Can The Renewable Goose Lay A Golden Egg In New Mexico?

Originally published on Forbes.com on September 10, 2024

Revenue from renewables won’t replace the loss of fossil fuels revenue—not even close. This is a very serious dilemma may affect public schools, universities, and health care in the state.

The renewable goose refers to energy produced by wind, solar, and batteries, but also the production of hydrogen and ammonia, and carbon capture and storage or CCS. The golden egg would be funds paid to the state from income from leases of wind turbines on state land, and taxes on production of renewable energies in New Mexico. But to be a golden egg in the fairy tale, there would have to be a windfall of money from these sources.

There has been a windfall of money, but it comes from the other goose—the oil and gas industry—which provided $15.2 billion to New Mexico’s revenue in FY 23. This golden egg came from land leasing and various taxes on the production of oil and gas, with both state and federal contributions. If oil starts to decline in 2025, when sales of electric cars and trucks are predicted to shoot up, the revenue from oil and gas will start to decline. The big question is: can new revenue from renewable energies fill the gap?

A recent report says 9 wind projects are operating on state land. The largest operation is Avangrid’s El Cabo Wind, situated on 40,000 acres and providing almost 200 MW (megawatts) of power. This can power 40,000 homes.

There are another 20 wind projects under development. Many of these will take 3-5 years to come online. The biggest wind project will be the SunZia project by Pattern Energy, which produce 1,000 MW of power that could provide 200,000 homes with power.

Altogether, current and future wind projects in New Mexico will amount to 2,100 MW, which makes it clear the SunZia project is dominant. In contrast, solar energy projects, operational and planned, add up to 400 MW—only about a fifth of the wind projects. Eight of these are operational, while five are still under development.

It’s worth noting that the San Juan Generating Station, a coal-burning power plant that was demolished recently, was operating at 850 MW at its peak. And the Four Corners Generating Station, which is producing 1,540 MW, is slated to close in 2031. So the new wind and solar power plays in toto could replace both these coal-burning power plants, at least in capacity. But they are not a direct replacement because the SunZia wind project plans to route most of its power to Arizona and California.

New Transmission Lines  

It’s one thing to construct a solar farm or a plantation of wind turbines, but quite another thing to capture and transmit the electricity to where it’s needed. To facilitate this transmission, a body in New Mexico is known as the Renewable Energy Transmission Authority, (RETA). RETA has oversight of two operating projects and four projects under development. One of these is SunZia, building a line from the center of the state to the southwest corner, where it will stream electricity at 525 kV (kilovolts) to Arizona and California.

According to RETA, the transmission line will be 550 miles long within New Mexico and will be able to stream 3,000 MW of power that could support over half a million homes. Curiously, all of this power, though produced in the state, will be used in markets in Arizona and California, when the project is completed in 2025 or 2026. So what’s in it for New Mexico, we wonder?

Revenues For New Mexico 

For fiscal year 2023, the Legislative Finance Committee reported a revenue of $15.2 billion to New Mexico from extractive industries, primarily oil and gas.  This is normally broken down into land income, which generated $8.6 billion, and taxes, which generated $6.6 billion. The land income portion of $8.6 billion allows a comparison between oil and gas and renewables. The biggest chunk of the latter is about $6 billion comes from federal royalties, rents, and bonuses. The rest, about $2.6 billion, comes from state royalties, rents, and bonuses.

The New Mexico State Land Office administers the non-federal $2.6 billion oil and gas funds from the state. It also receives funds from renewable energies, wind, and solar, but this was a miniscule $4.4 million in FY 2023. This $4.4 million was further broken down into $3.85 million from wind energy projects, and $550,000 from solar projects. The disparity is enormous: 97% of the land office revenue was from oil and gas, while a paltry 0.16% was from renewables, and the eye-catching $6 billion from federal royalties, rents, and bonuses makes this disparity much worse.  There is no golden egg coming from the renewables goose in New Mexico.

Can Renewables Ever Replace Revenues From Oil And Gas

A new study from January 2024 looks at 79 counties (not state) that produce substantial energy within 10 U.S. states. The data is based on local (not state) property tax revenues from fossil fuels versus renewables. For the sampled counties, 82% of this revenue was oil and gas, 8% was coal, and 2% was wind and solar renewables.

A main finding is that renewables revenue won’t replace the loss of fossil fuels revenue caused by increasing EVs, etc. Part of the reason is a lack of acreage available for wind and solar farms. This can lead to a serious dilemma because major funding for basic services such as public schools, health care, and infrastructure often comes from revenues paid by fossil fuels. In New Mexico, the fossil fuel legacy is primarily oil and gas.

The study showed that counties that depend on fossil fuels often receive $1,000 of government revenue per person each year, and sometimes up to $10,000. Therefore, with oil and coal declining in the next ten years, strong oil and gas counties will have to diversify their economy—they will have to find new tax bases to maintain their basic services, as well as to offset job losses. 

How Can An Oil-Rich State Bring About A Feasible Energy Transition    

This is a key question facing New Mexico legislators. Here are the main decision pointers: First, global oil demand will begin to fall by 2030, according to analyses by BP and others, as discussed in detail elsewhere. The main cause is increasing sales of electric vehicles, or EVs.

Second, New Mexico can’t rely on commercial expansions of solar and wind energies. Although these are already happening, a dollar-for-dollar transition from oil and gas to renewables is impossible for New Mexico.

Third, a large catalog of potential diversification industries needs to be drawn up by legislators. Some examples, with businesses already in place, are IT- or AI-related (Intel), new solar cell manufacture (Maxeon and Ebon Solar), hydrogen generation (BayoTech and Star Scientific), carbon capture and storage in plentiful old oilfields or gas fields, and tech spinoffs from prominent in-state laboratories such as Sandia and Los Alamos.

Fourth, massive funding, to the tune of $479 billion from the Infrastructure Act and the Inflation Reduction Act, has been made available from the U.S. federal government for projects that address new, clean energy and climate. States are already proposing, and winning, huge contracts that will focus on solving climate change problems, kickstart new businesses, and create lots of new jobs.

Why Don’t Oil And Gas Companies Just Switch To Producing Renewables

The reason is simple. The internal rate of return is 20-50% for a company investing in oil and gas when the price of oil is $75-85 per barrel. This return eclipses the 5-10% that can be made on an investment in wind or solar energies. While many investors are happy with a steady risk-free return of 5-10%, this is small potatoes for large oil and gas companies that need to keep their stock valuations high.