trending Market Intelligence /marketintelligence/en/news-insights/trending/BIteM12Ma_xF1SGOHe_mlA2 content esgSubNav
In This List

Court agrees to limit damages for cancellation of Texas wind power purchase deal

Podcast

Next in Tech | Episode 49: Carbon reduction in cloud

Blog

Using ESG Analysis to Support a Sustainable Future

Research

US utility commissioners: Who they are and how they impact regulation

Blog

Q&A: Datacenters: Energy Hogs or Sustainability Helpers?


Court agrees to limit damages for cancellation of Texas wind power purchase deal

The Lower Colorado River Authority must pay no more than $60 million in damages for exiting a power purchase agreement for output from the 201-MW Papalote Creek Wind Facility II in San Patricio County, Texas, a U.S. district court judge ruled.

Furthermore, the liquidated damages that the authority, or LCRA, has already paid for canceling the agreement will count towards the $60 million liability cap, Judge Sam Sparks with the U.S. District Court for the Western District of Texas said in an Aug. 26 order.

In 2009, LCRA entered into an agreement for Papalote to build an 87-turbine wind farm from which the authority would buy all the energy produced at a fixed price for 18 years. The deal stipulated that LCRA's damages for failing to perform its obligations under the agreement "shall ... be limited in the aggregate to sixty million dollars."

Half of the Papalote Creek II facility is owned by a subsidiary of E.ON SE, with the other half owned by a division of PensionDanmark Holding AS. The two companies also co-own the 180-MW Papalote Creek Wind Facility I also in San Patricio County.

After construction of the Papalote Creek II facility finished in 2010, LCRA upheld its end of the deal for several years but moved to cancel the agreement following a steep drop in energy prices in 2014 that it said made LCRA pay much more for power than it would at prevailing market wind energy prices. As of late August 2015, the authority said it had paid about $184 million for output from the Papalote Creek II plant, which E.ON SE said would leave LCRA on the hook for more than $300 million in plant development and construction costs if LCRA broke the contract.

LCRA eventually stopped taking power from the wind farm in October 2016 and asserted LCRA's aggregated liabilities should total no more than $60 million based on the language in the power purchase agreement. Papalote disagreed and refused LCRA's request for arbitration. A federal appeals court concluded the dispute was not arbitrable, prompting LCRA to file a separate lawsuit in the U.S. District Court for the Western District of Texas that sought a declaratory judgment capping its aggregated liabilities at $60 million.

Despite LCRA's decision to stop taking power from the plant, Papalote contended the authority had not yet failed to perform its material obligations under the deal because LCRA was making liquidated damage payments. Papalote, therefore, argued the liquidated damage payments already made should not count towards the $60 million liability cap because the damages were not payment for failure to perform.

But in his Aug. 26 ruling, Sparks sided with LCRA, saying the power purchase agreement was "unambiguous" that LCRA would owe no more than $60 million if it failed to perform its material obligations. Sparks also rejected Papalote's argument that the payments LCRA made after not taking power do not count as liquidated damages, as they were payments for failing to perform LCRA's material obligations to take electricity from the plant.

E.ON SE did not respond to questions about whether the company planned to appeal the ruling or potential other customers for the Papalote Creek II plant.

LCRA spokesperson Clara Tuma said the authority made its final payment to the Papalote Creek II Plant and satisfied the $60 million liability cap in June and that Judge Sparks "found that each party has fulfilled its obligations and has no further requirements under the contract."

Falling costs for wind power helped drive record U.S. wind energy capacity additions in 2018, although growth could slow in the coming years as a key federal wind energy production tax credit is set to expire after 2019. Large U.S. companies, however, could cushion the decline, with corporate renewable energy demand potentially reaching 85 GW by 2030, according to a recent report from Wood Mackenzie and the American Wind Energy Association.