THE GREENING OF... TEXAS?

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1 THE GREENING OF... TEXAS? Jay Zarnikau Frontier Associates LLC & The University of Texas at Austin President, Frontier Associates 1515 S. Capital of Texas Hwy, Suite 110 Austin, Texas P: 512/ F: 512/ Overview Texas is not commonly thought of as a green state. It is home to most of America s oil companies and the leading state in electricity consumption and production. Yet (perhaps, quietly), Texas has become the nation s leader in non-hydroelectric renewable energy production and has implemented a set of successful energy efficiency programs. These policies were not enacted out of concern over climate change. In fact, the state s governor sees no link between global warming and human activities. These policies simply make economic sense in a state with declining oil production, the largest non-hydroelectric renewable energy resource potential in the U.S., an entrepreneurial business climate, and an interest in diversifying its energy mix. This paper traces the success of Texas renewable energy and energy efficiency initiatives to its vast resource potential and reliance upon well-articulated policy goals and the use of market mechanisms to achieve the policy goals. Successful policy initiatives are reviewed, including the state s renewable energy portfolio standard, renewable energy credit trading program, the designation of Competitive Renewable Energy Zones, and energy efficiency goals. Further, this state s success demonstrates that goals for renewable energy development and energy efficiency can be successfully achieved within a competitive electricity market structure. At the same time the state government sought to reduce regulatory oversight and enhance competition in electric and natural gas industries, it established non-market-based programs to foster the development of renewable energy projects which would not otherwise prove cost-effective. Goals were set for energy efficiency programs. Each policy had some market-based elements. A credit trading system was established to permit load-serving entities to meet renewable energy targets in a least-cost manner. The role of regulated transmission and distribution utilities in energy efficiency was limited to program administration, in hopes of creating a competitive market of energy efficiency services providers. An enormous untapped potential for further renewable energy and energy efficiency development remains. Following an overview of the state s energy industries, the potential for renewable energy and energy efficiency potential are discussed and the success of various policies are analyzed.

2 Energy Markets in Texas Consumption Texas consumes almost 12 percent of all energy used in the United States. 1 In 2005, Texas energy consumption of over 11,500 trillion Btus exceeded that of California (8,400 trillion Btus), the nation s second largest energy consumer, by 38 percent. 2 A number of factors contribute to Texas leadership in energy use. The hot and humid climate that dominates much of the state is responsible for high summer air conditioning demand. Until recent years, the price of electricity in Texas tended to remain below national averages. Relatively low energy prices, the availability of crude oil and natural gas reserves within the state, and an expanding economy made Texas an ideal site for the development of energy-intensive industries, such as petroleum refining, chemicals production, steel and aluminum smelting, and electronics production and assembly. Texas s industrial sector accounts for 53 percent of the state s total energy consumption and nearly one-fifth of all U.S. industrial consumption. Texas consumes almost 12 percent of all energy used in the U.S., as noted in Exhibit 1. In 2005, Texas s energy consumption of over 11,500 trillion BTUs exceeded that of California (8,400 trillion BTUs), the nation s second largest energy consumer, by 38 percent. 3 Exhibit 1 Energy Consumption, Texas versus U.S. Texas Percent of Total U.S. Consumption Total Energy Consumption by Sector (Trillion Btu), 2005 Texas 4 U.S. Residential 1,618 21, % Commercial 1,399 17, % Industrial 5,812 32, % Transportation 2,730 28, % Total 11, , % Source: Energy Information Administration. Texas ranks fifth in the nation in terms of total energy consumption per capita, at 506 million BTU in 2005 (Exhibit 2). 5 Although total energy consumption has increased by 2.2 percent annually since 1960, per capita usage has declined. In 2005, energy consumption per capita dropped to 1965 levels. 6 1 Texas Comptroller of Public Accounts, The Energy Report 2008 (Austin, Texas, May 2008), p. 5, (Last visited May 30, 2008.) 2 Energy Information Administration, State Energy Data 2004: Consumption, (Last visited September 7, 2007) 3 Energy Information Administration, State Energy Data 2004: Consumption, (Last visited September 7, 2007) 4 Source; Energy Information Profiles: Texas. Energy Information Administration. Online. Available; 5 Energy Information Administration, Energy Consumption by Source and Total Consumption per Capita, Ranked by State, 2005, m/plain_html/rank_use_per_cap.html (Last visited August 5, 2008). 6 Texas Comptroller of Public Accounts, The Energy Report 2008 (Austin, Texas, May 2008), p. 5, (Last visited May 30, 2008).

