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Can the U.S. Military Meet Its Renewable Energy Goals and Still Give Investors a Fair Return?

“We have to try to balance the interest of the military with those of developers, investors, and lenders,” said Scott Provinse, Director of Government Programs at SunEdison, speaking at the ACORE (American Council on Renewable Energy) U.S. Military and Renewable Energy Industry Forum in Washington, D.C. on July 18th.

The Department of Defense has set a goal of 25 percent renewable energy by 2025 with a 1-gigawatt target for the Army, Navy and Air Force. One of the most visible programs, the Army Energy Initiative Task Force (EITF) was established in September 2011 to meet its mission objectives of energy security, energy surety and cost savings leveraging third-party financing and the PPA model for solar, wind, geothermal, and biomass renewable technologies. 

But, can it meet the challenge of accomplishing those mission objectives while still attracting capital and allowing investors to meet their return requirements? 

With panel titles like Streamlining Procurement and Enhancing Project Financeablity and Monetizing the Value of Military Renewable Energy and Energy Security, the discussion at the forum was as heated as the temperatures outside.

The Army EITF currently has three solar PV, one biomass and one biodiesel project among its five projects in the acquisition stage. Three of those are solar energy systems that would provide the Army with a discounted kWh rate over a twenty-five year term. Solar energy developers cobble together revenue from their projects with SRECs (in SREC states like Maryland) as cash off the deal along with federal tax incentives; the ITC and MACRS depreciation.

One of the ARMY EITF requirements under its energy security mission objective is that utility-scale solar systems of 10 MW or more must be “microgrid ready” combining generation with energy storage. Concerns arise because those additional system requirements increase the developer cost-per-watt (currently around $2.00 per watt), but the additional storage costs may not be eligible for the federal tax incentives that developers rely on to drive deals. 

Jeff Weiss, Managing Director at Distributed Sun, said, “We need to find a way to bake those microgrid costs into the rate structure. Everything beyond generation is not eligible for federal tax incentives. Because of that, the incremental amount has a different return profile.” 

Meeting the other objective of energy surety, or reliability, also adds to system costs. Proposed co-generation solutions, such as adding gas-fired power plants as a backup to the solar systems better meet mission objectives, but add to developer costs. Developers principal revenue stream on PPAs is electricity revenue — the price per kWh of energy generated that the Army will buy. And while the twenty-five year term guarantees developers a predictable revenue stream with a creditworthy offtaker, that rate may not reflect additional developer costs. According to Dave Belote, VP of federal business at Apex Clean Energy,  “meeting mission objectives like energy surety would be more appetizing to investors if there were an additional revenue stream.”

Adding to investor return challenges are long government procurement cycles combined with expiring subsidies. The ITC reverts from a 30 percent to 10 percent tax credit after 2016 and the MACRS 50 percent bonus depreciation expires at the end of this year. Key players in the military renewable space like SunEdison actively try to “predict the intersection of long sales cycles and expiring subsidies, triangulating to achieve the best project economics,” said Provinse. However, he said, “this is the best opportunity out there for investors,” alluding to the DoD as a creditworthy offtaker. 

The Army EITF is working closely with developers and the renewable energy investment community to address their concerns. PPA terms are modeled on a commercial-scale or utility-scale template but also include additional federal contracting requirements that are foreign to developers. An ACORE white paper published in May solicited industry feedback on the Army’s model PPA with the objective of “addressing the issues that impact the potential pool of capital available for financing projects.”  

Kathleen Ashing, the EITF director for planning and development, said, “we have been streamlining procurement practices and we are here to help industry navigate those practices with the goal of enhancing project bankability.”

Lead image: U.S. military via Shutterstock

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