A Year Out: Renewable Energy Developer and Investor Compliance with the Texas Lone Star Infrastructure Protection Act | Husch Blackwell LLP

It has been almost a year since Texas’ Lone Star Infrastructure Protection Act (“LIPA”) was signed into law by Governor Abbott on June 18, 2021, and took effect. In the past year, we have seen developers, tax investors, and purchasers of renewable energy projects alike address compliance with LIPA in varied ways.

In this post, we aim to provide a refresher on LIPA, discuss why developers, owners, and investors of renewable energy projects should be concerned with LIPA, and recommend actions for incorporating LIPA-related provisions into renewable energy development transaction and project financing documents.

A. What is the Lone Star Infrastructure Protection Act?

LIPA amends Subtitle C, Title 5, of the Business and Commerce Code by adding a new Chapter 113 and adds a new Chapter 2274 to Subtitle F, Title 10, Government Code, both of which concern prohibitions on agreements/contracts with certain foreign-owned companies in connection with critical infrastructure.[1] LIPA prohibits a business entity from entering into an agreement relating to critical infrastructure in Texas with a company if (1) under the agreement, the company would be granted direct or remote access to or control of critical infrastructure in the state, excluding access specifically allowed by the business entity for product warranty and support purposes; and (2) the business entity knows that the company is (A) owned by, or the majority of stock or other ownership interest in the company is held or controlled by: (i) individuals who are citizens of China, Iran, North Korea, Russia, or a designated country; or (ii) a company or other entity, including a governmental entity, that is owned or controlled by citizens of or is directly controlled by the government of one of the countries in (i) above; or (B) headquartered in one of the countries in (i) above.[2] This prohibition also apply to contracts or other agreements relating to critical infrastructure in Texas with governmental entities.[3] LIPA expressly applies regardless of whether a company, or its parent company, is publicly traded or whether the company is listed on a public stock exchange as a Chinese, Iranian, North Korean, or Russian company, or a company of a designated country.[4]

LIPA defines “critical infrastructure” as a communication infrastructure system, cybersecurity system, electric grid, hazardous waste treatment system, or water treatment facility.[5] While “electric grid” is not defined in LIPA, it is commonly understood that this term includes the state’s electric power transmission network. Such interpretation is supported by guidance from the Texas Attorney General’s office on LIPA.[6]  Thus, the ERCOT grid falls within the definition of “critical infrastructure,” and every power generation project that interconnects with ERCOT must ensure it complies with LIPA.

Lest there be any doubt about the applicability of LIPA to renewable energy projects in the ERCOT market, the Texas Attorney General has issued at least one opinion providing specific guidance on the applicability of LIPA to both (1) interconnection agreements between a power generators and electric grid transmission system and (2) land lease agreements between a generation resources developer or transmission service provider and a landowner who is a citizen of, or a company owned by individuals who are citizens of, China, Iran, North Korea, Russia, or a designated country.[7] In short, the Texas Attorney General takes the position that both types of agreements are ones that “relate to” critical infrastructure in Texas and implicate LIPA.[8]

B. Why Developers and Investors in Renewable Energy Projects Should Care About LIPA

As discussed above, because the electrical grid falls within the definition of “critical infrastructure” under LIPA, projects hooking into the electric grid fall within the purview of LIPA. While LIPA currently does not contemplate fines or penalties for non-compliance or otherwise address enforcement mechanisms, developers of renewable energy projects in Texas should ensure their projects comply with LIPA and be prepared to certify to such in connection with project financing transactions. Increasingly, tax equity investors and debt financing parties for renewable energy projects are including in their due diligence analysis and transaction documents requests for certifications, representations and warranties, or other assurances that the landowners of land on which projects are sited comply with LIPA.

Even if not expressly addressed in investors’ due diligence analysis, a project’s compliance with LIPA will come up directly or indirectly. For example, while LIPA may not be specifically called out in a financing agreement, most financing agreements include certifications or representations that the project company is complying with all laws of the state where the project is located. Necessarily, as a Texas law, LIPA falls within this general statement of compliance.

All renewable energy project companies planning to engage in generation development within Texas should familiarize themselves with LIPA and how to document compliance with its terms.

C. Recommendations for Compliance with LIPA

Over the past year, we have seen compliance with LIPA come up at a variety of stages within a renewable project’s lifespan. The following are recommendations for renewable energy project developers and investors to incorporate provisions addressing compliance with LIPA into their project agreements and due diligence.

  • Site Control Agreements: Developers who are currently negotiating new land lease and easement agreements, should consider incorporating into the landowner’s representations and warranties a provision from the landowner stating that the landowner is not a foreign-owned landowner prohibited under LIPA. For existing land lease and easement agreements, it is not necessary to amend such agreements expressly or the purpose of including a landowner representation and warranty related to compliance with LIPA because this can be handled via other mechanisms. However, if an existing lease is in the process of being amended for other reasons, best practice would be to add the necessary provisions to the agreement amendment before execution.
  • Tax Equity Investor and Debt Financing Due Diligence: Tax equity investors and debt financing parties should consider including in their due diligence a question related to the ownership of the property on which a renewable energy project sits to confirm that there are no foreign-owned landowners prohibited under LIPA.
  • Landowner Estoppel Certificates: Any party requesting landowner estoppel certificates in connection with a renewable energy project should consider requesting that a certification be added to each landowner estoppel certificate that certifies that the project landowner is not a foreign-owned landowner prohibited under LIPA.
  • Representations and Warranties in Financing/Transaction Documents: Many project transaction agreements or financing agreements already include general certifications or representations and warranties addressing that a project is in compliance with the laws of state in which the project is sited. Generally speaking, this general language encompasses LIPA. Parties to these transactions can consider the possible benefits of including specific representations and warranties addressing compliance with LIPA in financing agreements and other transaction documents for renewable energy projects.

While the scope of this post focuses on the impact of LIPA on renewable energy project site control and financing or transaction documents, LIPA’s broad scope potentially impacts many other agreements related to the electric grid and other critical infrastructure in Texas.  For example, LIPA may be interpreted to relate to equipment purchased from a foreign-owned entity that can maintain some level of access and oversight to such equipment.

[1] Lone Star Infrastructure Protection Act, 87th Leg. R.S., Tex. S.B. 2116 (codified at Tex. Bus & Comm. Code §§ 113.001–.003, Tex. Gov. Code §§2274.0101–.0103).

[2] Tex. Bus. & Comm. Code § 113.002 (2022).

[3] Tex. Gov. Code § 2274.0102 (2022).

[4] Tex. Bus. & Comm. Code § 113.003.

[5] Id. § 113.001(2); Tex. Gov. Code § 2274.0101(2) (emphasis added).

[6] See Tex. Att’y Gen. Op. No. KP-0388 (2021) (discussing in Section I the applicability of LIPA to ERCOT).

[7] Id.

[8] Id.

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