The U.S. Armed Forces, for a variety of reasons, has been at the leading edge of change when it comes to renewable energy deployment in government, spurred by statutory federal government renewable energy and energy efficiency targets. Faced with enacting sharp and deep cuts as a result of sequestration, U.S. military leaders are ramping up recruiting efforts nonetheless, aiming to strike up partnerships with private-sector renewable energy project developers.
The U.S. Army, Navy and Air Force each intend to install 1 gigawatt (GW) of renewable power capacity through 2025 as they strive to reach the 25 percent-by-2025 federal government renewable energy target required by law. Public-private partnerships are seen as playing a central, pivotal role in reaching this goal, and that could spell significant opportunity for private sector businesses across the renewable energy value chain.
Contracting with the U.S. military can be daunting and the sunk costs high, however. Having only recently begun moving into the energy sector mainstream, renewable power installations are only now building up the history of past performance that affords banks and other investors the level of comfort they typically look for before committing large amounts of capital to building sector-specific loan and investment portfolios.
Added to this, developers and other prospective military renewable energy project participants — utilities, suppliers, banks, insurers, municipal authorities and other government agencies — may be unfamiliar with each other's project finance standards and working processes, as well as the regulations and compliance standards governing U.S. military contracts.
Enter the Army Energy Initiatives Task Force (EITF). Established in 2011, the Army EITF serves as enterprise-wide central management office and point of contact for project proposals and prospective Army development partners. Through EITF, the Army is looking to leverage federal funding in the private sector — including some $7 billion in Renewable and Alternative Energy Power for DOD (Department of Defense) Installations Multiple Award Task Order Contracts (MATOC).
Rapid deployment of renewable energy at scale (10 MW or greater) will require strong public-private sector collaboration and a good deal of creative path finding on the part of the Army and its renewable energy project partners, EITF executive director John Lushetsky told participants during a July webinar sponsored by law firm Ballard, Spahr's Energy and Project Finance Group entitled, “Beyond the News: Financing US Renewable Energy Contracts.”
Monetizing the Strategic Value of Renewable Energy
“One of the challenges is monetizing the strategic value of renewable energy on military installations...It's inherently difficult in terms of regulations and compliance issues. There are a lot of things particular to military projects, in terms of mission clearance and going through an acquisitions process governed by FAR (Federal Acquisition Regulation) for instance,” Lushetsky elaborated.
“One thing we do is really qualify that a project is right for the Army. We try to remove a lot of the roadblocks, the risks to industry. We'll get mission clearance, work through leases and permitting procedures, work with utilities on grid interconnection and systems integration, and we'll work with with different acquisition authorities, such as the Army Corps of Engineers and the Defense Logistics Agency.”
The Army has pushed through five renewable energy projects to date, including the first MATOC contract awards, for geothermal energy systems installations. Put out for competitive bid, an open RFP for a sixth – to finance, design, build and operate a proposed 15 MW solar photovoltaic (PV) system supported by a long-term power purchase agreement (PPA) with the Army at Fort Irwin, California — is due to close August 15. Project fact sheets are available on the Army EITF's website.
The U.S. Army: Achieving a 1 GW Per Year Renewable Energy Target
The Army is on pace to reach its target of installing 1 GW per year of renewable power capacity, Lushetsky told webinar participants. The Army EITF expects the going will get tougher as projects get more complex and sequestration proceeds, however, he added.
As a result, the Army EITF, drawing on resources and expertise across the government and private sectors, is doing as much as it can to get the economics right and develop model deal structures so as to make contracting with private sector partners a “win-win” situation for both the service and project developers.
“We are identifying projects that look to be fundamentally sound and inherently financeable from a developer's perspective,” Lushetsky explained. “We have some models of public-private partnerships with the military that have been done before using similar types of structures.”
In addition to long-term PPAs, these include enhanced-use leases and renewable energy service agreements. The Army EITF has also developed a renewable energy systems agreement template, and though the public comment period has closed, it is still open to receiving comments. “We want to allow a certain amount of creativity and ingenuity from the industry standpoint to develop new projects,” Lushetsky said.
Army EITF performed a fairly rigorous analysis in order to structure project proposals so that industry participants earn a reasonable return and the government save money over 30 years. The Army's first five renewable power PPAs are based, and contract prices anchored, according to respective bases' current cost of electricity, with higher escalation rates for future years. That's meant to ensure that projects are budget-neutral in the short-term and NPV (net present value) positive over the life of the project, Lushetsky explained.
Furthermore, “DOD policy allows services to pay fair and reasonable premium for energy security,” he pointed out. “But we haven't quite found the definition of what fair and reasonable means exactly as yet. Ultimately, we think it will be defined on an installation by installation basis.”
Military vs. Commercial Solar: So What's the Difference?
There's a copious amount of federal law that governs contracting with the U.S. military. Ballard Spahr's R. Thomas Hoffmann and Darin Lowder moderated the discussion, zooming in on several key aspects of particular relevance to prospective renewable energy project developers. These issues, as Hoffmann put it succinctly, boil down to: “So, what's the difference between 20 MW of rooftop military solar and the same installation for Wal-Mart?”
One key difference is the so-called “compliance premium” associated with contracting with the U.S. military. This premium consists of the wide scope and scale of renewable energy projects and the sunk costs associated with evaluating, selecting and submitting bid proposals.
“If the Army's putting a 25-MW project up for competitive bidding and the Navy and Air Force are doing something similar, it becomes a pretty large and diverse pipeline. You'd have to sift through and pick and choose your spots. It's difficult to cover them all, and tough to be extremely competitive,” First Solar's Tim Rebhorn, a panel member, stated.
“My fear as a developer in these auctions is that they often end up as a race to the bottom in terms of pricing, to the point that we're now starting to see a 'failure in execution' clause written into contracts. I think the approach John is taking addresses many of these issues, as EITF did early in this process, in a pre-briefing in Birmingham with the manufacturer and developer community to get good quality bids for them to review.”
From a manufacturer or developer's perspective, “it's a big challenge,” Rebhorn continued. “From an overall market perspective, the scale of the projects envisaged through 2020 and 2025 aren't terribly big, but it's big enough for the North American market that you can't ignore it. But it's going to be terribly resource intensive.”
Lushetsky and the Army EITF are familiar with such industry feedback. “We've heard this on many occasions,” he responded. “We're trying to make the compliance premium as small as possible, indistinguishable from a commercial project. We'll never get there, but that's the aim nonetheless.”
In an effort to minimize the compliance premium, the Army EITF is reaching out to the renewable energy development community to clarify key legal and compliance issues, such as FAR and “termination for convenience” clauses, as well as federal budgetary and operational decisions, such as base closures and realignments, that could negatively impact project cash flow and return on investment.
Lead image: U.S. Army uniform via Shutterstock