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LCRA poised to pay $60 million to back out of wind power contract

  • Nov 18, 2016
Austin American-Statesman

Any day now, the Lower Colorado River Authority could cut a $60 million check to break a long-term deal to buy power from a South Texas wind farm.

The decision to voluntarily pay the penalty reflects the economic realities of power in the age of cheap natural gas: In 2009, when its then-general manager inked the 18-year deal, the nonprofit LCRA locked in a price of $64.75 per megawatt-hour.

Today wind power sells for less than half of that price, leading the nonprofit utility that sells wholesale power to electric co-ops and cities around Central Texas -- including the Johnson City-based Pedernales Electric Cooperative and the Bastrop-based Bluebonnet Electric Cooperative -- to prepare to cut the massive check as a long-term money-saving measure.

The river authority's priority is to give its customers "the best priced product we can," said LCRA general manager Phil Wilson.

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But the river authority's business partners, who will ultimately take a big haircut on their power sales, are livid.

"The whole project is predicated on this contract," said Patrick Woodson, chairman of North America operations for E.ON, the German company that built the project. He has said the river authority should pay at least $300 million if it backs out of the deal.

One of E.ON's lenders is now suing the river authority; in filings, the LCRA has claimed government immunity to the suit.

"You can't act like private entity when you want to and a governmental entity when it suits you," says Woodson. Texas leads the nation in wind industry, but this is "a really troubling signal to the wind industry, certainly to project lenders."

"If Texas is to remain open to business, this is something for the Legislature to review," he said.

But the LCRA says the $60 million opt-out was put in the contract so either side could drop out -- including E.ON if the price of wind power had skyrocketed. Woodson says that language was meant to apply only to the construction phase of the deal.

"A contract is a contract and words have meanings," said Wilson. "These were grown-up, sophisticated parties on both sides of this transaction. There was no ambiguity."

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The LCRA appears to have the upper hand. In June a federal-court-appointed arbitrator agreed with the river authority that it could break the contract for $60 million. In October, the LCRA stopped taking power generated at the Papalote Creek Wind Farm; now it's just waiting for a bill from E.ON describing whether it wants the money in a lump sum or paid out in installments.

The LCRA had spent roughly $45 million per year to buy hundreds of thousands of megawatt-hours of wind power from the E.ON wind farm.

With at least a decade remaining on the contract, the $60 million payout could save the river authority tens of millions of dollars. Downstream ratepayers will benefit, too, say LCRA customers.

"The cost of wholesale power generation is a pass-through to our customers," said Will Holford, a spokesman for Bluebonnet.

"If all other things are equal and their consumption of power is the same, their monthly bill will be lower," he said.

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 -- and by November 2010, the project was complete, with LCRA the sole customer.

But the price of wind dropped, following a dive in natural gas prices and the innovation of yet-bigger, more efficient turbines.

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

The blades are still turning at Papalote Creek, but instead of selling the power at $64.75 per megawatt-hour, it's going for about $25 a megawatt-hour on the open market.

LCRA will replace the power it bought from Papalote by getting more electricity from its coal and natural gas plants -- as well as buying power on the open market.

The climate consequences of getting out of the wind contract don't appear to be part of the conversation at the LCRA.

"We're pro-renewable -- if it fits what we need to do economically," Wilson says.

In 2015, about 48 percent of LCRA's energy output was generated from natural gas, about 47 percent from coal and about 5 percent from renewable sources, including wind and hydroelectric dams -- but the lion's share of that renewable energy was from the Papalote wind farm.

Wilson continued: "We want to deliver reliable power to our customers: As to the source of that, we're agnostic."


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