Federal Actions Banning Foreign Grid Equipment Cause Uncertainty For Energy Infrastructure Projects

On August 26, President Trump signed an Executive Order declaring a national emergency and ordering the Secretary of Energy ("Secretary") to implement rules restricting the "acquisition, importation, transfer, or installation of foreign-produced bulk-power system electric equipment" ("Order"). Authority for the Order is based in the International Emergency Economic Powers Act ("IEEPA"). The Order sets forth concerns over certain foreign countries—particularly China—remotely accessing and exploiting vulnerabilities in the U.S. electric grid.

Under the Order, "bulk-power system" means transmission facilities rated at 69 kilovolts ("kV") or more. Restricted equipment includes, among other things, reactors, capacitors, substation transformers, utility-scale and other grid-connected inverters, battery energy storage systems and "any critical component, software, firmware, digital service, maintenance service, or remote-access capability associated with such equipment." Equipment falls within the scope of the Order only if it is "designed, developed, manufactured, or supplied by persons owned by, or subject to the jurisdiction or direction of" countries subject to a U.S. arms embargo or sanctions regime or otherwise "engaged in conduct that is detrimental to the national security or foreign policy of the United States."

The Secretary must finalize rules implementing the Order within 120 days. The Secretary has authority to prohibit equipment deemed to pose "an unacceptable risk to the national security." The rules may also include a list of pre-qualified equipment exempt from restrictions as well as a system for determining whether to license transactions that fall outside of the whitelist on a case-by-case basis. While the Order is forward-looking, it does give the Secretary authority to "isolate, monitor, secure, disconnect, replace, or remove" bulk-power system electric equipment acquired or installed prior to the issuance of the Order.

The Order injects substantial uncertainty for project developers and utilities pending issuance of the final rule. This uncertainty is exacerbated by a recent decision by the FCC to prohibit the certification, marketing, and sale in the U.S. of any new models of foreign-produced power inverters intended for use by electric utilities, albeit with certain exceptions. As a result of these two federal actions, purchases may need to be delayed to avoid large investments in equipment that may later be deemed prohibited by the Secretary or made obsolete by the FCC's prohibition on new replacement models. Longer term, the need to source equipment from a more limited, domestically-sourced pool may lead to even further extended timelines and significantly higher costs for sourcing critical components to electric infrastructure projects.