Houston faces critical inflection point amid energy transition, says expert

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The question the Houston business community must be able to answer today is “Are we going to be ready for 2035?” Photo via Getty Images

In 1914, Winston Churchill faced a difficult decision. Over two decades before his first term as Prime Minister during World War 2, he oversaw the entire Royal Navy as First Lord of the Admiralty. Shipbuilding technology was rapidly evolving in that era and one of the key questions was whether to use coal or oil as fuel for the large ships in the fleet. Coal was the more proven technology at that point and the British had a strong supply chain across the Empire. Oil was lighter and easier to operate, but the worldwide supply and infrastructure were still limited.

Ultimately Churchill was persuaded by Admiral Jacky Fisher and others to convert the entire fleet to oil. To resolve the supply chain issue, the British government bought a majority stake in Anglo-Persian Oil Company, which became BP. The Royal Navy was possibly the largest consumer of fuel worldwide at the time, so this decision had a major effect on the energy transition in that era. Within 30 years, steam engines were no longer used for transportation in most of the world.

In that same decade, Houston emerged as a leading energy hub in the United States: Humble Oil was founded, the Houston Ship Channel was dredged, and the Baytown Refinery was constructed. World War I in Europe, and the mass adoption of cars in the US spurred a major increase in demand for oil. Oil went on to dominate the global energy market, providing cheap and reliable transportation, industrial production, and materials. Houston grew and prospered along with it to become the 5th largest metro area in the country today.

Over a century later, the global energy industry may be at a similar inflection point. According to IEA, the electric vehicle market more than tripled from 4 percent in 2020 to 9 percent in 2021 to 14 percent in 2022. Major automakers like GM, Ford, Volkswagen, Mercedes, and Volvo have pledged to become all-electric by early-to-mid 2030s. Similar commitments are being made in commercial trucking and shipping.

At the same time, the electric power grids in the United States and many other nations are undergoing a rapid shift to renewable energy. Lazard’s annual Levelized Cost of Energy (LCOE) report showed that by 2015, wind and utility-scale solar power in the US were cheaper than all other technologies on a $/MWh basis; the gap has only grown wider since. EIA data on new power generation capacity in the US for 2020-2023 shows that solar, wind, and energy storage combined have ranged from 74 percent to 81 percent while natural gas has ranged from 14 percent to 22 percent and other fuels less than 5 percent.

All of these figures show market trends that are already happening, not projections of what may happen if the technologies improve. This leads to a natural question: will the growth of EVs and renewable energy reach a limit and tail off? Or will this trend continue until the internal combustion engine and fossil fuel power are replaced like steam engines were before? Both EVs and renewable energy are experiencing insatiable market demand in developed markets but have hit other barriers such as supply chain and infrastructure. However, just as the oil industry itself demonstrated in the past, those constraints can be overcome if the push is strong enough.

The year 2035, only 12 years away, is a major deadline for the transition. The US government and the EU have both set it as a target to complete the transition to EVs. In the US electric power industry, BloombergNEF projects that 126 GW of US coal power will retire before then. S&P also forecasts 85 GW of new energy storage will be online, which will help resolve intermittency and transmission issues that have limited the role of renewable energy up to now. That paints a picture of a radically different energy industry from the one we see today; one with oil demand at a fraction of its current levels and natural gas demand in rapid decline as well.

These market trends have drawn a variety of responses in Houston and other energy hubs, ranging from enthusiastic adoption to cautious skepticism to firm denial. Two recent examples of this range are BP CEO Bernard Looney advocating for continued investment in renewable energy and Shell CEO Wael Sawan emphasizing a move away from them due to lower returns. Business leaders should always be aware of threats to their long-term operations, regardless of their personal opinions on an issue. While demand for oil generally remains strong, every business in the energy industry should be prepared for the scenario that all new cars sold in a decade are electric. There is a graveyard of companies like Kodak, Sears, and Blockbuster Video that failed to act on an existential market threat until it was too late.

Plans for the transition can look different from company to company, but Houston is full of resources that can help with planning and deployment. The workforce, financial sector, and professional services can adapt to new energy technologies from their existing oil and gas expertise. Industry organizations like the Houston Energy Transition Initiative, Renewable Energy Alliance Houston, and the energy policy centers at Rice University and the University of Houston can help leaders make connections and discuss new technologies.

