Petition for Review Filed in TXU v. FPL Curtailment Case
On April 11, 2011, FPL Energy, LLC, et al., filed with the Texas Supreme Court a petition for review of the Texas Court of Appeals’ decision FPL Energy, LLC, v. TXU Portfolio Management Company, L.P. The case illustrates the significant economic impact that curtailment can have on variable energy resources. For a detailed description of the case and its implications, see our Renewable + Law Blog entry on the Court of Appeals’ decision here.
The petition for review focuses on the question of whether the Court of Appeals was correct in enforcing the liquidated damages provisions contained in three wind energy power purchase agreements. The pertinent provisions in each PPA required the petitioners to pay $50 for every MWh that the plants fell short of achieving the their minimum REC output guarantees—the Court of Appeals’ holding meant that the petitioners owed TXU roughly $29 million in shortfall damages for a four year period of curtailment imposed by the transmission provider (ERCOT), on top of the pain of losing the contract price and the production tax credit on each MWh of energy curtailed.
Petitioners argue that the Court of Appeals should have held the liquidated damages clause to be unenforceable, as the trial court did, because (1) the $50/MWh liquidated damages amount was based on a regulatory penalty for a renewable energy credit (REC) shortfall that was never imposed on TXU or its assignee, and (2) the $50/MWh sum “exceeds any conceivable damage” actually suffered by the buyer.
The petitioners also argue that the Court of Appeals’ reasonableness determination was based on a comparison of $50/MWh to the bundled market price per MWh (energy plus RECs), rather than the market price for RECs alone. According to petitioners, TXU’s cost to cover the REC shortfall was in the range of $4 to $14 per MWh, not $50, and TXU was able to cover the energy shortfall with coal-fired electricity at $12 to $13 per MWh vs. the $24/MWh price in the PPAs. By giving TXU a windfall, say petitioners, the Court of Appeal’s holding violates the principle of “just compensation.”
I’m sympathetic to the arguments that FPL is making on liquidated damages, but I won’t speculate about how the Texas Supreme Court will finally rule. The case does, however, show that liquidated damages clauses should be handled with care in any negotiation, especially around PPAs. The basic rule is that a provision that sets unreasonably large liquidated damages is unenforceable as a penalty. PPAs with hard-wired liquidated damages amounts (e.g,, $x per MWh regardless of actual market conditions) may be subject to scrutiny and ultimately may not be enforced, especially if a court concludes that the resulting damages look like a penalty. Liquidated damages provisions that use cost-to-cover tied to a market index are much less likely to draw the unwanted attention of a court or arbitrator, since the link to the market will cause the liquidated damages to appear reasonable relative to market conditions.
The petition also challenges the Court of Appeals ruling that TXU only had an obligation to provide transmission services sufficient to accept and transmit the “Net Energy” of the three plants (i.e., the energy that hit the busbar after ERCOT’s curtailments were imposed). The argument seems to be that because TXU was responsible for “purchasing or arranging all services, including without limitation Transmission Services, . . .necessary to deliver Net Energy to TXU Electric’s load from the Renewable Resource Facility throughout the Contract Term,” it had a duty to do whatever it took to obtain transmission services sufficient to take everything the three plants could generate regardless of congestion—even if that meant arranging and paying for substantial improvements to the transmission system to eliminate the congestion problem.
Our litigators tell me that, as a general matter, if you are going to place a multi-million dollar obligation on a party to a contract, you should be really explicit about it, and that’s a good lesson to apply generally in negotiating PPAs. A fair reading of Section 2.03 is that it required TXU to obtain whatever transmission service was offered on the transmission system to take away whatever the plant was able to generation after taking into account ERCOT curtailments, but not—without a very clear obligation in the PPA—that it was obliged to build transmission or pay for curtailments if it didn’t. Of course, that’s just my opinion from afar, and the Texas Supreme Court might take a different view after a careful review of the record.
We’ll continue to monitor the TXU v. FPL appeal and will report on the Texas Supreme Court’s final decision when it is handed down.
A Unique RFP for Energy Storage
Santa Fe-based Chamisa Energy Corporation recently announced a request for proposals for up to 250MW of nameplate wind generation resources to be used to provide energy to a 135 MW or larger compressed air energy storage (CAES) facility under development in Swisher County in the Texas panhandle. The proposed CAES facility would compress air and store it in solution-mined underground caverns. To convert the stored potential energy back into electricity, the stored air would be released and mixed with a small amount of natural gas to drive a turbine. The RFP describes CAES as a "bulk electric storage technology used to complement wind energy generation so that wind energy becomes a fully dispatchable resource suitable for peaking, intermediate, baseload or tolling resource."
