Key Takeaways for the Energy Industry from the 2023 Texas Legislative Session: What Passed and What Failed

Monday, May 29, 2023, marked the official end of the 88^th regular session of the Texas Legislature. It was an especially active session for the energy industry, which saw the passage of several bills that, if signed into law by Gov. Greg Abbott, will have significant and long-term impacts on the oil and gas, renewable energy and power sectors in Texas. Generally speaking, legislation in this area focused on enhancing the reliability of the ERCOT power region by favoring and incentivizing dispatchable power such as natural gas power plants more than non-dispatchable power such as wind and solar facilities. Businesses operating in these sectors should be aware of the recent legislative developments to best position themselves to take advantage of their benefits and ensure compliance with new requirements.

Laws Impacting the Oil and Gas Sector

Produced Water

New laws intended to update Texas’s water infrastructure and create new sources of water supply may also impact what happens with “produced water” — water generated through oil and gas production operations.

Together, Senate Bill 28 and Senate Joint Resolution 75 would establish the New Water Supply for Texas Fund, the Texas Water Fund, and the Statewide Water Public Awareness Account to be administered by the Texas Water Development Board (TWDB). 

If passed into law, the New Water Supply of Texas Fund would be used to finance projects that will lead to at least seven million acre-feet of new water supplies by December 31, 2033, (enough water to cover seven million acres of land to a depth of one foot). Loans made from the fund could provide for a repayment term of up to 30 years, at TWDB’s discretion. The Texas Water Fund will be used by TWDB for certain water initiatives, including for the water assistance fund, the New Water Supply for Texas Fund, the State Water Implementation Fund for Texas, a revolving fund for financial assistance for water pollution control, a rural water assistance fund, and the statewide water public awareness account.

According to Rep. Charles Perry (Lubbock-R), the author of Senate Bill 28 and Senate Joint Resolution 75, the primary goals of the funds are (1) to fix the state’s leaking and breaking water infrastructure and (2) accelerate new, large water supply projects, as stated in an article by the Texas Tribune. Perry, however, was also quoted in that same article as saying that the funds would benefit desalination projects for brackish and produced water. 

Based on the 2022 findings of a state-commissioned study group, the Texas Produced Water Consortium, oil and gas extraction in the Permian Basin of arid West Texas is expected to produce approximately 14 million barrels (or 588 million gallons) of wastewater per day for the next 38 years. Determining whether and how such enormous volumes of produced water can be recycled for other beneficial uses, rather than simply disposed of, is the subject of ongoing research with potentially significant importance to the public and the oil and gas industry in Texas.

Laws Impacting the Power Sector

Enhanced reliability of the ERCOT power region

Aimed at increasing the reliability of the ERCOT power region in Texas, Senate Bill 2627, or the Powering Texas Forward Act, creates a taxpayer-funded, low-interest loan program for up to $7.2 billion in upgrades or new construction of dispatchable electric generation facilities such as natural gas plants. To be eligible for a loan, upgrades to existing facilities or new construction must, in each case, result in a net increase of at least 100 megawatts to the ERCOT power region. Electric energy storage facilities are not eligible for loans under the new program. Loans under the bill may be issued at the discretion of the PUC based on various listed factors, including an aggregate cap on the program of 10,000 megawatts of generating capacity, and each loan must have a term of 20 years, be payable ratably starting three years after the estimated commercial operation date for the facility and bear an interest rate of 3%. The program also provides for “completion bonus grants” to be paid to companies that get qualifying new or upgraded plants connected to the grid by certain deadlines. Grant amounts will be disbursed to recipients in equal annual payments over 10 years and are based, among other factors, on megawatts of capacity provided to the ERCOT power region, not to exceed $120,000 per megawatt. The bill also includes caps on amount of the fund balance that can be expended at any given time.

Senate Bill 2627 is the enabling legislation for Senate Joint Resolution 93, which proposes a constitutional amendment providing for the creation of the Texas Energy Fund to support the construction, maintenance, modernization, and operation of electric generating facilities. 

Periodic rate adjustments up to twice per year for electric utilities’ distribution-related assets

Under the current version of the Texas Utilities Code, electric utilities may apply only once per year for rate adjustments based on the parts of the utility’s invested capital that are categorized as distribution plant, distribution-related intangible plant, and distribution-related communication equipment and networks.

Senate Bill 1015 changes that to allow for periodic rate adjustments up to twice per year and eliminates the restriction limiting such adjustments to no more than four times between comprehensive base-rate proceedings. The bill requires the PUC to enter a final order on a periodic rate adjustment request by 60 days after the request is filed, but the PUC could extend the deadline for up to 15 days for good cause.

The bill appears intended to mitigate large changes in customer charges by allowing for more frequent, incremental increases over time. Supporters also say the revisions make the process for distribution-related assets similar to the way utilities are already recovering costs for building transmission projects.

Opponents of the legislation argue, however, that it takes power away from cities that have original jurisdiction over electric utilities’ rates and will result in greater overall rate hikes. They also point out that the PUC’s shortened 60-day review period makes public participation — and rate increase challenges — more difficult.

Electric utilities will need to adjust their internal processes to take advantage of the new process for distribution-related, cost recovery proceedings, while challengers to rate increases sought by utilities in such proceedings will need to be prepared to act quickly.

Laws Impacting the Renewable Sector

Reformed tax break / economic development program trims subsidies and excludes renewable energy generation and energy storage facilities

For over 20 years, tax incentives for large-scale economic development projects — including multimillion- or multibillion-dollar energy manufacturing and infrastructure projects — have been subject to a program known as “Chapter 313” — so called because of its position in the Texas Tax Code.  The program worked by providing successful applicants a 10-year discount on local school district property taxes in exchange for investment in new businesses and job creation. In 2021, however, the Texas Legislature declined to extend Chapter 313, and the program officially expired on December 31, 2022. 

