Dow Buying Texas Wind to Power Its Freeport Plant

The new state motto of Texas may soon be "Come for the natural gas but stay for the wind."

Look no further than Dow Chemical to see how this has played out. The company had been shopping for more electric power for its Freeport, Texas manufacturing complex, which is undergoing a huge expansion. A new propylene plant had just been finished and a new ethylene cracker remained on track to startup in 2017 — its two most visible investments riding the cheap natural gas revolution.

Then last March, instead of adding another gas turbine to Freeport's energy mix, Dow made headlines after agreeing to purchase 200 MW of energy from a wind farm under development in South Texas (see press release).

Also quoted in the press release: "Adding large scale renewable energy to Dow's manufacturing process is just one smart move that we can make to secure a future of sustainability, growth, and long-term competitive advantage,” said Seth Roberts, global business director of the Energy and Climate Change portfolio at Dow. 

Catching the wind

Although Texas is the twangy heart and soul of gas and oil country, Dow's decision shouldn't have surprised anyone. As costs plummet, wind is being installed at a rapid clip around the country. The wholesale cost — via a “power purchasing agreement,” (PPA), when a company buys power from a wind farm under a long term contract — is now 2.35 cents per kilowatt hour (including the production tax credit). That's a record low and cheaper than wholesale electricity in many parts of the country.

And Texas leads the nation in wind energy. In 2014, wind generated 10.6 percent of the electricity in Texas, up from 9.9 percent the previous year and 6.2 percent in 2009. Currently, Texas has more than 12 gigawatts of wind power capacity installed across the state.

Obviously, Dow had been watching this trend develop from the sidelines. After all, energy is the very core of its business. With half of every dollar going toward energy, mostly gas feedstock, but also the power to run its plants, reducing the BTU's to make a pound of product has always been a matter of survival. So much so that Dow was among the first companies to set quantitative, measured energy savings goals.

Dodging a bullet

In 1995, after Dow set a goal of reducing energy use per pound of product 20 percent by 2005, it overshot that goal, coming up with 22 percent savings by 2005. But to prove that no good deed goes unpunished, from 2002 to 2007, Dow’s energy bill rose from $8 billion to $27 billion as natural gas prices skyrocketed. At that point, it looked to everyone that the US would spend the future importing expensive LNG from Qatar, a signed, sealed, and delivered death sentence for heavy energy users like Dow.

So even though the previous energy cuts staunched $8 billion of the potential losses during that bleak period, CEO Andrew Liveris decided to unload the Freeport complex — lock, stock and barrel — according to Forbes. This was similar to GE selling its plastics unit to Sabic in 2007.

In the clarity of hindsight, it's ironic that two of the savviest energy companies in America were unaware or couldn't wait for the surge of cheap oil and gas about to flood the market. So as he bleakly reconnoitered the feedstock future, Mr. Liveris finessed to spin out much of Dow’s low-end domestic petrochemicals business into a joint venture with the Kuwaitis. This almost-done-deal was so close that he was practically waiting for the $7.5 billion check to clear in late 2008 when the financial crisis snuffed the deal.

The rest is cock-eyed, unpredictable history. Flash forward to April 2012. Now flush with low cost feedstocks, Mr. Liveris announced a plan to build the new ethylene facility at Freeport, his former white elephant.

At the press conference, he reflected that the same multibillion-dollar investment would have been considered unrealistic a decade ago.

Then he grew unusually poetic, perhaps paying a debt of gratitude to George Mitchell, the developer of gas fracking, saying, “And then along came shale gas — this gift, this miracle," reported Fuelfix.  He went on to predict that cheap gas and its wet byproducts, like ethane and propane, would create a new era for American manufacturing.

Becoming a part of Dow

So how does wind energy fit into Dow? First of all, it's important to know that energy constitutes its own business unit within the company, owning and operating 10 percent of all of Dow’s assets. This makes it the second-largest business unit behind Olefins.

At the Freeport Texas site, Dow generates 1,000 Megawatts of electricity, as much as the largest utility power plants.

While selling electricity, steam, and natural gas to other business units, the energy unit is also a major player in world, national, and state energy markets, selling as well as buying energy on a wholesale basis.

Dow’s power generation is fully interconnected with the Texas power grid operator, allowing it to behave like other large generators on the system.

So Dow can watch market conditions minute to minute to make decisions when to dispatch power.

Occasionally, when Texas power prices are high enough, Dow will shut down one or more production units and sell power into the grid, because it is more profitable to sell electricity than to make chemicals under those conditions.

Which brings us back to the specter of price volatility. In Texas, since wholesale electricity prices are heavily influenced by natural gas costs, Dow has a big incentive to lock in a portion of future electricity needs through low-cost wind energy. And it's no secret that LNG and gas liquids will be leaving the US in larger and larger quantities starting in 2016, which will tend to bump up prices.

So while the use of wind energy can't directly replace the huge volumes of natural gas that Dow buys for chemical manufacturing, it can provide a cushion against price volatility and structured prices unavailable through a standalone natural gas trade.

Will other Texas chemical companies follow Dow?

Images: Dow