A three-judge panel at the U.S. Seventh Circuit Court of Appeals on Dec. 6 ruled for Benton County Wind Farm LLC in a dispute with Duke Energy Indiana over contractual obligations for Duke to take power from an existing wind farm.
In 2005,Duke Energy Indiana offered to buy 100 MW of renewable energy at a price high enough to enable potential sellers to finance the construction of wind turbines. As part of the deal Duke would acquire renewable-energy credits that buyers or generators of wind energy can trade or sell to other utilities that lack wind generation. Benton County Wind Farm accepted Duke’s offer and built a 100-MW facility that became operational in 2008.
The contract between Duke and Benton requires Duke to pay Benton for all power delivered during the next 20 years. Duke does not have its own transmission lines in Benton County, and the contract requires Benton to deliver to lines owned by Northern Indiana Public Service Co. (NIPSCO) or some other place designated by the Midcontinent Independent System Operator (MISO).
Regional transmission organizations like MISO have concluded that the price system is the best tool to balance loads on the networks. Potential buyers of energy bid for power to be delivered over the network (this is done principally through utilities such as Duke and NIPSCO, which aggregate end-users’ demands); potential sellers such as Duke (on behalf of Benton) also submit bids for sale, and the regional transmission organization accepts the bid that clears the market. When Benton’s wind farm started producing, the bidding was conducted once a day. Now it is conducted every five minutes—necessarily by computers.
When Benton started operating it was the only wind farm in the area, and NIPSCO’s facilities could carry its entire output. Duke purchased and paid for everything Benton could produce, and MISO cleared the transfers to the regional grid. But central Indiana has excellent conditions for generating power from wind, and by 2015, when a U.S. District Court issued its opinion inn this case, aggregate capacity of local wind farms was not 100 MW but 1,745 MW. More wind farms are being built. The capacity of the local transmission grid has been exceeded. It is no longer possible for all of the local wind farms to generate power at the same time, because the grid cannot accept their full output. And because local generation capacity substantially exceeds local transmission capacity, the market-clearing price in MISO’s auction has fallen—indeed, the price sometimes is negative, and then would-be producers must pay MISO to take the power off their hands, and buyers get free electricity.
Prices near or below zero induce some producers to stop supplying electricity and thus reduce output to what the grid can carry. Until the end of February 2013, MISO allowed wind farms to deliver to the grid no matter what other producers (coal, nuclear, solar, hydro, etc.) were doing, which meant that other classes of producers had to cut back. Sometimes the market price in this must-carry-wind-power system fell below zero, which meant that wind generation alone had overtaxed the local grid. When that happened Duke paid a negative price, displacing other wind farms to ensure that Benton ran at capacity. So if the auction price was minus $10/MWh, Duke would pay MISO that amount and pay Benton for the power; it would receive nothing for this power (save the potential value of renewable-energy credits) and charge the loss to its customers.
Duke could recover some of the loss in its role as a buyer of power from MISO’s grid, because even if the power on NIPSCO’s grid goes north (Duke’s operations are in southern Indiana), a lower price on NIPSCO’s network will depress prices on other grids, which will buy from NIPSCO and tell other sources to curtail their own output. But Duke believes that it loses more in its role as seller of Benton’s power than it gains in its role as buyer from MISO.
MISO rule change from 2013 led to these issues
In March 2013, the rules changed to put wind farms constructed after 2005 on a par with other classes of producers. Benton lost its status as a must-run facility. Duke responded to the new system by deciding to bid exactly $0, all the time, to put Benton’s power on the grid. When this bid is accepted, Duke gets the market-clearing price (usually positive but sometimes zero) and pays Benton the contract price (roughly $52 per MWh). But when the market-clearing price in MISO’s auction falls below $0, and Duke’s bid therefore is rejected, MISO instructs Benton not to deliver any power.
Once Benton generates power it must deliver it (otherwise it would fry its own equipment), so an order not to deliver power equates to an order not to generate power, and Benton must stop its turbines from rotating. Under MISO’s new system, with Duke’s standing bid of $0/MWh, Benton has gone from delivering power 100% of the time the wind allowed to delivering (and being paid) only 59% of the time that the weather can drive its turbines at their capacity.
In this litigation, Duke takes the position that, when MISO tells Benton to stop delivering power, it does not owe Benton anything. Benton takes the position that Duke could put Benton’s power on the grid by making a lower bid (MISO accepts bids as low as negative $500 per MWh), thereby displacing other producers’ power, and that when Duke elects not to do this it owes liquidated damages under the contract. Sometimes for load-balancing or other technical reasons MISO tells Benton to stop delivering power even when the market price exceeds zero and Duke’s bid nominally has been accepted. Benton acknowledges that in this situation Duke need not pay damages.
The District Court sided with Duke, ruling that it need pay only for power delivered to the “Point of Metering” where it is measured and passes to the local grid; when MISO issues a stop order that quantity is zero.
The parties have a second contract that requires Duke to cooperate, reasonably, in marketing Benton’s power; the district judge found that bidding $0 is “reasonable” cooperation because it usually leads Duke to suffer an out-of-pocket loss, since the market price will be less than what Duke must pay Benton. Indeed, on this understanding Duke might be entitled to bid $52 in MISO’s auction and ensure that it makes a profit on reselling every megawatt-hour that it buys from Benton.
The appeals court noted that Duke did not attempt to add transmission capacity in the time between the MISO new rules announcement and their 2013 application to post-2005 wind farms—and as far as the court can tell it has not attempted to build or buy new transmission capacity in Benton County since then.
The appeals court said the key to resolving the parties’ dispute lies under contract provision which requires Duke to pay if it “fails to accept delivery of all of the Electrical Output at the Point of Metering, whether due to Buyer’s failure to obtain Transmission Service (if applicable) or for any reason other than … [a list].” This covers the sort of situation that prevailed after MISO changed its dispatch rules at the end of February 2013 and no longer deemed Benton a must-carry generator. As of March 2013, Benton was being told to stop 41% of the time because transmission was unavailable at the price Duke was willing to offer—and could have been unavailable even if Duke had bid negative $500/MWh, if owners of the remaining local wind farms had made the same negative bid.
The court added: “With insufficient transmission capacity, someone (or a lot of someones) had to stop delivering energy to NIPSCO’s facilities no matter what price Duke offered. But the contract provides what is to happen when the stoppage is ‘due to Buyer’s failure to obtain Transmission Services’. Duke is to pay for power not taken. Duke could build its own transmission lines or buy extra capacity from NIPSCO or some other firm. If there is a market for transmission services, as there surely is in central Indiana where more and more wind power is becoming available, then there will be a supply of transmission lines. It is only a matter of time until more capacity is built, whether by Duke or someone else. And [the contract] tells us that, until this happens, Duke must pay Benton. The risk of inadequate transmission was contemplated by the contracting parties and allocated to Duke. By accepting this risk, Duke enabled Benton to finance its project; otherwise potential investors might have feared exactly the overcapacity situation that has come to pass.”