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Don’t tell JR, but Texas has ‘Gone with the Wind’

Don’t tell JR, but Texas has ‘Gone with the Wind’

02-06-2020 | Opvallende getallen
Those of a certain age may recall Dallas, a 1980s US soap opera about a dysfunctional oil-rich family headed by the scheming JR Ewing. And if you mention Texas to most investors, the image of cowboys shouting “yee-haw” against a backdrop of oil wells may spring to mind. But times are changing.

Speed read

  • Texas is now the world’s fifth-largest producer of wind power
  • Solar is rapidly increasing capacity as hydro remains no. 1
  • Opportunities for investors in suppliers to the energy transition

What has happened

As the US increasingly adopts renewable energy to meet growing needs, Texas has become the world’s fifth-largest wind power producer, after India, and by far the largest in the US. The 40 wind farms in Texas have a current capacity of 28,000 megawatts, equivalent to eight average-sized US coal-fired power stations and enough to power seven million homes.

The Roscoe Wind Farm in the middle of the vast state was the largest in the world when it was built in 2009, with 627 turbines and a total installed capacity of 781 megawatts, before it was overtaken in 2012 by a 1,020-megawatt wind farm in California. Wind power accounted for 22% of the energy produced in Texas in 2019, exceeding power generated by coal for the first time. (You might say the state has ‘Gone with the Wind’… though the famous film hails from nearby Georgia.)

Meanwhile, Texas is also swapping extraction for refraction, as the amount of solar power capacity has roughly doubled in the state every year since the first panels were installed in 2004. Solar capacity reached 4,300 megawatts in 2019. Progressively larger solar farms have been built in the sunnier western counties, the largest of which – in Upton – now generates 180 megawatts.

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Why is it important

Cutting reliance on fossil fuels and switching to renewables is essential to meeting the targets of the Paris Agreement, which seeks to limit global warming to 2°Celsius above pre-industrial levels by the end of this century. While the US under President Trump has pulled out of the Paris Agreement, the country’s commitment to switching to wind and solar has remained strong. This is partly because vast tracts of land that are difficult to farm are easy to monetize with renewable power installations.

The biggest contributor to energy in the US remains hydroelectric power, which has been part of the landscape since the Hoover Dam was built in 1936. Renewables made up more than 17% of net US electricity generation in 2018, with the bulk coming from hydroelectric (7%) and wind (6.6%), and rapidly expanding solar currently about 1%, according to the US Energy Information Administration.

JR can rest easy on one point though: oil production in Texas remains at 5.5 million barrels a day, or the bulk of the US 13 million barrels, making it the world’s fourth-largest producer after Russia. However, without any new discoveries, its proven reserves will run out in 11 years at the present rate of production. Current estimates are that the world has about 50 years of oil left in total.

What does it mean for investors?

The success in Texas is indicative of how renewables are changing the energy market, and the opportunities that lie ahead for forward-thinking investors, says Chris Berkouwer, portfolio manager of the Robeco Sustainable Global Stars Equities strategy.

“The market remains wary of transition stories about traditional oil and gas companies becoming more sustainable,” he says. “Investors want to avoid the risk of uncertain terminal values and opt instead for the winners of the future that do see their share of the pie growing.”

“Clearly, renewable energy continues to see strong demand in the US, driven by state-level sustainability targets, closures of coal and nuclear plants, and much better economics of renewables.”

“Utilities that invested early in the energy transition, as well as other providers of renewable infrastructure such as wind turbine makers and industrial battery companies have the best cards to play this theme.

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