3 Exhibit 2 Total Energy Consumption per Capita (2005) Million Btu Alaska Wyoming Louisiana North Dakota Texas United States State Source: U.S. Energy Information Agency. Online. Available: tates/sep_sum/plain_html/rank_use_per_cap.html. Accessed August 5, Roughly half of the state s electricity supply is generated with coal. Coal consumption in 1995 totaled 1,365 trillion BTU; in 2005 this number had increased to 1,628 trillion BTU. 7 Energy Production Historically, Texas has been a national leader in the production of petroleum products, crude oil and natural gas, and in the generation of electricity. Texas is home to approximately one-fourth of the nation s oil reserves and leads the nation in the production of oil and gas (excluding federal offshore areas). 8 Texas continues to produce the most oil and gas of any state in the country; however, production has declined since the 1970s. 9 7 EIA, Table 7. Energy Consumption Estimates by Source, Selected Years, , Texas, (Last visited August 7, 2008). 8 Texas Comptroller of Public Accounts, The Energy Report 2008 (Austin, Texas, May 2008), p. 14, (Last visited May 30, 2008.) a Production/consumption estimates based on heating content by BTU values. If production and consumption levels are based on the economic value of energy resources, Texas continues to be a net exporter. 9 Texas Comptroller of Public Accounts, The Energy Report 2008 (Austin, Texas, May 2008), p. 14, (Last visited May 30, 2008.)

4 Exhibit 3 Energy Production Estimates by Source in Texas, ,000.0 Trillion BTU 10, , , ,000.0 Coal 1 Natural Gas 2 Crude Oil 3 2,000.0 Nuclear Electric Power Renewable Energy 4 Year Source: EIA: Natural gas from Texas accounts for approximately 30 percent of the nation s total energy supply 10 and over 60 percent of energy production within the State. 11 While Texas has some of the largest coal mines in the country, the majority of the state s coal supply is imported from Wyoming. 12 This resource accounted for approximately 6% of total energy produced in the state, in terms of heating values. Nuclear power accounted for 398 trillion BTU (4%) of Texas total energy production in have been proposed, which could add a combined generating capacity of over 6,000 MW. 14 Four new units Is Texas a Net Importer of Energy? As noted in Exhibit 4, Texas became a net importer of energy (if energy is measured on the basis of heating values) in the 1990s, although Texas remains a net exporter of energy if the value of energy resources is used as a metric Texas Comptroller of Public Accounts, The Energy Report 2008 (Austin, Texas, May 2008), p. 14, (Last visited May 30, 2008.) 11 EIA, Table P7. Energy Production Estimates in Trillion Btu by Source, Texas, , (Last visited August 7, 2008). 12 EIA, Window on State Energy Profiles: Texas. Online. Available: Accessed September 30, EIA, Table P7. Energy Production Estimates in Trillion Btu by Source, Texas, , (Last visited August 7, 2008). 14 EIA, Status of Potential New Commercial Nuclear Reactors in the United States, (Last visited August 7, 2008). 15 Zarnikau, Jay, Has Texas Become a Net Importer of Energy Resource?, Texas Business Review, June 1997

