.

A New Direction

The value of that symbolism appears to be changing. The federal government began phasing out the PTC at the end of 2013 and is currently looking at ways to reform the federal Renewable Fuel Standard.

And here in Texas, there is a growing sense that programs like the RPS and CREZ outlived their usefulness (if they were ever useful to begin with). Wind, in particular, has been the recipient of billions in subsidies over the course of several decades. If the technology can’t survive on its own by now, there’s no reason to think that a few more years of subsidies would change that.

Even if the CREZ program is repealed, Texans will still be paying the cost of these projects for years to come. With Texas wind at more than double the state’s RPS minimum, repeal is unlikely to do much to change the profile of renewable energy in Texas wither. But repeal is still important, because it sends a clear signal that markets, not politics, should decide what kinds of energy Texans use.

———————————

Appendix: Texas Public Utility Commissioner Kenneth Anderson [1]

EnergyWire: After a [Texas] PUC report to lawmakers, bills have been moving forward on possibly scrapping a renewable energy standard and specifying commission oversight of certain direct-current (DC) ties to ERCOT. Some people are pretty upset, particularly on the renewable one (EnergyWire, April 14).

Anderson: I think their concerns are way overstated. … To be clear, we’re still counting renewable energy credits. We wanted to make sure that that continues to happen because it is the way that load-serving entities distinguish products. …

We just felt that there was no real reason to continue to have a mandatory purchase program because … we blew past our target years ago.

EnergyWire: A wind coalition has said the value of some credits could be affected.

Anderson: Will the price be affected slightly? It is possible, but I’m not sure why we should be continuing to have a mandatory program.

EnergyWire: Some environmental groups say Texas would be sending a bad message.

Anderson: How long do you have to subsidize something before it’s finally grown up? … We spent $7 billion to build out a transmission system that doesn’t cost them anything so that it would facilitate their interconnection to the grid. That is an ongoing and continuing, basically, social subsidy. …

Wind does not have to meet a schedule. They’re just a price-taker. ERCOT schedules the wind effectively first, you know, absent constraints on the system. … But, all things being equal, wind gets a free pass from the obligation to meet a schedule. So that in itself is a huge incentive.

 [1] Source: Edward Klump, “From renewables to the grid, regulator seeks to keep Texas on its own path,” EnergyWire (E&E News), April 28, 2015 (subscription required).