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Buying The Dip In The Markets

Worries about the U.S., China…

Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Texan Wind Is Blowing Away The Competition

You have to hand it to Texas. The state that is perhaps most closely identified with oil production is now doing a good job of diversifying its investments and positioning itself well for the future, and it’s starting to show. Texas has long been a champion producer of convention energy sources, but thanks to its natural landscape and sage investments by the state government, Texas also appears poised to be one of the dominant producers of wind power in the future.

Despite Texas’ long history of success in the oil fields, the state has not rested on its laurels. Texas was the second state after Iowa to pass a renewable portfolio standard requiring a certain amount of electricity come from renewable sources. Texas has also invested billions in developing the infrastructure to support that renewable portfolio including putting up high voltage power lines to link cities like Austin with windy west Texas. That investment is paying off big for Texas – for instance, last December 20th, Texas windfarms set a new all-time record for energy produced from wind power with wind providing 45 percent of the state’s total energy needs at its peak. That amounted to 13.9 gigawatts of power. Related: Oil Prices in 2016 Will Be Determined By These 6 Factors

Texas wind farms are actually generating so much power that the state leads the country in wind production despite competition from green friendly states like California. Amazingly, Texas utilities are generating so much power from wind energy that some utilities in the state are literally giving power away to consumers for free. The free electricity is limited of course – it only runs from 9pm to 6am and it is offered by TXU Energy to customers coupled with slightly higher rates for power during the daytime.

For investors this leading position in wind energy underlines a stark reality – Texas’ leadership in energy is not going away anytime soon. Transmitting electricity is very different than transmitting oil of course, but investors who have traditionally thought about investing mostly in oil companies in Texas might want to start thinking about diversifying. Investments like utility companies offer the opportunity to benefit from either a rebound in oil eventually or continued growth in Texas’ alternative energy portfolio. Related: Do Canadians Want To Stay In The Oil Business?

Texas’ wind farms are efficient enough that they should be able to survive even as government subsidies in the space slowly start to disappear. That does not mean that wind farm operators or consumers will be happy about that reality, but Texas has the geography and now the infrastructure that wind power should be an enduring reality in the state. Texas’ wind power also makes the company likely to be an attractive market for Tesla’s new Powerwall batteries. Wind power blows most strongly at night which is part of why utilities are willing to give it away since costs for the electricity are cheapest at that time just as demand happens to be lowest.  

Tesla and eventually competitor battery systems could offer a way to take some of that overnight power production and save it until it is needed the next day. With electricity essentially free at night for utilities, any power that can be held over and saved until being sold the next day using an energy storage system would be extremely high margin. Related:Confusion On Saudi Proposed Production Cut See Oil Prices Spike

Ironically the group that could be the most hurt by Texas’ success in wind power is the group many might least expect; environmentalists. If Texas is successful in meeting more and more of its own electricity needs from wind power, that will give it the opportunity to sell more conventional fuels like natural gas and oil to other states that are less prepared. That won’t make environmentalists in places like the northeast happy of course, but then economics is not a morality play.

By Michael McDonald of Oilprice.com

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  • Lissa Magel on February 01 2016 said:
    This is probably not news to anyone except Mr. McDonald, but Texas has been #1 in US wind since 2006, when it surpassed California. In 2015, wind power blew by nuclear's 11.3% to provide 11.7% of electricity in ERCOT (the ISO that manages about 90% of Texas' electric load).

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