More Renewable Energy Coming to Texas: Government-Induced Malinvestment

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New wind and solar farms are continuing to be constructed all over Texas. Longroad Energy, a company headquartered in Massachusetts, has recently announced plans to build two new renewable energy plants in Texas, which are both set to be completed in the year 2020.

Earlier this month, Longroad Energy signed a 15-year Virtual Power Purchase Agreement (VPPA) with Pennsylvania company, Crown Holdings, Inc., agreeing to supply them with over 400,000 megawatt-hours (MWh) of electricity from a new wind farm set to be located in Knox County, Texas.

Longroad has also announced the construction of the new 379 MW Prospero solar energy project set to be located in Andrews County, Texas. This project is expected to cost $416 million and will be one of the largest solar projects in the nation. Facebook and Shell are the two primary investors in the Prospero project, with Facebook financing a tax-equity investment and Shell purchasing a 12-year power-purchase agreement for the plant’s power.

Why are so many renewable energy projects being built in Texas? On Facebook’s investment in the Prospero plant, Ben Inskeep, an analyst for North Carolina renewable energy consulting firm, EQ Research, says it’s not surprising that Facebook has invested in the project, claiming, “it’s not about saying you support renewable energy. It makes good business sense.” Yet, solar power is vastly more expensive than other means of generation. The question now becomes – why does is make good business sense to invest in a business that is not cost competitive? The answer is – the subsidies, of course.

Investing in unproductive activities is called malinvestment. Malinvestment of capital can be defined as “a mistaken investment in [the] wrong lines of production, which inevitably leads to wasted capital and economic losses, subsequently requiring the reallocation of resources to more productive uses.”

Widespread malinvestment occurs when the government provides incentives to certain activities, businesses, or industries, as investors become over-eager to invest in them. Often, the incentives impose huge costs on the taxpayer. A clear example of this is the rise of renewable energy subsidies across the nation, particularly in Texas.

Since the federal Production Tax Credit (PTC) was introduced, renewable energy production has skyrocketed. For instance, in 1999 Texas operated roughly 7.4% of the nationwide total of wind energy generation. By the start of 2007, the nationwide total was around 11,000 MW, and Texas operated the most of any state at 2,736 MW. As of July 2018, project installations have grown to nearly 23,000 MW in Texas alone, which is now 25% of the total installed in the U.S.

This growth comes at a high price for Texans. When considering state and local subsidies, Texas taxpayers are being dealt an expensive hand for the promotion of renewable energy. For instance, renewable energy credits required by the Texas renewable portfolio standard have cost Texas consumers over $500 million. Further, the cost of connecting renewable energy facilities to the electric grid has cost Texans almost $1 billion. The implementation of Chapters 312 and 313 of the Tax Code, which are local property tax abatements for wind and solar farms, have imposed a cost of $2.5 billion on the taxpayer. And finally, the Competitive Renewable Energy Zone (CREZ) transmission lines, built solely to promote wind and solar energy generation through the State, have cost Texans over $7 billion, which is paid through their monthly electric bills.

In short, when the government decides to impose itself into the market, poor decisions are encouraged, causing malinvestment at the expense of the taxpayer. It is imperative that Texas take note of these consequences and take steps towards eliminating  renewable energy subsidies and preferential treatment for renewables across the board.

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