Texas Passes New Funds to Support Power and Water Developments

In 2023, Texas passed two pieces of legislation designed to address concerns about the Texas water supply and the reliability of the state’s electric grid. These bills would establish the Texas Water Fund and the Texas Energy Fund to provide state support for water and generation projects. Both measures required constitutional amendments, which passed on November 7 as Proposition 6 (water) and Proposition 7 (dispatchable generation).

Proposition 6 and the Texas Water Fund

Proposition 6 calls for $1 billion to be appropriated to the Texas Water Fund. The fund will be administered by the Texas Water Development Board (TWDB), which may direct the money to any number of these programs: New Water Supply for Texas Fund (which will receive $250 million); the State Water Implementation Fund for Texas (and its supporting State Water Implementation Revenue Fund for Texas); the Clean Water or Drinking Water State Revolving Funds; the Rural Water Assistance Fund; the statewide water public awareness account; the Texas Water Development Fund II financial assistance program; and the Texas Water Development Fund II state participation account. In particular, the New Water Supply Fund is authorized to support public-private partnerships, which may serve an increasing role as a solution to the issues facing the global freshwater supply according to a book by Stanford Law Professor and O’Melveny attorney Barton H. Thompson, Jr. titled Liquid Asset: How Business and Government Can Partner to Solve the Freshwater Crisis.

The programs—and the funds earmarked for them—are aimed to develop water supply projects including desalination, water treatment, aquifer storage, and recovery and transport infrastructure, as well as low-cost financing for water projects in low-income and rural areas. TWDB has already started seeking public input to expedite the implementation of the Water Fund.

A surging population, global climate change, and aging infrastructure have led to global concerns about the availability of freshwater, as highlighted in Professor Thompson’s book Liquid Asset. According to the 2022 Texas State Water Plan, the estimate to meet projected water supply demands in the state through 2070 is $80 billion. Texas legislators acknowledged the need to stabilize Texas’ water supply —this concern is what fueled the effort behind the Texas Water Fund, which will be financed by an existing government surplus. Texas reflects only a component of the recognized water infrastructure shortfall in the United States, which exceeds $1 trillion. Experts across the country have recognized the need for not only additional public funding sources, but public-private partnerships that can effectively leverage available public financing dollars. Efforts like the Texas Water Fund provide opportunities for advancing such partnerships.

Proposition 7 and the Texas Energy Fund

Since Winter Storm Uri, policymakers have been increasingly focused on grid reliability and have expressed concern that intermittent generation sources, such as wind and solar, are effectively “crowding out” new investment in dispatchable generation. Legislators have been concerned about the ability to meet Texas’ growing energy demand during times of lower renewable output without additional dispatchable generation. In response, the legislature devised the Texas Energy Fund to provide low-cost financing and grants for investment in new dispatchable facilities and to support upgrades to utility-owned facilities outside of ERCOT. As compared to other proposals that would have increased consumers’ electric bills to subsidize existing and new dispatchable generation, the Texas Energy fund is a targeted solution to elicit new investment without raising customers’ costs.

Proposition 7 implements the Texas Energy Fund, which comprises three components: (1) up to $7.2 billion for low-interest loans and completion grants to be used exclusively for new dispatchable generation projects in ERCOT; (2) up to $1 billion for grants to modernize, weatherize, and enhance transmission and distribution infrastructure and electric generation facilities outside of ERCOT; and (3) up to $1.8 billion for Texas Backup Power Packages, which are backup generators and micro-grids that can provide power to key facilities during emergencies.

This is all new for Texas. The Public Utility Commission will be responsible for implementing a process to award the funds—something it has never done before. At the recent UT Gas & Power Institute held in Houston, Commissioner Jimmy Glotfelty noted that the agency will need to acquire or contract for additional expertise to administer the fund. The Commission currently plans to outsource some of this responsibility to a third-party contractor, who will be engaged in the next couple of months. There are a number of remaining questions that need to be answered in order for funding to begin. The Commission will first need to adopt rules to define which projects are eligible and how the awards will be prioritized. The Commission has previously taken comments from the public on these issues but has not released final rules.

The Commission will begin accepting loan applications for facilities to be developed in ERCOT on June 1, 2024, and must make initial disbursements by December 31, 2025. To be eligible, a project must add at least 100 MW to the ERCOT grid and cannot be a battery storage facility or a facility that is “primarily” dedicated to an industrial user. The loans will have a 20-year term at a 3% interest rate, which is attractive compared to prevailing market offers, and will be repaid ratably beginning in year 3 of a facility’s operation. New dispatchable generation that is in service before June 1, 2029, may also receive a completion bonus. The program is set to expire on September 1, 2050.

About O’Melveny

The water and energy teams at O’Melveny are happy to discuss projects that our law firm has worked on in recent years taking advantage of programs like the Texas Water Fund and the Texas Energy Fund and how we envision investors and businesses can access such programs to facilitate new projects in the years to come. We have deep expertise across our firm and in Texas about such projects and investments.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Monica Hwang, an O'Melveny partner licensed to practice law in Texas, Jason Schumacher, an O'Melveny partner licensed to practice law in Texas, Katie Coleman, an O'Melveny partner licensed to practice law in Texas and New Mexico, Phillip Oldham, an O'Melveny partner licensed to practice law in Texas and New Mexico, Buzz Thompson, an O'Melveny of counsel licensed to practice law in California, Matt Kline, an O'Melveny partner licensed to practice law in California, Heather Welles, an O'Melveny counsel licensed to practice law in California, Connor Corbitt, an O'Melveny associate licensed to practice law in Texas, and John Russ Hubbard, an O'Melveny associate licensed to practice law in Texas, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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