The energy would be provided to the facility pursuant to a power purchase agreement (PPA). Chamisa invites wind plants located either in the Southwest Power Power (SPP) or the Electric Reliability Council of Texas (ERCOT) to respond. Chamisa will consider proposals that supply wind energy for seven years, but prefers a minimum term of 15 years. The target date for delivering electricity to the Storage Facility is the second quarter of 2014.
Chamisa notes that it is not aware of completed or pending PPAs between WGR and CAES facilities, and thus anticipates that the successful proposal "will be creative in its approach to the RFP." Although the RFP isn't explicit on the point, Chamisa's plan may be to purchase energy from a wind generator or wind generators pursuant to the PPA, store the energy, and then sell the electricity and ancillary services from the facility to a third-party off-taker. If Chamisa can take the bulk of the energy into CAES primarily in off peak hours and then sell the stored energy during on-peak hours, might in theory be able to profit on the arbitrage between the two price points, although past efforts to get grid-scale storage to pencil out on that basis have had limited success. Alternatively, the facility may be able to profit by using the stored energy to provide ancillary services, grid congestion relief, grid stability and support for grid expansion.
In principle, the CAES facility could also be used in a tolling arrangement by which a utility or a seller of wind energy hires the CAES facility for storage, pays a reservation and storage charge to Chamisa, and then dispatches the stored energy at will--in other words, the third-party offtaker could be the same party as the generator delivering the wind energy to the facility (e.g., a utility that is buying wind energy that it wants to shift from off-peak hours to on-peak hours). Under this structure, the party tolling electricity would retain title to the electicity being stored and could arbitrage or otherwise deploy the stored energy into the market as it saw fit. However, a tolling transaction of that type isn't clearly called for by the RFP (although it doesn't appear to be precluded).
Regardless, Chamisa's RFP will be worth monitoring to see whether an independent storage developer can create a workable market structure for its storage assets in order to facilitate financing. The outcome of this effort will be of great interest to developers of solar and wind resources, as well as to developers of pumped storage and other grid-scale storage solutions.
The deadline for written or email questions is March 31, 2011, and proposals are due no later than 5pm Mountain Standard Time on May 16, 2011. If submitted by mail, proposal(s) must be postmarked May 16th. E-mail submission is preferred. You can access Chamisa's RFP by clicking here.
Show Me the Money: $141 Million Awarded Under State Energy Program
From our colleague Christina Asavareungchai:
Today, the Department of Energy announced more than $141 million in Recovery Act funding to six states and territories under its State Energy Program (“SEP”). Here is how the funds will be used in Hawaii, Maine, Nebraska, New Mexico, the Northern Mariana Islands, and Texas:
Hawaii will use its SEP funds to directly finance high-performance buildings, retrofits, and other energy-saving measures, in addition to training professionals in the building and design industry about energy efficiency. After demonstrating success in the execution of its plan, Hawaii will receive additional funds of nearly $13 million, for a total of almost $26 million.
Maine will use its SEP funds to improve energy efficiency across multiple sectors. The funds will facilitate the establishment of more energy-efficient building codes, as well as the expansion of programs that aim to improve the energy efficiency of businesses and homes. After demonstrating success in the execution of its plan, Maine will receive additional funds of more than $13 million, for a total of over $27 million.
Nebraska will use its SEP funds to promote energy efficiency and renewable energy. The state will establish more efficient building energy codes, offer energy efficiency training, and fund programs that offer low-interest loans to the commercial and industrial sector. After demonstrating success in the execution of its plan, Nebraska will receive additional funds of more than $15 million, for a total of over $30 million.
New Mexico will use its SEP funds to offer financial incentives for the purchase of fuel-efficient vehicles, alternative fuels, and investments in related infrastructure. The state will also fund building retrofits, energy audits, the establishment of energy codes, and the expansion of the Weatherization Assistance Program. After demonstrating success in the execution of its plan, New Mexico will receive additional funds of nearly $16 million, for a total of almost $32 million.
The Northern Mariana Islands will use its SEP funds to improve the energy efficiency of its buildings, establish energy efficiency policies, and educate the public about energy efficiency. After demonstrating success in the execution of its plan, the territory will receive additional funds of more than $9 million, for a total of over $18 million.
Texas will use its SEP funds to establish a revolving loan program for improving energy efficiency at public facilities and to offer competitive grants to state agencies, schools, hospitals, and communities for the implementation of renewable energy technologies. Texas will also use its funds to provide training for green jobs and to launch an educational campaign designed to teach the public about the link between energy conservation, reduced emissions, and job creation. After demonstrating success in the execution of its plan, Texas will receive additional funds of $109 million, for a total of almost $219 million.
