With energy price dropping, LCRA mulls withdrawal of wind contract

The price of wind power is now half the 2009 rate the utility locked into place. That has left the LCRA, which sells wholesale power to dozens of Central Texas communities, mulling a costly, fraught escape from the contract. In papers filed in federal court in late August, the LCRA is asking for an arbitrator to confirm that it would be penalized no more than $60 million should it break the contract.

When the Lower Colorado River Authority agreed six years ago to purchase wind power from a Corpus Christi area wind farm, the nonprofit utility’s general manager called it “a good business deal for our customers.”

But what looked like a good deal then has less shimmer today: The price of wind power is now half the 2009 rate the utility locked into place. That has left the LCRA, which sells wholesale power to dozens of Central Texas communities, mulling a costly, fraught escape from the contract.

In papers filed in federal court in late August, the LCRA is asking for an arbitrator to confirm that it would be penalized no more than $60 million should it break the contract. But an official with Germany-based E.ON, the company that built the wind farm and now owns half of it, says the river authority is misinterpreting language in the contract and ought to be on the hook for at least $300 million if it backs out of the long-term deal.

“If they get away with this, it will create a chilling effect for investors and severely limit the choices available to LCRA and its customers in the future,” said Patrick Woodson, chairman for North American wind at E.ON Climate and Renewables.

The move is unusual, say experts, but the LCRA says it is exploring a possible dollars-and-cents business decision.

“LCRA’s new management team is doing everything it can to reduce costs to LCRA’s customers,” General Manager Phil Wilson said.

Last year, the LCRA shelled out a little over $40 million to buy 653,000 megawatt-hours of wind power from the E.ON wind farm.

If it could pay no more than $60 million to get out of the current rate, the LCRA could save tens of millions of dollars, given that the contract obligates the LCRA for at least a decade more.

E.ON says such a calculated breach of contract would roil the prospects of other renewable energy projects and raise questions about the trustworthiness of a utility established by the state. And, the company points out, LCRA officials cried foul when some of its electric customers bolted over the past couple of years over rate disputes.

Originally seeking to expand its wind holdings as a hedge against uncertainty in the fossil fuel market — a new U.S. president was proposing carbon regulation that could increase conventional energy costs — the river authority in 2009 signed an 18-year agreement to purchase power from the 200-megawatt second phase of the Papalote Creek Wind Farm, about 30 miles north of Corpus Christi.

Eighty-seven turbines were rapidly erected, generating enough electricity to power as many as 70,000 homes during periods of the year — and by November 2010, the project was complete.

Unlike wind farms in West Texas, Papalote Creek’s location on the Gulf Coast provides more wind power during late afternoon when power demand is at its highest.

To date, the LCRA has paid over $184 million to Papalote at the rate of $64.75 a megawatt-hour since the agreement was signed, according to the contract and the court filing.

But the price of wind dropped, following a dive in natural gas prices and the innovation of yet-bigger, more efficient turbines: According to a September 2014 report by financial management firm Lazard, wholesale wind costs $37 per megawatt-hour; some reports have that now under $30.

“Prices have fallen way off,” said Rod Wetsel, a Sweetwater attorney who represents landowners in wind power contracts and the co-author of “Texas Wind Law.” Some contracts were even higher in 2009, he said.

But trying to rework the massive wind power contract is entering into shaky territory, according to experts not involved in the dispute.

Becky Diffen, who handles wind power transactions at Vinson & Elkins and is also a co-author of “Texas Wind Law,” said wind projects are capital intensive — the fuel is free — making locked-in pricing over a long term crucial for the financing and construction of wind projects.

The locked-in rate is “probably the first thing any potential investor would look at,” she said. “We know the project is going to be able to sell its power and it’s going to be able to get this amount for its power.”

On the flip side, she said, the long-term purchase agreements are also meant to provide protection for utilities or other buyers, because they know what they’re going to be paying for power in the long term.

“It’s a hedge against what might happen in the gas market,” which is much more volatile, she said.

E.ON’s Woodson said that “trying to renegotiate this deal after five years creates real harm to the project landowners and the investors. We can’t go back in time and rebuy turbines or change our economics.”

The other owner of the wind farm is a Danish pension company, Woodson said.

In its petition in federal court, the LCRA points to a contract clause that says: “Buyer’s damages for failure to perform its material obligations under this Agreement shall likewise be limited in the aggregate to sixty million dollars ($60,000,000).”

Woodson said that clause pertains only to pre-construction disputes.

“We basically went through a public process and were induced to build this project,” he said. “We honored our commitments, and want them to honor their commitments.”

He said the wind farm has added hundreds of millions of dollars to the county tax base and changing the contract will jeopardize the royalties some landowners depend upon.

Patricia Carver, who lives in the small town of Taft, said royalty money from two turbines on land belonging to her 92-year-old mother pays about $36,000 a year, or enough to cover her mother’s housing, utilities and food.

The wind power would, in likelihood, be sold to another buyer, but at current market rates the landowners, whose royalties are generally a percentage of revenues, would get less money.

“This is not only affecting large energy companies, it affects little ordinary people, too,” Carver said.

Carver’s husband, a former longtime board member at the largely rural local school district, said the district has in recent years remodeled a high school and athletic facilities — investments it calculated would be covered by wind contract royalties.

“If the income from the wind farm goes down because of some renegotiation on a contract that was agreed on at that time, every taxpayer (in the district) will have to pay for that,” Johnny Carver said.

Power broker

The LCRA is the chief wholesale electricity provider to wide swaths of Central Texas. Among its customers are Bluebonnet Electric Cooperative, Pedernales Electric Cooperative and the cities of Bastrop, Brenham, Burnet, Fredericksburg, La Grange, San Marcos and Smithville.

In 2014, about 55 percent of LCRA’s power was generated from coal, 39 percent from natural gas and 6 percent from hydroelectricity and wind energy.


SEP 28 2015
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