Energy / 3 min read
On November 7, 2023, Texas voters approved Proposition 7, a constitutional amendment implemented by Senate Bill 2627, to establish the Texas Energy Fund (TEF). The TEF is designed to provide statewide support for energy generation projects in partnership with eligible private entities and will be administered by the Public Utility Commission of Texas (PUCT), providing loans and grants to advance the purposes of the TEF.
Developers of traditional dispatchable energy generation are struggling to compete with renewables on a cost-per-kilowatt basis. Low-cost loans from the TEF are designed to bolster historically proven reliable sources of energy generation and will provide opportunities for companies to access capital and to procure projects from PUCT.
Proposition 7 requires that PUCT allocate money to eligible projects in each region of Texas that contain an electric power grid in proportion to that region's load share, and the expectation of this constitutional amendment is that it will galvanize investment to both sustain and enhance sources of energy production which have proven dependable in severe weather events.
In response to Winter Storm Uri, in February 2021, Texas policymakers prioritized ensuring grid reliability. To prevent another catastrophic grid failure, legislators have focused on incentivizing investment for the construction and modernization of traditional dispatchable energy generating facilities which can be activated during times of weak renewable output.
The TEF will provide low-cost financing to subsidize existing and new dispatchable energy generation, as well as to upgrade utility-owned facilities outside the jurisdiction of the Electric Reliability Council of Texas (ERCOT). The TEF will use existing state funds to stimulate new investment, with the added benefit that Texas consumers' energy bills will not rise as a result of Proposition 7's enactment.
As detailed by PUCT, there are three components to Proposition 7's implementation:
(1) Inside the ERCOT Power Region:
Entities may apply for a loan to finance upgrades to existing generating facilities providing power to the ERCOT region or to finance the construction of new electric generating facilities within the ERCOT Region. To qualify, a project must result in a net increase of at least 100 megawatts of generation capacity for a single facility. Loans for new construction are only available for facilities added to ERCOT's Capacity, Demand, and Reserves (CDR) Report after June 1, 2023. PUCT will begin accepting ERCOT loan applications on June 1, 2024, and plans on making initial disbursements by December 31, 2025. There is a cap of $7.2 billion for low-interest loans and completion grants for new dispatchable generation projects within the jurisdiction of ERCOT. However, loan amounts cannot exceed 60% of the estimated project cost for the facility to be constructed. The loans will have a 20-year term at an appealing 3% interest rate.
(2) Outside the ERCOT Power Region:
Entities may apply for a grant to be used for transmission and distribution infrastructure or electric generating facilities in Texas outside the ERCOT Power Region. PUCT will award these grants, which are capped at $1 billion. The terms of these grants will vary between PUCT and the grant recipients.
(3) Texas Backup Power Packages:
Backup power package infrastructure, such as generators and microgrids that provide critical power sources in periods of crisis, are eligible for up to $1.8 billion in grants and loans combined, with individual grants capped at $500/KW of capacity. The terms of these grants and loans will vary between PUCT and the program recipients.
PUCT will be responsible for awarding TEF funds. However, because of its novelty in the State of Texas, PUCT is in the process of devising a procedure by which to award and disperse these funds. Having publicly stated that it will need to contract for additional expertise in administering the funds, PUCT plans to outsource some of this administrative function to a third-party contractor. The details of such an arrangement are predicted to be clearer by Q2 of 2024, when PUCT aims to formally adopt rules governing the loan and grant programs for ERCOT facilities.
These rules will address remaining uncertainties surrounding: (i) program eligibility criteria, (ii) application and fund disbursement processes, and (iii) and performance standards.
As the implementation procedures become clearer in the coming months of 2024, companies should be aware of the business opportunities that will be available from the Texas Energy Fund to construct and maintain energy generation infrastructure.
We will be assiduously monitoring these new rules and their further clarification to apprise our clients of the ways they can apply to participate in the projects that will be created by the passage of Proposition 7.