TAKEAWAYS

• The 88^th regular session of the Texas Legislature saw an unusually high number of proposed bills with a stated focus of ensuring reliability of the Texas grid and favoring “dispatchable generation” (having output within human control, such as coal and natural gas) over, and in some cases to the detriment of, “non-dispatchable generation” (having output controlled largely by forces outside of human control, such as wind and solar).
• Renewables were spared from the significant adverse effects that would have resulted from several proposed bills which ultimately did not make it through the Texas Legislature (including SB624, SB6 and SB7). Numerous bills favorable to oil and natural gas industries cleared the Texas Legislature last minute and were sent to the Governor (including HB1500, SB2627 and HB5).
• While the full impact of the bills that did pass the Legislature on the energy industry in Texas remains to be seen, renewables developers can breathe a sigh of relief as Texas continues to lead in the path towards energy transition with major new solar and wind capacity to be added in 2023. Renewables seem to be here to stay, as Texas lawmakers try to strike a balance between grid reliability, clean energy goals and the continued importance and contributions of the traditional oil and gas sectors to energy security and the economy in Texas and globally.

While Texas is the top crude-oil and natural-gas producing state in the United States, it also leads the nation in wind power generation and is second only to California on utility-scale solar (source: U.S. EIA). During the 88^th Legislature’s regular session (which ended on May 29, 2023), the Texas Legislature considered numerous bills whose stated purpose was to make the Texas electric grid more reliable—stemming from continuous calls for industry reform following disastrous Winter Storm Uri, which saw over two-thirds of Texans lose power and over 200 deaths. During Winter Storm Uri, many types of power generation failed, including both natural gas- and renewables-powered generation. However, various state officials—including Governor Greg Abbott and Lt. Gov. Dan Patrick—focused their criticism in the aftermath of the storm on renewables generation. The large proportion of non-dispatchable generation (such as wind and solar powered electricity) is perceived by certain officials and observers as a threat to the overall reliability of the Texas grid, with some arguing that increased dispatchable generation (typically gas-fired electricity) is urgently required (source: Lt. Gov. Dan Patrick: Statement on the Passage of the Texas Senate’s Power Grid Reform Package).

Developers, financers and contractors of all types in the energy industry are encouraged to pay particular attention to the bills signed into law by the Governor (as well as the enrolled bills sent to the Governor), to ensure continuing regulatory compliance and to consider economic viability of projects once these bills become effective. Please contact Anne Austin (anne.austin@pillsburylaw.com) or Irina Tsveklova (irina.tsveklova@pillsburylaw.com) for further information and updates.

Part I: Energy Industry Bills Signed by the Governor or Enrolled and Sent to the Governor
Summarized below are key bills that will have a significant impact on the oil, gas and renewables industries in Texas. These bills have been signed into law by the Governor and will become effective on the dates indicated below.

HB1500 (Signed by the Governor; Effective September 1, 2023)
House Bill 1500 (HB1500) reauthorizes the Public Utility Commission of Texas (PUC) through September 1, 2029. Last minute amendments to this bill (some of which incorporated provisions from failed SB7) will have a significant effect on the Texas power market, including with respect to the following matters:

