PensionDanmark joint venture embroiled in dispute over US wind farm

Lower natural gas prices at the heart of dispute with Lower Colorado River Authority

A joint venture between PensionDanmark and Germany’s E.ON is trying to recoup some $300m of losses after a US water authority scrapped its commitment to buy power from its wind farm in the face of tumbling natural gas prices.

In 2012, PensionDanmark – the €26.4bn non-profit Danish labor market scheme – bought a 50% stake in a 200MW Texan wind farm known as Papalote from E.ON North America. E.ON retained the remaining equity in the project, which is owned by a holding company called Papalote, and continued to be responsible for the day-to-day running of the project. The site secured an 18-year power purchase agreement, or PPA, with the Lower Colorado River Authority (LCRA).

At the time, PensionDanmark’s CEO, Torben Moger Pedersen said he expected the pension fund’s investment into wind farms in Denmark and the US to “provide a stable and attractive return at a level very similar to what you can expect from equities, but with a significant less risk and expose to the business cycle,” adding that the firm “will continue to focus strongly on investment of this type”.

However, faced with wholesale energy prices in Texas dropping to less than $25/MWh – driven largely by natural gas production in the country – LCRA has pulled the plug on the $64.75/MWh contract. In an unusual move, the authority terminated the PPA last year, saying the decision was permitted in its contract with Papalote. It told RI the penalty agreed with Papalote for early termination was “a $60m termination payment or $60m in liquidated damages over time”.

But Papalote is fighting the decision in the courts, claiming that it is actually owed more than $300m in losses as a result of the decision, according to reports,which say it is arguing that the cancellation clause should only have been applicable during the construction phase of the project.

In June, an arbitrator came down on LCRA’s side, agreeing that its interpretation of the contract was accurate. Following that, the water authority officially terminated its contract in October.

“LCRA currently is making Papalote whole by paying the difference between the contract price and the prevailing market price that Papalote receives for its wind power in the market,” a spokesperson told RI. “LCRA will continue to do so until the $60m liability cap has been reached. This process could take up to three years.”

To complicate matters further, the site was refinanced after construction by Sumitomo Mitsui Banking Corporation, which is also now pursuing litigation to challenge the move, according to LCRA. Reports claim that the PPA was used as collateral for the refinancing deal.

PensionDanmark confirmed that it had part ownership “in a company currently engaged in legal proceedings against LCRA”, but declined to comment further.

The fiasco doesn’t seem to have put PensionDanmark off the sector, though. In November, it invested in the Fluvanna I wind farm in Texas, via the fund Copenhagen Infrastructure II. It is one of 19 investors backing the fund, which provided a $61m mezzanine loan to the $251m project, which will be operated by Terna Energy.

“The investment in the Fluvanna I project is PensionDanmark’s fourth investment in American wind farms. The investment will provide our members with attractive and stable returns in the next many years,” said PensionDanmark’s Möger Pedersen at the time the deal was announced.