US federal foreign investment review does not guarantee access to the Texas grid—Texas is free to add its own foreign ownership restrictions beyond those applied at the federal level. On October 16, 2026, the US Court of Appeals for the Fifth Circuit affirmed a district court’s dismissal of a developer’s challenge to the denial of its request to interconnect a solar energy project to the Electric Reliability Council of Texas (ERCOT) grid. The court found that the Committee on Foreign Investment in the United States (CFIUS)—the interagency committee that screens foreign-facing financial transactions for national security and strategic risks—does not preempt the Lone Star Infrastructure Protection Act of 2021 (LSIPA).
For developers, utilities, suppliers, and investors, the decision underscores a separate project-development risk: federal CFIUS clearance (or a determination that clearance is unnecessary) may not be the last word on foreign ownership in the energy sector. At least in the Fifth Circuit, states may layer their own foreign-entity requirements on top of federal review, so long as those requirements do not conflict with federal law. A state grid-access restriction like LSIPA can survive a CFIUS preemption challenge.
Why Federal Review Did Not Secure Grid Access
LSIPA bars a governmental entity or critical infrastructure-related business from entering into a contractual arrangement that would give a company “owned or controlled by” or headquartered in China, Iran, North Korea, Russia, or a country designated by the governor of Texas direct or remote access to or control of the state’s critical infrastructure, which includes the Texas electric grid managed by ERCOT. Texas law also expressly requires businesses to attest to LSIPA compliance before ERCOT may register or interconnect them.
In 2023, the Texas Legislature strengthened LSIPA, directing ERCOT not to register or provide interconnections to a business entity unless the business entity attests that it complies with LSIPA. A later enactment, effective in 2025, ratcheted up enforcement measures by granting ERCOT, the Texas attorney general, and the Public Utility Commission of Texas authority to investigate and enforce LSIPA compliance.
The plaintiff was an energy project developer and Texas limited liability company—but a subsidiary of a Chinese-owned parent. The developer was formed in 2018 to develop renewable energy projects. Its ERCOT interconnection requests, including for its Blue Star solar project, were already pending when LSIPA took effect in 2021.
In October 2022, ERCOT canceled the Blue Star interconnection application as noncompliant with LSIPA, and it separately denied the developer’s request to pursue a screening study. The developer, which alleged that the interconnection denial caused it to sell two other renewable projects at a substantial loss, sued ERCOT’s assistant general counsel, ERCOT, and others, but it later dropped ERCOT and its damages request and kept only an official-capacity claim against the ERCOT counsel. On appeal, the developer pursued only its claim that the federal CFIUS regime preempts (and therefore precludes) LSIPA, but that argument did not prevail.
The Fifth Circuit’s Decision
The court rejected both conflict and field preemption theories raised by the developer. First, the court noted that regulation of an intrastate electric grid is a core state regulatory function, which triggers a heightened presumption against preemption that a challenger must clear a “high threshold” to overcome. The court accepted Texas’s framing of the state statute as a utility-security measure governing access to a state grid, rather than the developer’s characterization of it as a foreign-investment gatekeeping regime (although the court acknowledged that the outcome would not differ even under the developer’s framing).
Second, the court framed CFIUS review as covering a specific, narrow class of transactions, including mergers, acquisitions, and takeovers that could result in foreign control, not every transaction that might involve a foreign party. LSIPA, the court reasoned, targets a different class of transactions—energy grid interconnections rather than foreign investment per se—and so “does not intersect with any focus of CFIUS.” It posed no “clear obstacle” to the federal scheme and did not conflict with CFIUS’s purposes.
Finally, the court rejected the field preemption argument, agreeing with the district court that nothing in the CFIUS statutes suggests an intent to create a pervasive federal regulatory regime. Ultimately, the court held that Texas has a “free lane” to enact and enforce LSIPA.
Federal Restrictions on Foreign Grid Equipment Are Emerging in Parallel
The ruling arrives as federal restrictions on foreign-owned grid assets have increased. Executive Order No. 14421, issued in August 2026, addresses the Bulk Power System and directs the US Department of Energy (DOE) to prohibit or condition the acquisition, importation, transfer, or installation of certain foreign-produced electricity equipment, with implementation rules, as needed, due in December.
