Governors' Wind Energy Coalition

A truck rolls past a wind farm in Colorado City, Texas. Photo: Spencer Platt/Getty Images

The Lone Star state still embraces its oil and gas, leading a revolution in innovative “fracking” technology. Yet an equally startling energy bonanza here has gone almost unnoticed—the rise of renewables.

Texas has added more wind-based generating capacity than any other state, with wind turbines accounting for 16% of electrical generating capacity as of April. Now Texas is anticipating a huge surge in solar power.

At a time when debate is raging between political parties over climate change, and critics charge that “green energy” is little more than a government creation, Texas has taken an approach that works within the state’s free-market-based electricity system. State officials say wind and solar are almost certain to play a significant and growing role in the state’s energy future even when federal subsidies decline in coming years.

Sheep help keep grass trimmed at a solar farm in Haskell, Texas. Photo: Matthew Mahon for The Wall Street Journal

“We’re in chapter three of a 50-chapter book,” says Joel Mickey, director of market design and development for the state’s electric-grid operator, the Electric Reliability Council of Texas, or ERCOT.

Elsewhere, most of the renewable growth is coming from blue states. California is the leader in solar power with more systems cranking out electricity, right now, than what Texas hopes to add in the nextfive to 10 years. New York finalized a plan Aug. 1 to get to half its power from zero-emission sources by 2030, with big goals for offshore wind turbines. And wind farms provided Iowans with nearly a third of their electricity last year—the largest percentage of any state. Texas remains one of the few reliably Republican states to jump on the bandwagon.

Its transformation hasn’t come without risks. In the early days, the state government charged electric-system users billions of dollars to build transmission lines needed to get power from windy West Texas to power-hungry cities. There was also a steep learning curve. Renewable power is only available when the wind is blowing or the sun is shining. It can’t be dispatched precisely when it’s needed but just when it’s available, meaning grid officials have had to become obsessive about anticipating weather. Efficient battery-storage technologies remain elusive.

Then there is the issue of subsidies. Wind projects get hefty federal payouts whenever they generate electricity. At auctions, this means they can sometimes pay the state to take their electricity and still make money, undercutting the business model of fossil-fuel generators.

Some critics worry this could lead power companies to decommission fossil-fuel plants prematurely—even though some fuel sources such as natural gas and coal are arguably cheaper these days.

“How do we keep big plants online if wind and solar have eroded the economics to the point that companies want to close them?” asks Travis Fisher, an economist with the Institute for Energy Research, a conservative think tank.

The roots of Texas’ renewables boom go back to 1999, when then-Gov. George W. Bush and a Republican-dominated legislature overhauled the Texas power market. The free market-oriented deregulation broke the grip of most monopoly utilities that controlled generation, transmission and retail sales of electricity and introduced competitive auctions for wholesale power.

The deregulation plan, which Mr. Bush signed just days after announcing he would run for the presidency, also included a government-imposed requirement to have at least 2,000 megawatts of renewable generating capacity by 2009.

George W. Bush kicked off the Texas renewable-energy boom when he was governor.Photo: David Woo/Sygma/Getty Images

Texas blew past that goal in 2005. Then Gov. Rick Perry, also a Republican and no fan of government intervention, raised the goal to 10,000 megawatts by 2025. Texas hit that target in 2011 and kept going. In April, there was more than 19,000 megawatts of renewable capacity, according to the U.S. Department of Energy, cranking out enough power for nearly 4 million Texas homes.

Texas officials didn’t invoke global warming to sell the program. Instead, they touted renewable energy as a consumer-choice issue, a jobs producer and a way to pump more money into rural counties.

Jimmy Glotfelty, Mr. Bush’s gubernatorial policy director from 1991 to 1994, says his boss “grew up in Midland where the wind blew all the time” and it gave him a hunch wind power could be a huge asset for the state. “It wasn’t part of the climate-change revolution but a belief in free markets and entrepreneurs.”

A recent poll conducted by the Texas Clean Energy Coalition, a nonpartisan group that supports the growth of gas as well renewable energy, found that despite strong distaste for federal environmental regulations aimed at reducing coal, 85% of Texans favored expanding renewables while 9% were opposed. Among Republicans and those who described themselves as ideologically conservative, nearly 80% favored those sources.

Residents of Houston currently can pick from 107 different rate plans offering 5% to 100% renewable power. In general, they are willing to pay a bit more to go green. Top-rated Reliant, a unit of NRG Energy Inc., charges 7.1 cents a kilowatt-hour for the plan that’s all renewable versus 5.9 cents for one that’s 5% green.

Federal subsidies are scheduled to shrink in coming years. An equally big driver of renewables has been the falling costs of solar and wind technology. Solar costs are down 48% since 2010, including a 6% drop last year, according to the Solar Energy Industries Association, a trade group. Those reductions are likely to continue as solar-panel manufacturers achieve economies of scale and new technologies cut costs and increase efficiency.

“[Texas] wants to have a diversity of resources because no one knows what gas prices will be in the future,” says Joel Cohn, at CohnReznick, an accounting tax advisory in New York that advises on renewable projects.

The state’s grid operator, ERCOT, expects explosive growth in solar. One analysis suggested the recent extension of the federal solar tax credit could lead to as much as 19,000 megawatts of solar capacity being built within 15 years, up from roughly 500 megawatts today. Texas is poised to vault from 10th place among states in solar capacity to second in the next five years, behind only California, according to the Solar Energy Industries Association.

Wind projects, including construction of power lines, created jobs in rural counties and gave landowners new sources of income. The state now has more than 100,000 people working in renewable energy, according to the Texas Workforce Commission, which is responsible for jobs creation.

Two sites in San Antonio operated by the city’s utility, CPS Energy, embody the change. The J.T. Deely generating plant, where smokestacks loom over piles of coal, is being retired. A few miles away, CPS’s two-year-old Alamo 2 solar farm, nestled between a pair of suburban neighborhoods, turns sunlight into electricity. As a few dozen sheep and a llama keep the grass in check, solar developer Randy Jenks notes the appeal.

“It’s clean. It’s quiet. People want it here,” he says, standing beside a few of the 17,920 solar modules that make up the 45-acre facility. When all phases of the Alamo solar venture are completed, it is expected to exceed 450 megawatts, or more solar capacity than existed in the whole state a couple of years ago.

Randy Jenks, a solar developer for Korea’s OCI Energy of Korea, used to work in the oil-and-gas business. Photo: Matthew Mahon for The Wall Street Journal

Mr. Jenks started out in oil-and-gas exploration in the 1980s, then moved into wind power in the 1990s. Now he’s pursuing what he and his employer, OCI Solar Power, which is part of OCI Company of South Korea, see as the next big thing for Texas.

Back in 2010, CPS started thinking about solar. By 2012, it was ready to bet big. The utility signed deals with OCI Solar to build what would eventually be 450 megawatts of solar generating capacity—50% more than in all of Texas even now—on the condition OCI set up its manufacturing operations nearby and create at least 800 local jobs.

Now the city boasts its own solar industrial base, with all of the solar panels for its facilities manufactured locally. OCI and suppliers it brought to San Antonio are now lining up orders from developers in Mexico and other parts of the U.S.

Renewables are still a tiny part of CPS’s business, but its leadership expects them to grow rapidly.

“The cost has come down to the point where people can really see the value,” said Cris Eugster, the chief operating officer for San Antonio’s utility, CPS Energy.=