As explored in Part I of this Article (Electric Energy T&D January- February 2013, Issue 1, Volume 17), over the past two years, the United States Army (“Army”) has established a dedicated Energy Initiatives Office Task Force (“EITF”), and kicked off a novel procurement program (the “Army Renewables RFP”) for a proposed $7 billion in power purchase agreements intended to stimulate private investment in the build-out of greenfield renewable power projects at Army bases across the continental U.S. These actions have attracted capacity crowds of interested bidders at Army conferences on renewable power project development opportunities. This Article explores some of the details underlying the Army Renewables RFP and sounds a cautionary note regarding certain legal and policy risks that are unique to it. Part I of this Article explains the unprecedented nature of the power purchase agreement (“PPA”) procurement approach adopted by the Army to attract private capital investment in renewable energy projects and the regulatory risks that arise in connection with that approach. This Part II examines the policies that underlie the Army’s renewables program and identifies challenging open questions that will need to be addressed in its implementation.
The EITF and the Army Renewables RFP are the Army’s solution to the looming set of requirements imposed by the various renewable energy mandates the Army faces in coming years. The Army has determined that very large capital expenditures will be necessary if the Army is to satisfy these mandates, and that the PPA approach embodied in the Army Renewables RFP will attract an infusion of private-sector investment to fund these expenditures. The somewhat idiosyncratic renewables mandates and policy objectives to which the Army is subject help to explain the shape and form of the Army Renewables Program that has emerged in response. However, they also give rise to questions critical to its implementation. One issue relates to how the Army can possibly reconcile its security objectives with its allegiance to renewable resources. Another goes to the fact that the mandates impose an expensive approach to the adoption of renewable resources by the Army, and it is not clear that the Army is prepared to pay for it. This then leads to the next issue, which is whether the Army Renewables Program offers a viable means of resolving the Army’s budget constraints relative to its renewables mandates. These core issues must be addressed before private investors can be expected to devote substantial resources to partnering with the Army to help it to meet its renewable energy goals.
The pressure on the Army to meet renewable energy standards comes from a number of sources, including the Energy Policy Act of 2005 (“EPAct 2005”), Executive Order 13423 (“EO 13423”), and the 2007 National Defense Authorization Act. Under the EPAct 2005, the federal government is required to procure an increasing proportion of its total energy needs from renewable energy sources, culminating in the requirement that 7.5 percent of its electricity come from renewable sources by 2013. EO 13423 requires that at least half of the statutorily required renewable energy consumed by a federal agency in a fiscal year comes from ‘new renewable sources’ (placed in service after January 1, 1999) and, to the extent feasible, from renewable energy on agency property. The 2007 National Defense Authorization Act codifies the voluntary goal of the U.S. Department of Defense (“DOD”) to ensure that at least 25 percent of the electric energy consumed by DOD at its facilities beginning in 2025 comes from renewable energy sources. Finally, on April 11, 2012, the President set a goal for the Army to use one gigawatt of renewable energy by 2025 in a release entitled ‘Obama Administration Announces Additional Steps to Increase Energy Security.’
The reference to energy security in the President’s April 2012 statement is illustrative of another theme underlying the Army’s renewable energy program. The Army consistently describes its actions to increase its renewable energy consumption as critical to achieving the larger goal of improving ‘energy security,’ meaning the availability of energy to allow the Army to carry out its mission uninterrupted, even if the civilian power grid is unavailable. The EITF ‘will help the Army build resilience through renewable energy...,’ according to Secretary of the Army John McHugh.1 As explained by Katherine Hammack, Assistant Secretary of the Army for Installations, Energy and Environment, renewable energy will ensure Army bases are able to operate and the military is able to serve and protect the community should power grids go down.2
The proposition that renewable energy is the solution to the Army’s exposure to grid events, asserted as though renewable energy were synonymous with distributed generation, is a reflection of a senior level policy choice to equate the two. For example, the 2009 Army Energy Security Implementation Strategy, which was intended to address the challenges facing the Army with respect to its energy usage and, in particular, its need for assured access to power, specifically identifies renewables as the Army’s chosen form of distributed generation by establishing – as one of the Army’s five strategic energy security goals – ‘accessing alternative and renewable energy sources available on installations.’
There seems to be some dissonance in the Army’s promotion of intermittent resources at Army bases while citing as the rationale the urgent need to enable installations to ‘island’ with reliable power upon a failure of the grid. Under the EPAct 2005, ‘renewable energy’ is defined as ‘electric energy generated from solar, wind, biomass, landfill gas, ocean (including tidal, wave, current, and thermal) geothermal, municipal solid waste; or new hydroelectric generation capacity achieved from increased efficiency or addition of new capacity at an existing hydroelectric project.’ EO 13423 has a similar definition, though not limited to electricity. As a practical matter, this means that the on-base choices for Army installations will largely be confined to the clean energy resources of solar and wind, or the generation of electricity by burning biomass and waste. The obvious problem with reliance upon solar panels and wind turbines, however, is that, even assuming that a large number of bases benefit from significant sun and wind, not even the Army can control when the sun will shine or the wind will blow.