5 Trillion Btu 18, , , , , , , , , Exhibit 4 Texas Energy Production and Consumption ( ) Total Energy Production Estimates (Trillion Btu) Total Energy Consumption Estimates (Trillion Btu) Year Energy production estimates: Consumption estimates: The Structure of Texas Energy Markets The energy markets in Texas are among the most competitive in the nation. About 85% of the electricity needs in the largest electricity-consuming state in the U.S. are satisfied through the ERCOT market. ERCOT is home for over 550 generating units, with a combined capacity of roughly 90 GW. Natural gas is used for over 44% of the electricity generation involved in market transactions (and probably over 50% of the total when on-site generation is considered) and constitutes well over 70% of the generating capacity. Because ERCOT is an intra-state market with limited interconnection to other markets in the U.S., there is very little federal regulatory jurisdiction over ERCOT. This unique jurisdictional status has permitted the Texas market to adopt policies and market features which diverge from other markets. ERCOT has undergone gradual restructuring since the mid-1990s to foster competition in the wholesale and retail segments of the industry and to relax regulatory oversight. Senate Bill 373, enacted in 1995, required the Public Utility Commission of Texas (PUCT) to establish rules to foster wholesale competition and create an Independent System Operator (ISO) to ensure non-discriminatory transmission access, leading to ERCOT s establishment as the first operating ISO in the U.S. in the summer of Sweeping reforms resulted from 1999 s Senate Bill 7 (SB 7) which allowed customers of the investor-owned utilities within ERCOT to choose among various retail electric providers (REPs) load serving entities which provide a retail supply of electricity within the areas of ERCOT opened to retail competition for a retail supply of electricity beginning on January 1, Over 100 REPs presently provide a retail supply of electricity to consumers, including REPs established to serve individual industrial loads. Roughly 15 REPs actively serve the residential customer segment. SB 7 also provided the ISO with much greater centralized control over the wholesale market and led to the establishment of formal markets for ancillary services and balancing energy. To a degree, the state s natural gas market is also competitive at the pipeline level. Larger users of gas have a choice among supply sources.

6 CO2 Emissions Partly as a result of its leadership as the top coal consuming state in the nation, Texas is the leading emitter of carbon dioxide and sulfur dioxide in the U.S., as is evident from Exhibit 5. Exhibit 5 Top Eleven States on CO2 Emissions Emissions of CO2 Million Metric Tons in TX CA PA OH FL IL IN NY MI GA LA Source: Calculated from US DOE EIA at: While emissions have been increasing in recent years (Exhibit 6), Texas share of the national total CO2 emissions has slightly declined (Exhibit 7). Exhibit 6 Texas CO2 Emissions ( ) Texas Em issions

7 Exhibit 7 Texas CO2 Emissions as a Share of the National Total ( ) 12.0% 11.5% 11.0% 10.5% 10.0% 9.5% Source: Calculated from US DOE EIA at: Renewable Energy Development Interest in renewable energy has grown due to an increase in environmental awareness, volatile oil and gas prices, and national security concerns. Former Governor Bush had a particular interest in wind power and encouraged state leaders to facilitate its development, and Texas has been quite successful in developing its wind power potential. With about 6,000 MW of installed wind power capacity, Texas has become the leading state in the U.S. in the generation of power from wind. In 1997, the state of Texas had less than 50 MW of installed utility-scale wind capacity. By 2005, Texas had easily exceeded the goal of 2,880 MW of wind power capacity established in the Renewable Portfolio Standard (RPS) created by SB 7 in In 2006 Texas passed California in installed wind energy capacity. 16 Presently, Texas has wind power generation maximum capability of about 6,000 MW. The locations of wind farms are identified in Exhibit Wiser, Ryan and Mark Bolinger. Annual Report on U.S. Wind Power Installation, Cost, and Performance Trends: (May 2007) U.S. Department of Energy: Energy Efficiency and Renewable Energy. (accessed: March 7, 2008) p. 5.

