Not everything is as big as it needs to be in Texas. Few Texans will soon forget the winter of 2021, with temperatures plunging as low as six degrees. The state’s electric power grid could not handle the increased demand for power. Rolling blackouts were initiated to prevent a complete failure of the system. Much of the state was without power in frigid temperatures for days.
The state legislature took action to reduce the risks of such events happening again. Below, the Texas energy lawyers at MehaffyWeber explain how the newly approved Texas Energy Fund will impact natural gas production in the Lone Star State.
Why Texas Might Have a Harder Time Meeting Its Electricity Needs
There are only three main electricity grids in the contiguous United States – the Eastern Interconnection, the Western Interconnection, and the Texas Interconnection. Unlike the other 47 states with interstate power connections to help maintain the reliability of the electricity supply, Texas is primarily reliant on its own interconnection, which covers 213 of the state’s 254 counties.
Winter Storm Uri made it very clear there was a need for greater electricity-generating capacity. In 2023, the Texas Legislature passed the Powering Texas Forward Act, creating the Texas Energy Fund (TEF) to encourage the construction, maintenance, modernization, and operation of facilities to generate more electricity. Texans then said yes to Proposition 7, amending the state’s constitution in support of the fund.
How The Texas Energy Fund Is To Be Used
The TEF was created to provide loans, grants, and other funding to encourage the development of electricity supply projects primarily in the region serviced by the Electric Reliability Council of Texas (ERCOT). ERCOT is the non-profit corporation responsible for managing about 90% of Texas’ electric power and serves more than 26 million customers.
ERCOT and Texas legislators were concerned about the ongoing threat of not having enough electricity to meet extreme demand conditions. The legislature decided what needed to be done was to increase the number of facilities generating electricity, make existing facilities more efficient, and create more capacity for energy storage.
Authority for the administration of the TEF is given to the Public Utility Commission of Texas (PUC). PUC may use the TEF loan and grant monies to fund no more than 10,000 additional megawatts of generation capacity. TEF programs have the following funding caps:
- $7.2 billion – loans and grants for facilities within ERCOT power region
- $1 billion – grants for facilities outside the ERCOT power region
- $1.8 billion – Texas backup power packages
TEF Loans
The PUC is authorized to make loans to dispatchable electric generating facilities (ones whose output is predominantly under human control) as long as the project results in a net increase of at least 100 megawatts of capacity for the ERCOT region. The loan amount is limited to 60% of the estimated cost of construction. The term of the loan is 20 years, and borrowers pay 3% interest. The repayment period will typically begin three years after project completion.
Borrowers will be required to place a deposit into an escrow account equal to 3% of the estimated cost of the project before loan proceeds will be disbursed. The PUC has the authority to release the escrow funds upon the timely completion of the project.
The PUC is to begin accepting loan applications no later than June 1, 2024. Loan applicants are to have been approved or denied no later than December 31, 2025, with initial loan proceeds paid by that date. TEF loans will not be available after September 1, 2050.
TEF Grants
Completion bonus grants may be given for the construction of dispatchable electric generating facilities. Electric energy storage facilities are not eligible for the grants. Grant applicants must have a generation capacity of at least 100 megawatts.
Grant amounts are limited by megawatts of capacity and project completion dates as follows:
- $120,000 per megawatt for projects interconnected to ERCOT by June 1, 2026
- $80,000 per megawatt for projects interconnected to ERCOT after June 1, 2026 and before June 1, 2029
Grant proceeds are to be distributed in equal annual payments over a 10-year period beginning one year after the facility begins commercial operations.
Texas Backup Power Packages
Texas backup power packages are stand-alone, off-the-grid, multi-day backup power sources. Backup power facilities eligible for TEF funds must be able to operate independently for 48 continuous hours. Grant amounts may not exceed $500 per kilowatt of capacity. Backup power packages that qualify for TEF funds are also entitled to expedited processing of permits and electric utility interconnection requests.
Why the Texas Energy Fund Is Focused on Natural Gas Production Instead of Renewables
Natural gas is the single largest source of power in the state. It is abundant and cost-effective to produce. If it were a country, Texas would be the third largest producer of natural gas in the world. One-third of the largest gas fields in the U.S. are in Texas, and the state has 25% of the country’s natural gas reserves. Although perhaps better known for oil and gas production, Texas also produces a lot of renewable energy, especially wind power. The Lone Star State’s commitment to renewable energy has made it the largest producer of renewables in the United States. However, wind and solar power are perceived to be unreliable during times of emergency. Conversely, fossil fuels were what could be counted on to provide electricity on demand as needed.
The Texas Energy Fund Will Fuel Natural Gas Production
Despite federal environmental regulations, Texas oil and gas production hit record levels in 2023 thanks in part to greater efficiency enabled by technology. Texas produced as much as 5.6 million barrels a day, helping the U.S. set a global production record of 13.3 million barrels per day. And record production is expected to continue over the next two years.
The TEF incentives for constructing natural gas-powered facilities to add electricity-generating capacity to the ERCOT region will serve to expand the use of fossil fuel-sourced energy at a time when oil and gas production is at record levels. Environmental considerations aside, it remains to be seen whether natural gas is the answer to keeping the lights on in Texas. To learn more about this and other actions affecting the energy industry, contact us to arrange a meeting today.