• HB1500 gives guidance to the PUC with respect to implementing the Performance Credit Mechanism (PCM) that was proposed by the PUC in early 2023. Under the PCM, certain electricity generators (mainly fossil fuels generators) could earn a performance credit for being available when demand surges. HB1500 (a) caps this financial tool at $1 billion annually and (b) provides that the credits are available only for dispatchable facilities (i.e., wind and solar will not be eligible for these credits).
• It creates an ancillary services program that will allow power generators to bid on a day-ahead and real-time basis if they can provide at least four hours of power that could turn on within two hours of being called for deployment and have dispatchable flexibility to address inter-hour operational changes.
• Generation facilities (including renewable energy producers, other than a battery energy storage resource) signed into interconnection after January 1, 2027, will be required to maintain electricity output during peak demand periods (i.e., “firming”). A generation facility may satisfy this requirement by using on-site or off-site resources, including battery energy storage (a win for battery energy storage, though this will overall add an additional cost for renewables-generated power).
• HB1500 establishes an allowance for the cost of building and interconnecting new transmission lines to the grid. This would limit how much electricity consumers would be required to pay for Electric Reliability Council of Texas (ERCOT) grid connection costs and require the rest of the tab to be picked up by the power generators. Previously, interconnection costs would be covered by the ratepayers. With the added limitation, there will be a more significant impact on new projects and the renewable energy developers who (1) often do not build as close to the existing power grid and (2) generally incur larger grid connection costs.
• The PUC is required to study ancillary and reliability services cost allocation “on a semiannual basis among electric generation facilities and load-serving entities in proportion to their contribution to unreliability during the times of highest reliability risk due to low operating reserves by season,” in effect to determine whether to make renewables pay higher ancillary and reliability services costs. This differs from SB7, which required study and cost allocation, rather than this “look-and-see” approach.
• The PUC is required to report annually to the Texas Legislature on (a) estimated annual costs incurred by load-serving entities associated with backing up dispatchable and non-dispatchable electric generation facilities to guarantee that a firm amount of electric energy will be available to the grid, (b) the cumulative annual costs incurred in the ERCOT market to facilitate the transmission of dispatchable and non-dispatchable electricity to load and to interconnect transmission level loads and (c) status of implementation of these rules, including whether such rules have materially improved the reliability, resilience and transparency of the electricity market.

SB2627 (Signed by the Governor; Effective upon Adoption of Constitutional Amendment)
Senate Bill 2627 (SB2627), a replacement to SB6 (see below), will create a fund for up to $7.2 billion designed to encourage construction, maintenance and modernization of dispatchable-electric-generating facilities (such as natural gas power plants) in Texas. (Funding of this program will require approval from the Texas voters of a constitutional amendment in the fall of 2023.) The non-dispatchable electric generation facilities (such as solar and wind) and electric energy storage facilities will not be eligible to take advantage of this fund. SB2627 creates multiple zero or low interest funding mechanisms that include:

• Loans to finance (i) upgrades to existing dispatchable electric generating facilities operating in ERCOT that result in a net increase of at least 100 MW of capacity for such facility or (ii) construction of dispatchable electric generating facilities providing power to ERCOT that have generation capacity of at least 100 MW (capped in the aggregate at 10,000 MW of generation capacity);
• Grants for transmission and distribution infrastructure and electric generating facilities outside of the ERCOT region for facility modernization, weatherization, reliability and resiliency facility enhancements and vegetation management; and
• Completion bonuses for certain dispatchable-electric-generating facilities of at least 100 MW generation capacity coming online by June 1, 2029.

HB5 (Signed by the Governor; Effective January 1, 2024 (Except §10, Dealing with Rules and Forms, Effective September 1, 2023))
House Bill 5 (HB5) is a replacement to the Texas corporate tax incentive known as “Chapter 313” program that expired on December 31, 2022. Chapter 313 program was an economic development tool that allowed school districts to offer a 10-year limitation on some of the taxable property value of new eligible projects in exchange for such projects bringing jobs and investments into the relevant school district. This created a significant financial incentive for businesses to develop projects in such school districts. HB5 provides a similar scheme that would allow companies to apply for such temporary property tax discounts from school districts, with a big caveat—non-dispatchable-electric-generation facilities (such as wind and solar) or electric energy storage facilities are not eligible to apply for such incentives. Specifically, an “eligible project” under this incentive program means:

• A project: (i) to construct or expand a new or existing facility that is (1) a manufacturing facility, (2) a facility related to the provision of utility services, including an electric generation facility that is considered to be dispatchable because the facility’s output can be controlled primarily by forces under human control, (3) a facility related to the development of natural resources, or (4) a facility engaged in the research, development or manufacture of high-tech equipment or technology; or (ii) to construct or expand critical infrastructure; and
• Does not include projects to construct or expand a new or existing (i) non-dispatchable-electric-generation facility (such as wind or solar), or (ii) electric energy storage facility.

