Project developers and O&M contractors risk violating Texas law if they use equipment from China or supplied by Chinese-owned companies in projects that are connected to the power grid.

Some other countries and companies are also on the proscribed list.

The restrictions are in the Lone Star Infrastructure Protection Act (LSIPA).

The statute is administered by the Electric Reliability Council of Texas, Inc. (ERCOT). The rules are in a set of "nodal protocols."

LSIPA

LSIPA is a Texas state law that prohibits any business entity from entering into any agreement relating to “critical infrastructure,” such as the electrical grid, if two things are true. First, the agreement would grant the counterparty to the agreement “direct or remote access to or control of” the infrastructure. Second, the counterparty is owned or controlled by citizens of, or directly controlled by the government of, a designated country or is headquartered in such a country.

Access that is limited to product warranty and support services is exempted.

The designated countries by statute are China, Iran, North Korea and Russia. LSIPA allows the Texas governor to add other countries to the list.

The prohibited counterparties are called "designated companies." 

Owners of power plants, batteries and other grid-connected projects in ERCOT must exercise vigilance over time. Ownership of counterparties can change. The governor may add more companies or countries to the list. An equipment supplier or other counterparty to an agreement may not be a designated company when the arrangements are put in place, but that could change if the governor adds more countries or companies to the list.  

Financiers and anyone acquiring projects should undertake technical diligence to confirm whether any equipment has a remote or routable electronic mechanism that could allow direct or remote access to, or control over, the electric grid.

Nodal Protocols

The ERCOT nodal protocols are a set of requirements for ERCOT market participants. A market participant that does not comply with the protocols can be knocked off the grid until it has demonstrated compliance to ERCOT’s satisfaction.

Market participants cannot be citizens of, or companies owned by or headquartered in, a designated country. If a wholly- or majority-owned subsidiary or affiliate would not qualify, the market participant can still register if it certifies that the affected subsidiary or affiliate will not have direct or remote access to or control of ERCOT’s wide area network (WAN), market information system (MIS) or any data from such systems.

Market participants must certify their eligibility after doing reasonable diligence.

Each market participant must also file a Form S with ERCOT to report its purchases, leasing or receipt of critical electric grid equipment or services from designated countries or companies.

Failure to do so can lead to immediate suspension or termination of the market participant's registration or access to ERCOT systems.

Critical electric grid equipment is any equipment that supports, operates or otherwise makes contact with the ERCOT grid. All of the following will create issues if manufactured in a designated country or supplied by a designated company: equipment that is "accessible by means of routable connectivity that, as installed, can be used to gain remote access to" any ERCOT systems and that, "if destroyed, degraded, misused, or otherwise rendered unavailable would, within 15 minutes or less . . . adversely impact the reliable operation of" any ERCOT systems.

Services related to critical grid equipment are also considered critical and cannot come from designated countries or companies. They include software.

Reporting is required if any components of critical equipment or services come from designated countries or companies. This is where diligence is required. Market participants must attest to the accuracy of the information on Form S based on “actual knowledge or knowledge that the . . . Market Participant could have obtained through reasonable inquiry."

The components do not have to have been manufactured in a designated country or by a designated company. Resale by a designated company somewhere in the supply chain is enough to taint the components.

It is important to get suppliers to represent that no designated country or company was involved in the supply chain. That relieves the market participant of having to do more diligence unless there is “clearly evident, non-obscure information" that should have raised suspicion. A market participant can rely on a letter of attestation from the supplier (instead of a contractual representation) for equipment or services purchased before June 8, 2023.

In cases where components -- or the equipment or services themselves come from designated countries or companies -- the market participant must disclose this fact on Form S and describe how it will mitigate the associated risks.

Timing

Companies applying for market participant status in ERCOT must report all purchases of critical grid equipment or services in the last five years. Future such purchases must be reported within 180 days after purchase.

The timing of the purchase (before or after June 8, 2023) determines the level of care that the market participant must apply toward preventing designated countries or companies from gaining potentially harmful access to ERCOT systems. For purchases made before June 8, 2023, the market participant must take “reasonable and necessary actions to mitigate access to or control" by such persons.

For purchases made after June 8, 2023, the market participant must go further and attest that the purchase “will not result in access to or control" by such persons and describe what measures it is taking to ensure that remains the case.  

The bottom line is developers of power projects in Texas should perform technical diligence of proposed procurement of equipment to ensure compliance with LSIPA and the nodal protocols. They should ask for representations from equipment suppliers. They should also include robust contractual restrictions mirroring the LSIPA restrictions on grid access in their supply agreements.