8 Exhibit 8 Wind to Energy Projects in Texas ERCOT - Electric Reliability Council of Texas SERC - Southeastern Electric Reliability Council SPP - Southwest Power Pool WECC - Western Electricity Coordinating Council Nolan and Taylor Counties El Paso Borden and Scurry Counties Howard and Martin Counties WECC SPP Amarillo Abilene 160 ERCOT New Electric Generating Plants in Texas Since 1995 (wind only) Austin Shackleford County Dallas Houston SPP SERC San Antonio 195 Sterling County Wind generation projects completed since 1995 totaling 8,403 MW Wind generation projects under construction totaling 330 MW Wind generation projects announced totaling 7,631 MW Corpus Christi Source: PUCT at: What factors are responsible for the boom in wind power in Texas? This success can be attributed to a variety of factors, including an enormous resource potential in the state, federal tax credits designed to encourage investment in this resource, favorable market rules in the competitive Electric Reliability Council of Texas (ERCOT) market, and the establishment of policy targets and a system of tradable Renewable Energy Credits (RECs). Senate Bill 7 in 1999 established initial goals for wind capacity, and SB 20 was passed by the Texas Legislature in 2005 to increase Texas goal for renewable energy. It also established a process to facilitate the construction of electrical transmission facilities to interconnect a significantly larger amount of wind power. SB 20 increased Texas goal for renewable energy to 5,880 MW in 2015 and set a voluntary target of 10,000 MW of wind power for Texas has already met the 2015 goal and is on track to meet the 2025 goal within the next few years, well ahead of schedule. While the growth of wind power in Texas has been impressive, it has presented a number of challenges to the state s electricity market. Peak wind production does not coincide with the state s peak demand and the maximum generating capacity of this resource is seldom approached, as noted in Exhibit 9. The state s transmission grid has not been able to expand fast enough to fully accommodate the wind power additions. The intermittent nature of the resource has presented operational challenges to the ERCOT independent system operator (ISO). And the establishment of new market rules was necessary in order to accommodate this nondispatchable resource.

9 Exhibit 9 The key factor limiting this growth of wind energy has been the state s transmission infrastructure. The best resources for wind energy reside far from major population centers. Wind energy resources have been developed in remote sparsely-populated windy areas with inadequate transmission infrastructure. The Competitive Renewable Energy Zone or CREZ project sought to identify, designate, and prioritize the construction of transmission lines to areas with strong renewable resources.

10 Exhibit 10 Regions of Texas Where Transmission Upgrades are Needed to Accommodate Further Wind Power Development Network Upgrades From the perspective of network upgrade needs, there are generally four sets of potential CREZs 1. Coastal (Area 24) 2. Mc Camey Area (Areas 5&6) 3. Abilene Area (Areas 9,10,12 &14) 4. Panhandle (Areas 2 & 4) The following transmission solutions for each area are the result of evaluating many potential solutions through iterations of economic dispatch and power-flow studies Over 60 different configurations evaluated for the McCamey area alone Source: Ercot Greater dependence on intermittent resources presents new challenges to grid operators, since generation levels are almost completely dependent upon the weather. This became particularly apparent on February 26, 2008, when ERCOT experienced its first curtailments since Curtailments followed a sudden drop in system frequency that occurred as the result of a mismatch between load and generation. ERCOT s day-ahead forecast had led to a resource plan that indicated 1,000 MW of wind that ultimately was not available. Strange market price patterns have also emerged. As illustrated by Exhibit 11, negative wholesale electricity prices in west Texas became common in early 2008 during periods of inter-zonal transmission constraints. Wind producers set negative market clearing prices and were willing to pay those prices. The value of federal tax credits exceeded the cost of paying ERCOT to take the excess power. This could occur during days of price spikes in other zones.

11 Exhibit 11 Wind Power Generators Pay Prices in Order to Sell Their Generation While Prices Spike in Other Zones Balancing Energy Prices in Various Zones on June 3, 2008 $1,600 $1,400 $1,200 Dollars per MWh $1,000 $800 $600 $400 Houston North Zone West Zone $200 $0 15 -$ Minute Interval Now that $5 billion in transmission upgrades have been approved by the PUCT through the CREZ project, further development of the state s wind to energy potential is imminent. Depending upon which expert is consulted, Texas has the best or second-best wind resource in the United States. The resource potential for wind power at a height of 50 meters is estimated to be 723,000 MW and the capturable wind power is estimated at 223,000 MW. 17 This is far in excess of the peak demand of Texas or ERCOT for electrical capacity. Solar energy development is beginning to take off in Texas. Many of the state s larger investor-owned electric utilities now offer photovoltaic rebate programs, following the lead of Austin Energy and CPS-San Antonio. Austin Energy is also commited to the development of a large-scale central station solar energy project. One study recently concluded that the state s vast geothermal potential is far greater than its resource potential for all other forms of renewable energy combined. 18 Consequently, geothermal resources, as depicted in Exhibits 12 and 13, merit some attention. However, the fact that there has been so little of this potential harvested to date casts some doubt over geothermal s future contribution to the state s energy mix. 17 Nelson, Vaughn. Texas Renewable Energy Resource Assessment - Chapter 4: Wind Energy, prepared for the Texas State Energy Conservation Office, ed. Frontier Associates LLC, December Texas Renewable Energy Resource Assessment, prepared for the Texas State Energy Conservation Office, ed. Frontier Associates LLC, December 2008.

