A major Texas wind lawsuit has underscored the importance of proper contracts to allocate the common risk of inadequate transmission capacity.
Three wind farms owned by NextEra Energy Resources LLC agreed by contract to sell annual minimum quantities of renewable energy (as both credits and wind-generated electric energy that produced those credits) to Luminant Energy Company, an electrical wholesaler, starting in 2002. The wind farms failed to deliver those quantities, allegedly because of inadequate transmission capacity in the grid. Luminant sued to recover $29 million in liquidated damages, for 2002 through 2005. The contract provided a liquidated penalty of $50 per megawatt hour for renewable energy and credits the wind farms failed to deliver.
The wind farms counterclaimed, claiming that their shortfall was due to failure (by Luminant and others) to supply adequate transmission capacity by upgrading their lines and facilities. As a result, ERCOT, managed by the Electric Reliability Council of Texas, forced the wind farms to reduce production. Luminant denied any obligation to provide the windfarms with adequate transmission capacity.
In July, the Dallas Court of Appeals (Fifth District) ruled against the wind farms. According to the court, Luminant’s explicit obligation to provide transmission services did not require it to provide all the transmission capacity that the wind farms needed to meet their contractual commitments to deliver energy. Accordingly, the liquidated damages provision is enforceable. The case was remanded to the trial court to determine the quantum of liquidated damages.
Similar issues must be addressed in Canadian wind energy contracts, since transmission constraints frequently occur. I wonder if the Texas wind farms will be suing their lawyers next?