SB28 (Signed by the Governor; Effective September 1, 2023 (Except §6, Establishing Texas Water Fund, Effective January 1, 2024**))
Senate Bill 28 (SB28), together with the Senate Joint Resolution 75, will establish** a new water supply fund to be administered by the Texas Water Development Board. This fund will be used to finance new, large water projects and to upgrade water infrastructure, especially in rural communities. The goal of the fund is to facilitate delivery of 7 million acre-feet (about 2.3 trillion gallons) of new water supplies by December 31, 2033, by financing desalination projects (for marine and brackish water), produced water treatment projects (other than those used only for oil and gas exploration), aquifer storage and recovery projects, and development of infrastructure to transport water produced by one of the previously described type of projects. This program, together with ongoing research on recycling technologies, is likely to have a significant impact on the oil and gas industry, which is keen to find beneficial uses for the vast volumes of water produced during oil and gas drilling, rather than simply disposing of it. If properly treated, such produced water can be used to address dwindling surface and groundwater supplies in Texas.

**Part of this legislation relating to the creation of the Texas Water Fund to assist in financing water projects is contingent on voter approval of a constitutional amendment in the fall of 2023.

In addition to the above listed bills affecting oil, gas and renewables, the Texas Legislature passed a number of bills that signaled the state’s support for the hydrogen industry. House Bill 4885 (HB4885) effective as of September 1, 2023, established a hydrogen infrastructure, vehicle and equipment $8 million grant program, with the purpose of encouraging the adoption of hydrogen infrastructure, vehicles and equipment (note this is not limited to green hydrogen). House Bill 2847 (HB2847), effective as of September 1, 2023, gives the Railroad Commission of Texas jurisdiction to oversee pipeline transportation and underground storage of hydrogen and establishes the Texas hydrogen production policy council to, among other things, study and make recommendations for the development of facilities for production, pipeline transportation and storage of hydrogen, and monitor the progress of the hydrogen hubs in Texas.

Part II: Overview of Failed Bills of Significant Potential Impact on Oil, Gas and Renewables
Some of the more controversial bills proposed during the 88^th Texas Legislature’s regular session that would have had a significant (and in many cases highly negative) impact on the renewables industry in Texas did not ultimately pass the latest legislative session. Summaries of these bills provide a flavor of measures debated and considered by the Texas Legislature in connection with its stated desire to make reliability and resiliency of the Texas grid a key priority following deadly Winter Storm Uri.

SB624
The most stringent of them all, Senate Bill 624 (SB624) proposed new permitting requirements that would be applicable solely to renewable energy generation facilities. Under SB624, a renewable generation facility with 10MW or higher capacity would have had to obtain a permit from the PUC for interconnection to a transmission facility and pay annual environmental impact fees. This would also have applied to any existing and interconnected renewable generation facility that wants to increase generation by 5 MW or more or change placement of the facility. Further, SB624 would have required solar and wind power facilities to be placed at a minimum distance from property lines and habitable structures (3,000 ft from property line in the case of wind and 100 ft from any property line in the case of solar). Both requirements would have been out of line with Texas’s historically unregulated approach to property ownership and development.

SB6
Senate Bill 6 (SB6) proposed a Texas Energy Insurance Program, which would use state funds or electricity customer payments to incentivize development of up to 10 gigawatts of “reliability assets,” including gas-fueled generation assets with on-site fuel storage facilities, that could be dispatched on-demand in the event of an emergency (and sit idle otherwise). The Senate Finance Committee set aside $10 billion to build the proposed plants, but critics believed that it would cost billions more.

