Challenges to Financing Renewable Energy Projects on US Military Sites

The Department of Defense (DOD) is looking to significantly increase the installation of renewable energy projects on US military bases over the next decade. Some of the first military projects out of the gate have been utility-scale solar PV projects in Arizona and Georgia. While utility-scale solar is a necessary and permanent stage of solar development in the electric utility sector, and while these projects appear to show progress toward a smart strategy of a strong, diversified, energy supply for our nation, they in fact face significant problems.

In the interests of full disclosure, my firm is a strong supporter of utility-scale solar and provides services to clients in this sector; however, this particular issue is one that needs to be more fully explored for its policy implications.

One problem centers on the duration of the federal procurement processes.  DOD clean energy projects take longer to develop and finance than private sector projects. Growing solar companies in a white hot market find the duration of these negotiations tough to endure in an incredibly competitive sector. Yet, regulated utilities can outwait private competitors by drawing on deep cash reserves, resulting in uncompetitive, expensive power bills for U.S. taxpayers.

A second problem with allowing regulated utilities to build, own and operate federal solar facilities is increased federal dependence on state-run public utilities. If a base commander, for instance, hinted at opening up a facility to cost-saving competition, the incumbent utility could use public and private powers to stifle competition. Utilities have nothing to gain, and much to lose, by the U.S. government’s plan to diversify its energy sources and competing power contracts. What’s best for the civilian government, military and American people might not be viewed as the best option for utility executives and their shareholders.

U.S.-based military facilities that include critical military command centers and other key operational assets require 100% energy reliability as a matter of national security.  The best way for our military and the government to ensure reliability, control its assets and achieve some of the well-planned federal renewable energy goals is free market competition.  Simply put, we need full allowance of modern, private financing structures for federal solar facilities, including third-party financing of solar on DOD facilities.

Modern third-party contracts, called power purchase agreements (PPAs), are used every day in the private sector to power facilities that range from Wal-Mart stores to General Motors factories to the corner hardware store. PPAs would cut electricity costs to bases and save taxpayer dollars. PPAs also offer the most flexible economic solution to meet military base energy demands and manage and lower energy costs, while increasing base as well as national security. However, in states like Georgia, North Carolina and South Carolina these types of agreements are not allowed, ultimately preventing third party PPAs and unwanted competition from the private sector.

To take advantage of the growing demand of solar, particularly in these states without third party PPA agreements, utilities are using their significant resources to finalize deals to install solar projects on military bases that they would own and operate. While these solar projects would be located on site, the base would not be able to depend on this solar generation for energy reliability as it would likely go into the grid under the discretion of the utility. As a result, these project costs would ultimately fall on local ratepayers and allow utilities unilateral control over the electricity generation as well as too much overall control at U.S. military bases.

Along with allowing 3rd party, private PPAs, there are other ways in which the DOD can put solar to work powering military bases.  While some of these actually improve behind the fence energy security and energy reliability, others are just cosmetic. 

1.  DOD can purchase, own and operate a solar system on site where it uses the electricity.  Federal tax rules generally prevent this.

2.  DOD can lease and operate a solar system on site where it uses the electricity. Federal tax rules generally prevent this. 

3.  Using an Enhanced Use Lease (EUL), DOD can lease land/real estate to a private company and the private company can own and operate a solar system on site. This makes rental income for the DOD/U.S. Taxpayer, but does not provide solar electricity directly to the base if the electricity feeds into the utility grid. 

4.  DOD can lease land/real estate to a private company and the private company can own and operate a solar system on site, with or without an Enhanced Use Lease, and that private company can sell its output only to the utility. Again, this makes rental income for the DOD and deploys solar in America, but no clean electricity would feed DOD and base security would not improve.

5.  A private company can install, own, and operate on a DOD site a solar system and sell electricity to a utility that serves the DOD site. The utility can then re-sell that same electricity to the DOD at that site at a cost savings. Utilities propose this as a way to prevent third party electricity sales.  However, it is uncertain if this really enhances behind the fence DOD base security and reliability benefits. Regardless, this puts the utility in the middle of DOD business and financing and generally complicates matters for the private solar owner as well as the DOD. 

6.  An electric utility can install, own, and operate on site a solar system and sell electricity to a DOD facility at that site.  This could provide “behind the fence” security and reliability benefits to the site if the deal is structured right. However, if the system is built by the utility that also owns and operates the system then the cost of that system is actually carried by local ratepayers.

While these options above get solar power projects built on military bases, some are not financially feasible and others give too much control to the utilities which directly impairs base security as well as national security.

7.  The best option in terms of cost savings, reliability and security is to allow the DOD to buy electricity from a private company that builds, owns and operates a solar system on site. This is essentially the same as the DOD buying electricity from a utility, but at a cost savings and with increased on site security as the base will be free from the utility grid. However, this option is only possible in those states that allow third party PPAs.

In all of these cases solar is physically located on the base, however not all of these scenarios mean that the base is using its generated solar energy on site. Once the utility gets its own systems on a base, that location is lost to new power development for decades. We need to be sure the military has the best choices for its financial and security needs with the ideal finance structure for its electricity generation. That means free market competition and third party PPAs.

Lead image: Military men via Shutterstock

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Lee Peterson is a licensed attorney and Senior Tax Manager for CohnReznick’s National Renewable Energy Practice. To date, Lee has been a critical tax advisor in over 10 billion dollars of renewable energy projects within the U.S. and its’ territories. He is responsible for thought-leadership and governmental affairs and his clients include the U.S. Department of Energy, Fortune 100 companies, state and local governments and domestic and foreign renewable energy project developers and manufacturers. Lee also advises the nation’s top financial institutions regarding their tax equity investment structures. Lee has published numerous articles in both the traditional and trade press, including, North American Windpower and Solar Industry magazine and he is regularly quoted in the media. Lee is also the author of numerous white papers on a wide range of critical renewable energy finance and tax topics and is a regular speaker at national professional education and industry events dealing with renewable energy policy, tax credit finance and federal and state tax policy. Lee volunteers hundreds of hours, pro bono, assisting non-profit renewable energy organizations, federal and state legislators as they seek to improve and implement new energy policies. For 10 years, Lee was an adjunct professor at Clayton State University and is a guest lecturer for the J. Mack Robinson MBA program at Georgia State University. Lee has also served as instructor for the State Bar of Georgia continuing legal education seminars.

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