Texas became the nation's most prolific generator of wind power in the past decade, but the industry's future growth will depend on tax incentives to make it cost competitive and new transmission lines to get electricity to consumers.Energy industries ; Tax incentives

Jackson Thies

English

Research Papers in Economics

SpotLight
	 FEDERAL	RESERVE	BANK	OF	DALLAS	•	THIRD	QUARTER	2009 SouthwestEconomy 15
Texas Wind Energy
Tax Breaks, Transmission Lines Key to Growth
Texas  became  the  nation’s  most  prolific 
generator of wind power in the past decade, 
but the industry’s future growth will depend 
on tax incentives to make it cost competitive 
and new transmission lines to get electricity 
to consumers.
  With  advances  in  turbine  technology 
and tax breaks, wind power is now the larg-
est source of renewable energy generation 
in Texas and second only to hydroelectric 
in the nation. The state’s installed capacity 
is approaching 8,500 megawatts (MW)—just 
over 28 percent of the U.S. total, up from 7 
percent a decade ago (Chart 1). 
  If projects under construction in Texas 
are completed by year’s end, capacity will 
increase by nearly 30 percent in 2009. While 
significantly below last year’s 65 percent gain, 
this growth rate just about matches the me-
dian of 37 percent over the past nine years. 
  On  a  generation-cost  basis,  wind  en-
ergy is competitive with conventional forms 
of power—but only after taking tax incen-
tives into account (Chart 2). The American 
Recovery  and  Reinvestment  Act  of  2009 
extended the federal production tax credit 
(PTC) through the end of 2012. It provides 
renewable  energy  facilities  a  2.1  cent  per 
kilowatt hour credit for the first 10 years of 
operation. Texas offers additional incentives 
for  developing  renewable  energy—for  ex-
ample, exemption from property taxes.  
  Tax incentives appear critical in driving 
wind industry growth. Every time Congress 
has allowed the PTC to expire, new installed 
capacity dropped significantly the next year. 
When the PTC lapsed in 2001, Texas saw no 
new capacity in 2002 and U.S. capacity grew 
only 10 percent, down from 66 percent the 
previous year. In 2003, the PTC lapsed again, 
and Texas saw another year of no new ca-
pacity in 2004.
Distance Poses Obstacle 
  Connecting new capacity to the grid is 
one of Texas’ greatest challenges. Hills sur-
rounded by open plains are the best loca-
tions for wind power, so most turbines are in 
Texas’ west and northwest regions, far from 
consumers in urban areas. 
  Transmission lines from west and north-
west Texas require an estimated investment 
Chart 1
Wind Power Capacity Rises in U.S., Texas
Megawatt installed capacity (thousands)
Texas
U.S.
0
5
10
15
20
25
30
2009:Q2 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999
7.2 7.0
25.6 23.4 20.3 19.2
21.8
23.7
25.5
28.1
28.4
(Numbers above Texas bars indicate state’s installed 
capacity as a percent of U.S. total capacity.)
SOURCES: “2nd Quarter 2009 Market Report,” American Wind Energy Association; Texas Comptroller of Public Accounts.
 
Chart 2
Wind Power Competitive— 
With Incentives
Dollars per megawatt hour
0
20
40
60
80
100
120
140
Nuclear Solar
PV
Coal Natural
gas
Wind Geo-
thermal
NOTE: Price ranges reflect all applicable tax incentives and 
capital costs. Assumes coal price of $1.75 per million Btu and 
natural gas price of $4 per million Btu.
SOURCES: Lazard: Levelized Cost of Energy Analysis–Version 
2.0; other calculations by the Dallas Fed. 
of $1.5 million per mile. Earlier this year, the 
Public  Utility  Commission  of  Texas  began 
awarding contracts to build 18,456 MW of 
transmission capacity under a $4.93 billion 
project  funded  by  fees  on  residential  cus-
tomers’ electricity bills.
  Continued growth in wind power ben-
efits Texas’ economy. The National Renew-
able Energy Laboratory estimates that each 
100 MW of installed capacity creates six to 10 
permanent operation and maintenance jobs. 
The construction process supports 100 to 200 
temporary jobs. In addition, landowners and 
farmers who allow wind turbines to be locat-
ed on their property receive rental payments. 
  Difficulties raising capital in the after-
math of a credit crisis and low natural gas 
prices will likely slow capacity growth in the 
short term, but Texas’ geography provides 
an edge in wind power. Wind energy now 
makes up only 3.5 percent of Texas electric-
ity consumption, but it’s likely to continue 
growing over the longer term, becoming a 
viable energy source for the state.
—Jackson Thies

Spotlight: Texas wind energy: tax breaks, transmission lines key to growth

http://dallasfed.org/assets/documents/research/swe/2009/swe0903d.pdf

Spotlight: Texas wind energy: tax breaks, transmission lines key to growth

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