The Army has provided the explanation that renewable energy, as ‘an intermittent resource... means that we are looking for energy to help reduce our peak power and give us the ability to operate longer should power disruptions occur...’3 Implicit in this statement is the idea that the intermittent resource in question will work in tandem (and at moments of peak load) with another, more reliable, form of back-up power that is independent of the grid, perhaps ‘some sort of storage mechanism,’4 as suggested by Assistant Secretary Hammock. However, upon questioning at Army Renewables RFP-related conferences, Army representatives have clearly stated that large-scale energy storage technology is not sufficiently proven or commercially viable in the Army’s view. Still, in a further sign that the Army continues to grapple with the renewables vs. reliability trade-off, the Army Renewables RFP indicates that ‘grid isolation technology will likely be required’ as an optional price component of individual proposed projects ‘so that a continuously operating plant will self-isolate and remain functional upon external grid power failure.’
Arguably, the choice to combine the Army’s energy security objective with its renewables goals will result in additional cost in the implementation of its Renewables Program. A similar conclusion may be drawn from other idiosyncratic requirements of the Army’s renewables mandates. For example, the bias in favor of the development of facilities on-base and the requirement for resources placed in service after January 1, 1999 lead to demand for new-build facilities to be dedicated to Army consumption on a smaller scale than would be possible for facilities that are utility-owned or have utility power purchasers. To appreciate the impact on cost that results, consider the finding by the Pacific Northwest National Laboratory, in relation to the cost of small scale wind projects, that ‘bids to install a single large turbine were two times the average cost quoted by industry for a wind farm of 60 MW or larger.’4
Another restriction on Army flexibility to embrace renewables in the most cost effective manner relates to the DOD’s 25 percent renewables by 2025 goal in combination with the Army’s Policy on Renewable Energy Credits (“Army REC Policy”).6 Federal agencies have fairly widely used the acquisition of renewable energy credits (“RECs”), representing the non-energy environmental attributes of the energy generated from renewable sources, in lieu of direct purchases of renewable energy as a means of meeting renewables mandates. This practice is expressly permitted pursuant to EO 13423 and the EPAct 2005. The Army REC Policy, however, establishes that the Army may not comply with its renewables mandates in this way. Instead, measurement of Army compliance with renewables mandates will be based on the actual production or purchase of the renewable energy itself.
In a reversal of the well-established notion of a REC as disaggregated from the energy output of a renewables facility, the Army REC Policy indicates that there must be a direct link between the RECs the Army purchases and the energy the Army consumes by providing that the Army’s renewables mandates can be met only with the purchase and retention of RECs created by projects in which the Army will:
- Construct, convert or renovate a renewable energy generating asset owned by the Army
- Purchase, under an agreement, energy output from a system under (1) or output from another system
- Grant use, under an agreement, of Army land for the purpose of generating renewable energy
In other words, a REC generated by a non-Army-owned facility must be bought by the Army directly from a renewable energy generating asset and in connection with the purchase of the energy output of that renewable energy generating asset or from a renewable project that happens to be located on Army land (apparently, in this narrow instance, without regard to whether the Army will purchase the associated energy output). No wonder there is an urgent need for capital expenditures on new renewables facilities. Even if the Army could buy RECs independent of energy output at a lower price or support the development of renewable power through voluntary green power or similar programs offered by the utilities that currently provide service to Army installations, these activities will not fit into the narrow parameters of the Army’s renewables mandates.
This then leads to the question of what the Army is willing to pay for the bespoke renewable power production infrastructure it is asking the private sector to build. Knowing what we now know, it seems quite predictable that the Army Renewables Program represents a more costly form of procurement than the Army’s current approach to energy procurement at retail rates through utility service contracts. After all, the Army is seeking small-scale, dedicated, new-build plants using all new renewable technology, likely requiring grid-free back-up, unable to monetize carbon credits and subject to high financing costs if open regulatory and government contracting risks are left unresolved (as suggested in Part I of this Article). And yet, the Army led the initiative by indicating that bases would not pay more for renewable energy than the rates they were paying to utilities. Bowing to reality, the Army has since acknowledged that its lowest-cost energy objective may not be compatible with its renewables goals and has said that it will buy renewable energy project output at a ‘fair and reasonable premium’ over the retail utility rates it would otherwise be paying.7 Most recently, however, Assistant Secretary Hammock explained, “we are not looking to pay more for electricity, we are looking for parity, or the price point with the private sector that will enable us to have reliable resources for the long term within our current budget...”8
The reference to the Army’s current budget relates to another area of uncertainty at the core of the Army’s Renewables Program: namely, how to treat a PPA for federal budget purposes. The appeal of a PPA approach as a means of renewable energy procurement is that it will attract private capital expenditure to fill in the Army’s budget gap relative to its renewables mandates. The Army would like to be able to expense the cost of renewable power plants over time by paying a tariff that, effectively, repays the capital cost of new projects over the life of a long-term PPA. From a budgeting perspective, however, this would require that the Army’s future year payment obligations under a PPA will not be ‘scored,’ or characterized, by the Office of Management and Budget (“OMB”) as a current year expense.