Proponents of Chapter 313 maintained that such corporate tax breaks were necessary to keep Texas competitive at attracting new businesses and high-quality jobs. The program’s critics, however, argued that it had become an excessive form of corporate welfare that took much-needed funding away from schools and other public welfare needs and, thus, either needed to be eliminated or substantially reformed.

After much debate, the Texas Legislature opted to reform Chapter 313. House Bill 5 was adopted on the last day of the legislative session as a replacement to Chapter 313. According to an article in the Houston Chronicle, the law “broadly mirrors” the corporate incentive program it replaces, but with key changes aimed at appeasing Chapter 313’s critics. For example, the new program subsidizes only half of a project’s maintenance and operations from school property taxes, rather than nearly the full amount, and it no longer allows companies to share their tax savings with the school districts that approve projects.

As defined in House Bill 5, projects eligible for a tax abatement agreement include a project (1) to construct or expand a new or existing facility that is (a) a manufacturing facility, (b) 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, (c) a facility related to the development of natural resources, or (d) a facility engaged in the research, development, or manufacture of high-tech equipment or technology; or (2) to construct or expand critical infrastructure. Clearly these categories cover a broad array of oil and gas facilities.

Notably, however, the definition of “eligible project” expressly excludes a project to construct or expand a new or existing nondispatchable electric generation facility, such as a wind power or solar power generation facility, or any electric energy storage facility. The exclusion of such renewable energy generation and storage facilities from the bill’s list of eligible projects represents a departure from the past. Supporters of that shift often cite the significant tax benefits that already exist at the federal level, such as the tax credits available under the Inflation Reduction Act of 2022. Others worry that the exclusion unfairly discriminates against a renewable energy industry that has historically prospered in Texas and resulted in the state’s position in the U.S. as the No. 1 producer of wind power and No. 2 producer of solar power.

Absent an unexpected veto by Gov. Abbott, House Bill 5 will take effect January 1, 2024. It will be important to monitor what impact the reformed tax break program will have on the future trajectory of energy development in Texas.

Energy Laws That Failed to Pass

In some ways, several failed energy bills that would have further impacted the overall balance between power generated from natural gas and power generated from renewable energy sources speak as loudly about the key policy debates happening right now in the Texas energy industry as those bills that passed. 

Wind and solar permitting scheme

Among the most controversial of these failed bills is Senate Bill 624, which if passed into law, would have had major impacts on existing and proposed wind and solar facilities in Texas, particularly for the financing and marketability of such projects.

Had it passed, the law would have required any new renewable energy generation facility with capacity of 10 megawatts or more to obtain a permit to operate from the PUC. In order to apply for a permit to operate, several items were required, including, among others, a copy of any information filed with the Federal Energy Regulatory Commission related to the facility, an environmental impact review conducted by the Texas Parks and Wildlife Department, and a copy of any wind power facility agreement or solar power facility agreement applicable to the facility (i.e., any leases authorizing the grantee to operate a wind power or solar power facility on the leased property). 

The bill was also retroactive. Renewable energy generation facilities that interconnected before September 1, 2023 would have had to apply for a permit if the facility increased the amount of electricity generated by 5 megawatts or more or materially changed the placement of the facility.

New setback requirements under the proposed law also would have required all solar power equipment to be located at least 100 feet from any property line and 200 feet from any habitable structure absent a waiver. For wind power facilities, all permitted equipment would have had to be located at least 3,000 feet from the property line of each property bordering the facility absent a waiver.

Some advocates of Senate Bill 624 saw the legislation as providing oversight of the renewable energy industry that is currently lacking in light of real or perceived impacts on wildlife and homeowners. Many others, however, criticized it as unduly onerous and disproportionate relative to traditional power generation sources such as coal, oil and natural gas. 

Purely voluntary renewable energy credit program

Senate Bill 2014 would have, among other things, made the existing renewable energy credit program under the Texas Utilities Code purely voluntary and likely would have resulted in reduced demand for renewable energy credits.

Group of bills aimed at incentivizing greater development of natural gas power plants in ERCOT

Aimed at addressing part of the devastating legacy and lessons of Winter Storm Uri, Senate Bill 2012, Senate Bill 6, Senate Bill 7, Senate Bill 1287, and Senate Bill 2015 focused on adding more dispatchable power to the Texas electric grid, mainly through natural gas power plants. 

The incentive program under Senate Bill 2012 would have provided up to $500 million annually in capacity credits for producers who built back-up megawatts of dispatchable power.  Senate Bill 6 would have called for the construction of power plants capable of producing up to 10 gigawatts of power intended to come online in cases of emergency. Senate Bill 7 would have established a complex performance credit mechanism, overseen by ERCOT, aimed at creating financial incentives for private development of energy generation resources that could come on within two hours and stay online for at least four hours, such as natural gas plants or batteries. Senate Bill 1287 would have required power generators in certain circumstances to pay for some of the transmission costs to connect to the grid. Overall, these bills—similar to Senate Bill 2627 that passed—would have provided more incentives to natural gas projects than renewable energy projects.

Republished with permission. This article, "Key Takeaways for the Energy Industry from the 2023 Texas Legislative Session: What Passed and What Failed"  was originally published by Bradley Arant Boult Cummings LLP on May 31, 2023, and republished by Texas Lawyer on June 2, 2023.