Texas has long since surpassed its mandated renewable portfolio standard, so market dynamics dictate the ongoing pace of renewables growth.
In this interview, David Campbell — executive vice president and CFO of Texas-based Vistra Energy — discusses the projected growth of solar in the state, wind’s path to prominence in Texas’s open market, and a key policy that helped pave the way for growth.
The state is "a good laboratory for new technologies and products as it’s more market-oriented than many other jurisdictions," Campbell said. "Plus, Texas benefits from tremendous resource potential, in terms of wind, solar irradiance and available land."
Texas offers an instructive case study for the growth of renewable energy. Most of the state’s electricity is delivered through the deregulated Electric Reliability Council of Texas (ERCOT) market. The state has long since surpassed its mandated renewable portfolio standard, so market dynamics dictate the ongoing pace of renewables growth. Nonetheless, Texas is by far the country’s largest wind power generator and is slated to see major growth in solar capacity as well.
David Campbell is executive vice president and CFO of Texas-based Vistra Energy, which operates in the ERCOT market as well as in 20 other states and the District of Columbia. Prior to joining Vistra in June 2019, Campbell served as president and CEO of InfraREIT and president and CEO of Sharyland Utilities. He is also a member of the Yale School of Forestry & Environmental Studies Leadership Council. In this interview, Campbell discusses the projected growth of solar in the state, wind’s path to prominence in Texas’s open market, and a key policy that helped pave the way for growth.
CEFF: How would you describe the solar energy market's current successes and challenges in Texas?
Campbell: I’d describe the solar market in Texas as one that is in a phase of rapid development. Texas has the largest electric market of any state; while it ranks second in population, it has a larger industrial load and higher average residential use than California. However, at end of 2018, according to the Solar Energy Industries Association, Texas ranked sixth in the United States for solar capacity. Texas solar was one-eighth the size of California, which is by far the U.S. leader.
Given Texas’ size and resource potential, a number six ranking is low, but the main focus of discussion when folks consider solar in Texas is the sheer amount of new solar that's expected to be built over the next few years. ERCOT projects that another over 6,000 megawatts (MW) of new solar capacity will come on line by the end of 2021. With that level of buildout, the state’s installed capacity would triple in size in three years. While the exact buildout is uncertain, many of the projects are in flight, and all observers agree that significant growth is coming.
What that reflects is the ongoing cost-competitiveness of solar. To date, we have not seen as much development of solar in Texas as in some other states. Texas does not have a state-level subsidy for solar other than relatively benign transmission build-out rules, and solar has simply not been economically competitive with just the federal subsidy. That is changing. What's in flight now and what's expected to come online reflect that solar economic dynamics have greatly improved.
By the end of 2021 — even though the other states are growing as well — I expect that Texas will end up being number two or three in the country in solar installed capacity. Time will tell how much new capacity comes online, but most market participants and the grid operator project a very significant increase. That is driven by the improved economics of solar, as well as the coincidence solar has with the peak pricing hours of the day, which is an important factor in the deregulated wholesale power market. The peak demand hours in Texas are typically 3-5 pm in the summer months.
There's consumer-led demand for solar-based products as well, and that's also a factor that has accelerated in recent years. You see more customers who are interested in renewables-based products, and that demand pull helps to spur development. Developers are certainly willing to construct new projects if there are power purchase agreements (PPAs) or something equivalent to back them up. TXU Energy [a Vistra subsidiary] offers a product called Free Nights and Solar Days, a residential offering which has had a high uptake in the market. TXU Energy is also active in the PPA space helping deliver renewables products for customers. I think you're going to continue to see increased demand from consumers for renewable products, and companies like TXU Energy and others are going to find ways to serve that demand and that's going to help build out the market.
CEFF: How would you describe the wind energy market's current successes and challenges in Texas?
Campbell: Wind is a remarkable story in Texas. Texas has by far the largest amount of wind capacity in the United States with over 25,000 MW of wind generation in the state. The second largest is Iowa with about 8,500 MW. While the federal subsidy for wind has definitely helped, the growth in Texas has been driven by the relative economics of wind. A key driver is the attractive resource potential, with lots of available land where steady prevailing winds result in high capacity factors coupled with widespread transmission access. The most attractive sites are in west Texas but there's also a relatively large installed base on the Gulf Coast. This year through July, wind accounted for 21% of total energy in Texas; wind’s share of the market has more than doubled in less than 10 years.
