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E.on in $300 million dispute over terminated PPA

UNITED STATES: German utility E.on is fighting publicly over a lucrative power purchase agreement (PPA) for the output from its 200.1MW Papalote Creek II project in Texas.

E.on has other projects in Texas (pic: GE)
E.on has other projects in Texas (pic: GE)

The dispute has been prompted by the collapse of wholesale electricity prices due to cheap natural gas and flat demand.

E.on claims the Lower Colorado River Authority (LCRA), a Texas power wholesaler, owes it at least $300 million for breaking its 18-year PPA. Signed in 2009, the PPA gave E.on a price of $64.75/MWh, but wholesale prices in Texas are now $20-25/MWh.

E.on has launched a new website, Keep Austin Green, which accuses LCRA of seeking to abandon 80% of its wind energy even while giving top executives $440,000 in bonuses.

LCRA says it legally exercised a "mutual termination" clause and only owes a $60-million penalty. "This is not a wind issue. This is a contract-based issue," LCRA general counsel Tom Oney told Windpower Monthly. He says LCRA tried unsuccessfully to renegotiate the contract and that E.on would instead be exiting the agreement if wholesale prices had risen.

E.on says the mutual termination clause was only meant to be in effect during construction. E.on co-owns and operates the project. PensionDanmark is also a 50% owner.

An arbitrator appointed by a federal court in June sided with LCRA, and in October LCRA stopped taking power from Papalote Creek II. Since then, the German company has every day offered power from the project to LCRA, which in turn refuses to accept it.  

LCRA says it is keeping up its side of the bargain with monthly instalments to E.on made up of the difference between the wholesale and PPA price. It expects to have paid off the $60 million within about three years, said Oney.

Complicating the matter is that Sumitomo Mitsui Banking Corp, the lead noteholder in E.on’s refinancing of the project, is now suing the non-profit LCRA, which is in return claiming government immunity. E.on had used the PPA as collateral in the non-recourse debt financing. In the suit, the bank is seeking to require LCRA to perform under the contract,  and buy the electricity.  

Lela Jgerenaia of Bloomberg New Energy Finance said she expects most utilities to stick with PPAs despite the price drop. The contracts are typically not easy to terminate.

Indeed, LCRA says the disputed PPA with E.on is the only one in its entire portfolio with a "mutual termination" clause. (LCRA’s other wind contract is with NextEra Energy for 51MW from the Indian Mesa wind project in Texas; it was to expire at the end of 2016.)

But financial institutions that provide hedges to wind projects may be more price sensitive and likely to try and find a ways to exit PPAs, said an analyst who preferred not to be identified.  

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