The burden is on every business leader to make use of the time remaining, not only to make plans for the changes coming in the energy industry, but to implement those plans. The question the Houston business community must be able to answer today is “Are we going to be ready for 2035?”

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Drew Philpot is president of Blended Power, a renewable energy consulting practice based in Houston.

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Blackstone clears major step in acquisition of TXNM Energy

power deal

A settlement has been reached in a regulatory dispute over Blackstone Infrastructure’s pending acquisition of TXNM Energy, the parent company of Texas-New Mexico Power Co. , which provides electricity in the Houston area. The settlement still must be approved by the Public Utility Commission of Texas.

Aside from Public Utility Commission staffers, participants in the settlement include TXNM Energy, Texas cities served by Texas-New Mexico Power, the Texas Office of Public Utility Counsel, Texas Industrial Energy Consumers, Walmart and the Texas Energy Association for Marketers.

Texas-New Mexico Power, based in the Dallas-Fort Worth suburb of Lewisville, supplies electricity to more than 280,000 homes and businesses in Texas. Ten cities are in Texas-New Mexico Power’s Houston-area service territory:

Alvin
Angleton
Brazoria
Dickinson
Friendswood
La Marque
League City
Sweeny
Texas City
West Columbia

Under the terms of the settlement, Texas-New Mexico Power must:

Provide a $45.5 million rate credit to customers over 48 months, once the deal closes
Maintain a seven-member board of directors, including three unaffiliated directors as well as the company’s president and CEO
Embrace “robust” financial safeguards
Keep its headquarters within the utility’s Texas service territory
Avoid involuntary layoffs, as well as reductions of wages or benefits related to for-cause terminations or performance issues

The settlement also calls for Texas-New Mexico Power to retain its $4.2 billion five-year capital spending plan through 2029. The plan will help Texas-New Mexico Power cope with rising demand; peak demand increased about 66 percent from 2020 to 2024.

Citing the capital spending plan in testimony submitted to the Public Utility Commission, Sebastian Sherman, senior managing director of Blackstone Infrastructure, said Texas-New Mexico Power “needs the right support to modernize infrastructure, to strengthen the grid against wildfire and other risks, and to meet surging electricity demand in Texas.”

Blackstone Infrastructure, which has more than $64 billion in assets under management, agreed in August to buy TXNM Energy in a $11.5 billion deal.

Neal Walker, president of Texas-New Mexico Power, says the deal will help his company maintain a reliable, resilient grid, and offer “the financial resources necessary to thrive in this rapidly changing energy environment and meet the unprecedented future growth anticipated across Texas.”

Constellation and Calpine's $26B clean energy megadeal clears final regulatory hurdle

big deal

Baltimore-based nuclear power company Constellation Energy Corp. received final regulatory clearance this month to acquire Houston-based Calpine Corp. for a net purchase price of $26.6 billion.

The acquisition has the potential to create America’s “largest clean energy provider,” the companies reported when the deal was first announced in January.

The Department of Justice approved the acquisition contingent on Calpine divesting several assets, including one in the Houston area.

The company agreed to divest the Jack Fusco Energy Center natural gas-fired combined cycle facility in Richmond, Texas; four generating assets in the Mid-Atlantic region; and other natural gas plants in Pennsylvania and Corpus Christi, Texas.

The Federal Energy Regulatory Commission, the Public Utility Commission of Texas and the New York Public Service Commission previously approved the deal. The companies can move toward closing the acquisition once the court finalizes the stipulation and order.

"We are very pleased to reach a settlement that allows us to bring together two magnificent companies to create a new Constellation with unprecedented scale, talent and capability to better serve our customers and communities while building the foundation for America’s next great era of growth and innovation," Joe Dominguez, president and CEO of Constellation, said in a news release. "We thank the Department for its professionalism and tireless work reviewing this transaction through these many months. It’s now time for us to complete the transaction, welcome our new colleagues from Calpine, and together begin our journey to light the way to a brilliant tomorrow for all."

Andrew Novotny, CEO of Calpine, will continue to lead the Calpine business and Constellation's fleet of natural gas, hydro, solar and wind generation, according to the company. He will report to Dominguez and also serve as senior executive vice president of Constellation Power Operations.

Constellation is considered one of the top clean energy producers in the U.S. Earlier this month, the company was approved to receive a $1 billion loan from the Department of Energy's Energy Dominance Financing Program to restart its 835-megawatt nuclear reactor in Pennsylvania known as Crane Clean Energy Center.