The Federal Communications Commission (FCC) has also added foreign-produced power inverters to its Covered List under the Secure and Trusted Communications Networks Act, meaning covered models cannot receive FCC equipment authorization. Without that authorization, covered models cannot be sold, imported, or marketed in the United States. Texas projects will ultimately need to satisfy both LSIPA and these federal requirements, which do not define covered equipment in the same way, so companies face overlapping regimes and near-term regulatory uncertainty until rules are finalized.
The Decision’s Reach Could Be Limited and Is Unsettled Beyond the Fifth Circuit
The Fifth Circuit’s decision is binding only in Texas, Louisiana, and Mississippi, and LSIPA itself applies only to Texas. The outcome in the case, therefore, reflects a particular application of preemption doctrine, LSIPA’s specific statutory language, and the unique nature of Texas’s state-managed grid system and thus may have limited application in other jurisdictions. Results elsewhere are mixed. The Fifth Circuit itself relied on a 2025 Eleventh Circuit decision rejecting a nearly identical field-preemption challenge to Florida’s restrictions on land ownership by certain aliens, including those from China.
In contrast, on December 9, 2024, a federal district court in Arkansas issued a preliminary injunction in Jones Eagle LLC v. Ward (E.D. Ark.), finding that federal law likely preempts the state’s foreign-ownership laws; the Eighth Circuit heard argument in that appeal (No. 25-1047) on January 14, 2026 and has not yet ruled.
Moreover, the decision did not address equal protection, dormant Commerce Clause, or dormant foreign-affairs arguments. The developer dropped its dormant Commerce Clause claim when it amended its complaint in the district court, and it did not appeal the district court’s dismissal of its national-origin equal protection claim or its rejection of dormant foreign-affairs preemption. Thus, a different statute, context, or set of transactions, particularly outside the Fifth Circuit, could produce a different result. However, the explicit finding that CFIUS does not create field preemption is broad and could be determinative for various similar challenges, at least in the same circuit.
Implications for Energy Companies and Market Participants
The decision makes early coordination between energy regulatory and foreign-investment diligence particularly important. For developers, utilities, suppliers, and investors active in Texas, federal and state compliance should now be treated as separate inquiries, as CFIUS compliance does not eliminate the need to comply with LSIPA.
ERCOT’s denial of the developer’s interconnection request, moreover, came only after the developer’s affiliates had bought thousands of acres of land through Texas limited liability company subsidiaries and the developer had invested in wind and solar resources and grid-connection consulting studies, underscoring that the time to identify a problem is before capital is committed, not after. The steps below draw on the Texas experience but may apply more broadly as federal and state foreign-ownership rules expand:
- Diligence ownership and supply chain risks before filing, committing capital, or purchasing. Assess company ownership against applicable state and federal statutes and review internal supply chain requirements to determine whether suppliers or their owners have ties to CFIUS-covered countries. Conducting these checks early can help ensure materials comply with applicable restrictions and avoid construction or transaction delays.
- Update engineering, procurement, and construction (EPC) contracts, with counsel, to require suppliers to confirm ownership, cooperate with regulatory inquiries, and allocate costs if a future regulation affects preordered equipment. Related provisions on termination rights, schedule extensions, lender or tax-equity consent, and mitigation obligations may also warrant review.
- Track forthcoming developments. December 24, 2026 is the deadline for DOE to issue implementation rules, as needed, concerning Executive Order 14421. In addition, ERCOT has requested the Texas Legislature to require large computational loads to comply with LSIPA, so data centers with on-site batteries, backup power, or co-located generation should review their equipment and vendor relationships now rather than after any rules go into effect.
The clear trend is that federal CFIUS clearance is no longer the last word. Companies that treat ownership and supply chain diligence as a routine part of every equipment purchase and transaction, rather than a one-time certification, will be better positioned to avoid delays, stranded costs, and failed transactions.
Law clerk Stefan Petrovic contributed to this blog post.
How We Can Help
Our team advises developers, utilities, and investors on energy regulatory requirements, supply chain compliance, and foreign-investment and transaction structuring. We will continue to monitor developments in these areas.