SB7
Senate Bill 7 (SB7) proposed allocation of ancillary services costs among dispatchable generation facilities, non-dispatchable generation facilities and load-serving entities in proportion to their contribution to unreliability during peak load hours. This would have effectively shifted the costs in the ancillary services market so that non-dispatchable resources, like wind and solar, would be paying more for those services. Additionally, SB7 specified that the credits obtainable by certain electricity generators were only available to dispatchable generation (excluding load resources and electric energy storage).

SB2015
Senate Bill 2015 (SB2015) proposed a goal for 50% of the “megawatts of generating capacity” installed in ERCOT to be sourced from dispatchable generation starting in 2024. This would mean that at least 50% of generation capacity could not be provided by renewables whose output is controlled largely by forces outside of human control. Additionally, SB2015 established a dispatchable generation credits trading program, requiring any power generation company, municipally owned utility, or electric cooperative that does not supply dispatchable generation, to purchase credits to support dispatchable generation.

SB1287
Senate Bill 1287 (SB1287) would have adjusted the allocation of ERCOT grid interconnection costs by having a limit on how much electricity consumers would pay for such service. Above the limit, the remainder of the costs would be on the power generators.

Part III: Future Outlook
The 88^th regular session of the Texas Legislature was very active in considering matters related to the energy industry, and in many ways constituted an unpredictable break with prior Texas policies. To date, the generally light regulatory environment in Texas has been credited with the rapid development of renewables in Texas. The bills that made it to the Governor’s office during the latest regular session—and even more so those that did not—were not generally reflective of the clean energy powerhouse that Texas has become or the Lone Star State’s otherwise conservative energy market approach. The effects of these bills on the energy transition in Texas (including increased costs for the renewables industry) remain to be seen, although developers likely feel somewhat reassured by the fact that more moderate versions of bills aimed at strengthening the Texas grid were generally the ones passed by the Texas Legislature. Texas lawmakers are having to strike a delicate balance between grid reliability, clean energy goals and the continued importance and contributions of the traditional oil and gas sectors to energy security and economy in Texas and globally.

Texas has a biennial legislature schedule, so that the next regular session is not scheduled until January 14, 2025. The Governor, however, can convene special sessions and only the Governor can set the agenda for any given special session. There is no limit on the number of special sessions the Governor may call, and each special session may cover numerous subjects identified in the proclamation calling for the special session. The Governor has already called special session number one on May 29, 2023, to focus on property taxes and border security, and there are indications that additional special sessions may be called over this summer.

Notwithstanding the fact that certain headwinds have been introduced by the political climate, Texas has been leading the nation in solar and wind capacity growth and is expected to become a leader in energy battery storage. The U.S. Energy Information Administration (EIA) reports that in 2023 (a) the most new solar capacity of any state will, by far, be in Texas (7.7 GW), (b) the most wind capacity will be added in Texas (2 GW) and (c) around 71% of the new battery storage capacity will be in Texas and California. A large number of solar projects in the Texas grid interconnection queue in 2022 were coupled with battery energy storage (according to preliminary data from Lawrence Berkley National Laboratory) and it is possible that the enacted bills may in fact boost battery energy storage in Texas. According to S&P, ERCOT is anticipated to offer “relatively healthy battery storage economics.” Overall, there are significant renewable and nontraditional energy projects growth plans in the state. Further, federal support for the renewables and non-traditional energy projects remains strong. The Inflation Reduction Act of 2022 (IRA) has been a game changer for renewables, battery storage and non-traditional energy projects. According to S&P Global Market Intelligence, many companies are planning renewable projects in geographies eligible for 10% tax credits adders under the IRA’s energy community special rule, with Texas being the number one state for seven of the top 10 companies (as measured by planned renewable capacity in identified energy communities). S&P also reports that “overall, 88 GW of currently planned renewable energy capacity is to be sited in qualifying Texas energy communities—roughly 71% of the state’s onshore renewable energy pipeline.”

When it comes to energy resources in the energy transition, it has become evident that the emphasis should be on the “and,” not the “or."

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