The rules relating to ‘scoring’ an agency’s payment commitments consistent with statutory requirements relating to the federal budget are exceedingly complex, but OMB’s past treatment of federal government Energy Savings Performance Contracts (“ESPCs”) offers a worrying precedent. An ESPC is a form of contract in which an agency undertakes to pay a private party over time for the energy savings that result from the private party’s capital investment in energy conservation measures. According to a Congressional Research Service report on potential Army PPAs, ‘these long-term contracts proposed for purchasing power from renewable energy projects potentially represent future unfunded commitments if funded through annual appropriations (much the same way that ESPCs do),’ and, if so, arguably should be ‘scored’ as a current year expenditure in respect of all future payment obligations.9
Although agencies have been able to avoid this result for multi-year power and natural gas supply contracts and other similar arrangements, this has been achieved by means of ‘explicit termination and damages provisions that limit the government’s financial risk to the difference between the contract rate and prevailing ... prices.’ Such provisions may be acceptable to private counterparties to commodity contracts or utility service agreements, but they will almost certainly pose a deterrent to equity investment and debt financing for the construction of dedicated power generation facilities. The essential problem is that, if all of the future payment obligations of the Army under a PPA are determined to represent a current year expense, then the Army will be unable to enter into $7 billion of PPAs.
In sum, it seems that the issues of budgeting, pricing and security are bound to impinge on the momentum of the Army’s Renewables Program. The Army’s roll-out of the EITF and its framework for $7 billion in procurement of renewable energy herald an exciting opportunity for renewable power project developers and investors. However, the uncertainties discussed in this Article can be expected to cause reluctance on the part of private parties to commit the resources the Army hopes to attract. If the Army is to turn this opportunity into a reality, it will need to build confidence by addressing such issues head-on. Only then will it be possible for the Army to inspire a mutually beneficial public-private partnership that will have a meaningful impact on the achievement of the Army’s renewables goals.
References
1 News Release, U.S Dep’t of Def., Army to Establish Energy Initiatives Office Task Force for Large- Scale Renewable Energy Projects (Aug. 10, 2011)
2 Rob McIlvaine, Army commits to security through renewable energy, ARMY NEWS SERV, May 22, 2012, http://www.army.mil/article/80303/Army_commits_to_security_through_renewable_energy/
3 Rob McIlvaine, Army commits to security through renewable energy, ARMY NEWS SERV., May 22, 2012, http://www.army.mil/article/80303/Army_commits_to_security_through_renewable_ energy/
4 Melissa Buckley, Hammack’s visit focuses on Fort Leonard Wood’s energy saving technology, ARMY NEWS SERV., Aug. 29, 2011 http://www.army.mil/article/64463/Hammack_s_visit_ focuses_on_Fort_Leonard_Wood_s_energy_saving_technology
5 W.M. WARWICK, PURCHASING RENEWABLE POWER FOR THE FEDERAL SECTOR: BASICS, BARRIERS, AND POSSIBLE OPTIONS, PACIFIC NORTHWEST NATIONAL LABORATORY 19 (2008)
6 Memorandum from the Department of the Army, Department of the Army Policy for Renewable Energy Credits (May 24, 2012), http://www.armyeitf.com/downloads/RenewableEnergyCredits Policy.pdf
7 Chuck Ross, Army working with industry in renewables initiative, ELECTRICAL CONTRACTOR, Feb. 28, 2012, http://www.ecmag.com/section/green-building/form-ranks
8 Rob McIlvaine, Army commits to security through renewable energy, ARMY NEWS SERV., May 22, 2012, http://www.army.mil/article/80303/Army_commits_to_security_through_renewable_ energy/
9 Anthony Andrews, Federal Agency Authority to Contract for Electric Power and Renewable Energy Supply, CONG. RESEARCH. SERV., 16 (Aug. 15, 2011)
About the Author
Maura Goldstein, a Partner in the Global Projects Group of the law firm of Baker Botts L.L.P., represents developers, equity investors and lenders in connection with major infrastructure projects, including power projects, worldwide. Maura has extensive experience structuring gas and coal-fired, solar, wind, energy storage, and biomass power projects, and negotiating power purchase agreements, project site leases, construction contracts, technology procurement, and project financing arrangements for power projects. Baker Botts’ energy and transactional associates Katrina Smith, Yuefan Wang, and Kyle Wamstad, provided valuable assistance in the research and development of this article. Maura can be contacted at Maura.Goldstein@bakerbotts.com