Like solar, wind is expected to have significant growth over the next few years, with more than 10,000 MW of new capacity estimated by ERCOT to come online by the end of 2021. With the ramp-down of the federal subsidy for wind, you are seeing a lot of developers trying to advance their projects quickly before the deadline.
The state has played a big role in enabling the rapid growth of wind generation. The state supported a very large transmission build-out called the Competitive Renewable Energy Zones (CREZ) program. CREZ was launched nearly 15 years ago and most of the new transmission lines were in service by 2012. The program had the explicit objective of supporting the rapid and large-scale buildout of new wind generation by building the necessary transmission infrastructure in advance of the wind resources.
At the time the CREZ program began, Texas had less than 5,000 MW of wind capacity. A major transmission program was critical given that the wind resource potential is primarily in west Texas and the Texas Panhandle, which are hundreds of miles from the big load centers in Dallas-Fort Worth, Austin, San Antonio and Houston. The state recognized the importance of new transmission and ultimately the CREZ program involved roughly $6-7 billion of new infrastructure, paid for by all of the customers in the ERCOT market.
In the next phase, ongoing wind development will largely depend on cost-competitiveness, particularly with the ramp-down of the federal subsidy. In addition, since the sites with the best resource potential are distant from the load centers, transmission bottlenecks could impede the pace of new development. However, notwithstanding these issues, all signs are that wind will continue to expand in Texas because of wind’s attractive relative cost position and the availability of sites.
CEFF: What can stakeholders do to help renewables continue to grow and thrive in the Texas market?
Campbell: Cost-competitiveness will be a critical factor, as will customer demand for green products. In addition, the ability of TXU Energy and its competitors to create products that serve customers’ interest in renewables will be an important factor.
From a market perspective, a challenge for renewables in general — as non-dispatchable resources — relates to dynamics that we’ve seen this summer, during which there have been multiple days when wholesale prices in the ERCOT market reached the $9,000-per-megawatt-hour cap. In August, the biggest driver of pricing volatility during the peak periods was the amount of wind generation online. When we had our tightest periods of high prices, the overall wind capacity factor was just over 10%. Typically, during the summer peak hours it has been 20% or higher. That volatility is an inherent feature of the market. Until storage is deployed at scale, markets with high penetration of renewables will be susceptible to big swings based on whether the wind is blowing or the sun is shining. For most of this summer, wind contributed to low wholesale prices; but for a few days in August, the absence of wind contributed to a tight market with very high prices. Managing price fly-ups and supply volatility are issues that are here to stay in ERCOT.
Another issue relates to transmission and relieving congestion. In effect, there is a chicken-and-egg dynamic: solar and wind developers prefer to wait to build new resources until they are sure that sufficient transmission is in place to mitigate congestion. On the flip side, the grid operator, on behalf of consumers, would prefer not to fund new transmission until it’s certain that new generation will come online; otherwise it’s a bet on 'if you build it, they will come.' I think the market will ultimately be able to manage these dynamics, but it’s complicated given the high cost and long lead times associated with new transmission.
ERCOT will also face the challenge of integrating batteries in a deregulated market that is energy-only, with no capacity market. What is the optimal regulatory framework for batteries, and who will build and own them? Likely they will be regulated as a generation resource, so developers will ultimately determine how, where and when storage is deployed. [Vistra subsidiary] Luminant has deployed a 10 MW battery, which serves an early example of merchant storage in a deregulated market. I think you'll see more of that type of innovation. Batteries and the effectiveness of their integration will no doubt be an important factor when we assess the ERCOT market from a medium- to long-term perspective.
Texas is a market to watch in the renewables space, both now and in the future. It's a good laboratory for new technologies and products as it’s more market-oriented than many other jurisdictions; plus, Texas benefits from tremendous resource potential, in terms of wind, solar irradiance and available land. I think that much will be learned by assessing the ongoing development of renewables in Texas.