Hi, I believe the sign for the penalty term is inverted, and from my understanding of the Navier-Stokes penalty method is that you use it to avoid solving for the pressure and continuity equation, so it is better to use a custom equation so as not to have the extra pressure dependent variable. See the attached model script file (note that it is very sensitive to mesh configuration and element type, so probably would need more stabilization).
navier-stokes-penalty-method.fes