Seventh Circuit Concludes that Transmission Constraints Do Not Excuse Payments for Power from Wind Farm
A recent Seventh Circuit decision underscores the dangers of constrained transmission systems for delivering power from renewable energy projects, and the importance of clearly addressing the attendant risks in Power Purchase Agreements (“PPAs”). The decision (Benton County Wind Farm LLC v. Duke Energy Indiana, Inc. (No. 15-2632, U.S. Court of Appeals for the Seventh Circuit, decided Dec. 6, 2016) interpreted the PPA governing the Duke Energy Indiana’s (“Duke”) purchase of the output for one of the first wind farms built in central Indiana.
When initially constructed, the local transmission grid had ample capacity to move power from the wind farm to Midwest load centers. But, as wind capacity in Indiana grew in the ensuing years to a total nearing 1750 MW, transmission became increasingly constrained. As a result, the regional transmission operator, the Midwest Independent System Operator (“MISO”), now regularly experiences transmission congestion in the region. It uses an auction mechanism to clear congestion and, with a surfeit of wind power in an area of constrained transmission, auction prices regularly fall to zero or even go negative.
Duke, which was required to bid the wind farm’s output into the MISO, addressed this situation by regularly bidding power from the wind project into the MISO auction at a zero energy price. Generally, this would result in power from the wind project being dispatched and Duke being paid the market-clearing price established by the MISO auction. Duke would then pay the wind farm the $52 per MWh price required in the PPA. However, with increasing transmission congestion, the MISO auction in central Indiana now regularly produces negative prices (indicating that some generators must be paid to curtail output so that available transmission can reliably accommodate the remaining generation). In these circumstances, the wind farm was not dispatched by MISO and was therefore forced to curtail production. The parties came to blows over who is responsible under the PPA to bear the risk of these curtailments.
The Seventh Circuit, in a decision authored by Judge Frank Easterbrook, with Judge Richard Posner concurring, concluded that Duke bears the risk of these transmission constraints since the PPA requires it to purchase “all” output delivered to the wind project’s metering point and the contractual exceptions to this requirement (such as system emergencies and Force Majeure) do not include transmission constraints. As a result, the Court concluded, Duke is required to pay the wind farm for output that cannot be delivered due to MISO-imposed transmission constraints and its practice of submitting zero bids to the MISO does change this result.
The Seventh Circuit litigation is reminiscent of extensive litigation arising from “oversupply” conditions here in the Pacific Northwest, when high river flows in the spring and high output from the region’s wind projects can exceed the system’s capacity to absorb power. As with the Seventh Circuit litigation, the oversupply litigation effectively turned on which resources are required to bear the risk of system constraints. These cases provide a stark reminder of the importance of adequate transmission for renewable energy development, and critical need for PPAs to carefully delineate how these risks will be allocated between the contracting parties.