The Future of Texas Energy: Decisions Based on Dollars and Sense
Texas’s role as a leader in the energy economy hinges on whether it includes — or doesn’t include — renewable sources in critical state incentive programs.
Texas is at the center of the energy economy. It has long led fossil fuel production in the United States. Texas has also been a leader in renewable energy development. Now the economics for the costs to produce energy are changing. How do the prices compare and what will Texas decide to do?
In the race to deploy renewable energy in the United States, Texas has already established itself as a leader. It is, for example, building utility-scale solar faster than any other state. But Texas is currently at a crossroads in deciding what its future in clean energy will look like — in part due to an obscure yet important program called Chapter 313. The Chapter 313 program was arguably the state’s single most significant economic development tool, giving communities the ability to attract major capital investments to grow their economies. It allowed school districts to offer a temporary 10-year limitation on a portion of the taxable property value of new, eligible projects which significantly reduced the property taxes a business owed to the district. The program expired at the end of 2022. Recently introduced legislation, House Bill (HB) 5, excludes renewable energy from the next iteration of the program. However, the legislation allows dispatchable sources such as natural gas plants for electricity generation to qualify.
RMI analyzed capital expenditures (CAPEX) for gas and renewable electricity generation under three scenarios: without tax incentives; only including the current Clean Electricity Investment Tax Credit (ITC); and including both the Clean Electricity ITC and Chapter 313 applied to natural gas facilities. We found that under current economic conditions and no additional incentives from Chapter 313, CAPEX utility-scale solar and onshore wind is already cheaper to build than new gas.
In addition, a version of Chapter 313 where only natural gas plants qualify is unlikely to close the significant cost difference between utility-scale solar and gas or onshore wind and gas. In other words, with renewable energy costs at an all-time low, building new natural gas power plants isn’t economically competitive. It would take between $150 and $300 of Texans’ taxpayer dollars for every kilowatt (kW) to make up the difference. Previous RMI analysis has also shown that fossil fuel electricity generation can be a costly mistake for the state, both in terms of economics and grid reliability.
With renewable energy costs at an all-time low, building new natural gas power plants isn’t economically competitive.Tweet
This change in the costs of renewables suggests that the energy economy is shifting to a clean energy one. RMI analysis shows that if Texas were to rapidly adopt clean technologies, the state could see strong economic development by keeping $130 billion in-state instead of sending it to the federal government, based largely on new available tax credits. This investment is the single largest potential prize of any US state in the scenario from the RMI analysis.
About 35 percent of that $130 billion potential will stimulate the electricity sector through incentives and programs for clean energy generation.
Regardless of whether Texas reinstates some version of Chapter 313 or not, the economics of today are clear. And future trends show that the prices will continue to decline for renewables. Choosing to only invest state dollars into the technology that is more expensive would likely lock in higher costs for residents while using public funds to do so. State policy that singles out renewables for exclusion could thwart energy affordability in Texas. What will Texas do to ensure its role as a leader in the energy economy of the future?
In order to compare CAPEX between utility scale solar, onshore wind, and natural gas combined cycle power plants we use National Renewable Energy Laboratory Annual Technology Baseline 2022 data and the National Energy Technology Laboratory 2019 data for these three technologies. To model the effect of the IRA on clean electricity CAPEX, we use an aggregate rate of 38 percent (in terms of percentage of project cost) based on internal RMI discussions on the likelihood of recipients meeting domestic content, energy communities, and labor requirements.
The effect of Chapter 313 on natural gas CAPEX is modeled using a summary of Chapter 313 in which the total investment of a natural gas project is given in the third table. We use this investment value to calculate an approximate Minimum Tax Limitation Amount which can then be leveraged to estimate a Property Value. The annual abatement according to the Minimum Limitation Amount is calculated using an average Property Tax Rate of about 1.8 percent across the state. The annual abatement is multiplied by ten to find the gross avoided tax for an average, ten-year natural gas project taking advantage of the limitation. Our numbers are benchmarked to the Gross Tax Benefit Estimation Tool and we perform a sensitivity analysis based on typical property values by project type and associated limitation amounts using a list of active agreements in the state.