12 Exhibit 12 Chacterization of Texas Geothermal Resource Base Exhibit 13 Temperature of Underground Formations Energy Efficiency Programs Under the state s 1999 electric utility restructuring legislation, the regulated distribution arm of each investorowned utility must meet a share of its annual load growth through energy efficiency. To achieve this goal,

13 utilities must provide incentives through standard offer programs or limited, targeted market transformation programs. Incentives are paid to Energy Efficiency Services Providers or to retail electric providers for the acquisition of cost-effective energy efficiency savings. Each utility contracts with national and local firms who contact electricity consumers (residential, commercial, or industrial) about performing work to save energy and reduce their electric bills. Customers select the contractor, decide what equipment will be installed, and choose what work the contractor will do. Price, warranty, financing, and other purchasing matters are entirely between the contractor and customer. Exibit 14 Overview of Texas Energy Efficiency Programs While Texas investments in energy efficiency programs are only about one-tenth of California s in terms of spending, the programs are relatively efficient and have proven successful in meeting policy goals. In 2007, the nine Texas investor-owned utilities (IOUs) exceeded their statewide legislative energy efficiency goals for the fifth straight year. The utilities achieved 167 Megawatts (MW) of peak demand reduction, which was 23% above their 136 MW goal, and Gigawatt-hours (GWh) of energy reduction. 19 These energy savings correspond to an equivalent reduction of 650,094 pounds of nitrogen oxide (NOx) emissions per year. Figure 15 illustrates the annual peak demand savings for the past five years. 19 Energy Efficiency Accomplishments of Texas Investor Owned Utilities Calendar Year Frontier Associates LLC. June 16, Available at

14 Exhibit 15 Total Demand Savings by IOUs, Demand Savings (MW) Goal Achieved Source: Energy Efficiency Accomplishments of Texas Investor Owned Utilities Calendar Year Frontier Associates LLC. June 16, 2008 Most of the utilities programs involve financial incentives, which were paid to project sponsors to offset the costs of a variety of energy efficiency improvements. The total program funds expended to achieve 2007 savings were just under $80.3 million. As of January 1, 2008, the utility programs implemented after electric industry restructuring in Texas had produced 923 MW of peak demand reduction and 2,433 GWh of electricity savings for the years 1999 though This translates to approximately 3,050 tons of NOx emissions reductions. Energy efficiency efforts by the City of Austin also merit attention. In the 1980s, Austin set out to build conservation power plants that is, conservation programs which would displace the need to build fossil fueled power plants. Austin sponsors an award-winning green building program, which is the oldest and largest program of its kind. Findings So, is Texas a green state or a brown state? Texas is not generally perceived to be a national leader in the transition to sustainable development. Indeed, the state leads in total energy consumption, CO2 emissions, the use of coal as a generation fuel, and has been a laggard in environmental protection. The state s conservative leadership has expressed little concern over global warming to date. Yet, Texas is in the midst of an important transition. Its wind power industry is the nation s largest and will increase in scale considerably in the coming decades. The state s vast potential for solar power is about to be tapped. Geothermal resources may also have considerable potential. Energy efficiency efforts have proven efficient and effective. The oil and gas and semiconductor which enriched the state in decades past are slowly

15 being replaced with green industries focused on developing wind power, solar power, and batteries. These new industries are aided by a favorable entrepreneurial and investment climate. To date, this state s policies to develop renewable energy and energy efficiency have been largely successful. Gains in these areas have been made within electricity and natural gas markets which have been restructured to foster competition by setting goals and using market mechanisms to achieve the goals. What happens in Texas is not merely of importance to Texans. The success of any world-wide initiatives to reduce greenhouse gas emissions and reduce reliance upon fossil fuels is greatly impacted by what happens in Texas, in light of the state s leadership in the energy industry.