"Work to restart the reactor comes at a time of unprecedented electric demand growth from electrification and the new data centers needed to support a growing digital economy and to help America win the AI race," a news release from the company reads. "Crane will support grid stability by delivering reliable, around-the-clock electric supply."

States brace for Trump's push to make oil drilling cheap again

Energy news

A Republican push to make drilling cheaper on federal land is creating new fiscal pressure for states that depend on oil and gas revenue, most notably in New Mexico as it expands early childhood education and saves for the future.

The shift stems from the sweeping law President Donald Trump signed in July that rolls back the minimum federal royalty rate to 12.5%. That rate — the share of production value companies must pay to the government — held steady for a century under the 1920 Mineral Leasing Act. It was raised to 16.7% under the Biden administration in 2022.

Trump and Republicans in Congress say the rate reset will boost energy production, jobs and affordability as the administration clears the way for expanded drilling and mining on public lands.

States receive nearly half the money collected through federal royalties, depending on where production takes place. The environment and economics research group Resources for the Future estimates a roughly $6 billion drop in collections over the coming decade.

The stakes are highest in New Mexico, the largest recipient of federal mineral lease payments. The state could could forgo $1.7 billion by 2035 and as much as $5.1 billion by 2050, according to calculations by economist Brian Prest at Resources for the Future.

More than one-third of the general fund budget in the Democratically-led state is tied to the oil and gas industry.

“New Mexico’s impact is way bigger than Wyoming or Colorado or North Dakota,” Prest said, “and that’s just because that’s where the action is on new development.”

The effects will unfold gradually, since federal leases allow a 10-year window to begin drilling and production. Still, state officials say they're already prepping for leaner years.

“It all hurts when you’re losing revenues," said Democratic state Sen. George Muñoz of Gallup, who said lawmakers still hope to invest more in mental health care and support Medicaid, even if federal royalty payments decline. “We’ve learned that until the chicken’s got feathers, we’re not even looking at it."

The higher federal royalty rate was in place for roughly three years while leasing activity was muted, Prest said. New Mexico budget forecasters never tallied the additional income.

New Mexico's nest-egg strategy

A nearly five-fold surge in local oil production since 2017 on federal and state land in New Mexico delivered a financial windfall for state government, helping fund higher teacher salaries, tuition-free college, universal free school meals and more.

The state set aside billions of dollars in investment trusts for future spending in case the world’s thirst for oil falters, including a early childhood education fund to help expand preschool, child care subsidies and home wellness visits for pregnancies and infants.

The state's investment nest egg has grown to $64 billion, second only to Alaska's Permanent Fund. Earnings from the trusts are New Mexico's second-biggest source for general fund spending.

That sturdy financial footing shaped a defiant response to this year’s federal government shutdown, when lawmakers voted to subsidize the state’s Affordable Care Act exchange, cover food assistance and backfill cuts to public broadcasting.

But lawmakers reviewing state finances learned that predictable income fell 1.6% — the first contraction since the start of the COVID-19 pandemic.

Muñoz said matters would be worse if the state had not raised its own royalty rates this year to 25%, from 20%, for new leases on prime oil and gas tracts, while ending a sales moratorium, under legislation he co-sponsored this year.

Encouraged in Alaska

After New Mexico, the states receiving the most federal oil and gas royalties are Wyoming, Louisiana, North Dakota and Texas.

Texas, the nation’s top oil producer, shares the bountiful Permian Basin with New Mexico but has far less federal land and therefore less exposure to changes in royalty policy.

In Alaska, state officials say they are encouraged by the royalty cut, seeing potential for increased development in places like the National Petroleum Reserve-Alaska, where the massive Willow project — approved in 2023 and now under development — is viewed by some as a catalyst for further activity. The reserve is expected to hold its first lease sales since 2019.

“If reduced federal royalty rates stimulate new leasing, exploration and production, that also could increase other kinds of revenue,” said Lorraine Henry, a spokesperson for Alaska’s Department of Natural Resources.

In North Dakota, federal royalties are split evenly between the state and county governments where drilling occurs. State Office of Management and Budget Director Joe Morrissette said the industry’s future remains difficult to forecast.

“There are so many variables, including timing, price, availability of desirable tracts, and federal policies regarding exploration activities,” Morrissette said.

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