By Sandra I. Erwin
Renewable energy suppliers, real estate developers and other members of the eco-industrial complex are awaiting details on a potential $7 billion, 30-year, opportunity to supply electricity to Army bases.
Of all the Defense Department’s green-energy initiatives, the Army’s plan to turn over land to developers in exchange for cleaner and more reliable electricity is seen as one with promise of real profits for the private sector, experts said.
Fueling industry’s optimism is a recent Obama administration directive that instructs the U.S. military to deploy 3 gigawatts — enough to power two to three million homes — of renewable energy, including solar, wind, biomass and geothermal, by 2025.
As the military’s largest landowner, the Army is the biggest consumer of electricity in the Defense Department and therefore is in a position to attract private sector investors. Of the Pentagon’s annual $15 billion energy bill, about 25 percent is spent on electricity for facilities at more than 500 military installations in the United States and overseas.
The Army alone has 155 installations and 200 utilities. The service last year launched an “energy initiatives task force” that was specifically created to ease the transition of outdated Army-owned power utilities into modern grids that integrate renewable sources of energy. The task force also is expected to help contractors navigate the complex regulatory maze and environmental red tape associated with building energy plants on military bases.
Industry analysts have estimated the military services will need at least 2,000 megawatts of renewable power just to meet the administration’s 2025 goal.
Army officials already have decided that privatizing the electricity supply is the way to go. The cost of building the infrastructure is too high for the Army to bear, and the military lacks the technological know-how of the private sector. But in order to capitalize on industry expertise and save money, Army officials said, nontraditional contracting vehicles and incentives for investors will be needed.
“To get megawatts of renewable energy you have to commit to long-term purchases,” said Robert E. Tritt, co-chair of the military base and communities practice of law firm McKenna Long & Aldridge.
Energy companies are awaiting a request for proposals that the Army, teamed with the Army Corps of Engineers, is expected to release later this year. It could set in motion a decades-long effort to bring renewable energy into many Army bases.
“This has the attention of defense contractors, renewable contractors and public utilities,” Tritt said. “Everyone wants to do business with the world’s biggest customer.”
Tritt predicted that if the Army structures the incentives right, contractors will have no trouble securing private financing.
“In a different time, the Army would simply build their own projects with their own money,” he said. But the Defense Department doesn’t want to be in the energy business any more. Furthermore, private firms can do it more economically because the federal government offers energy tax credits of 30 percent to developers. These credits would not be available to the Defense Department.
“It’s cheaper for the Defense Department to buy energy from the private sector,” Tritt said.
Once the Army commits to 30-year power-purchasing agreements, investors will step up, he said.
The Army already has decided that it will structure the contracting process in two phases. First, it will pre-qualify vendors, and later it will issue specific “task orders” for which the qualified vendors would bid. Under these so-called multiple award task order contracts, only the pre-selected pool of contractors is allowed to compete for individual projects.
Interest in the Army’s energy business appears to be high. A draft RFP that was published in February drew 900 industry comments, said Richard G. Kidd IV, deputy assistant secretary of the Army for energy and sustainability.
But the final RFP is still weeks, or possibly months, away, Kidd said in a recent interview. “We are trying to create a process that industry can have confidence in,” he said. The multiple award task order approach is more desirable, he said, as it is much shorter than traditional one-off contracts.
“We want to reduce risk for industry,” said Kidd.
John Lushetsky, executive director of the Army energy initiative task force, said he could not predict an exact date for the final RFP as it is still being reviewed by Army and Defense Department contracting officials. There is also the possibility that the Army will join forces with the Navy and the Air Force, which also have large bases that will need more renewable energy.
Lushetsky noted that the multiple award contracts the Army intends to use — with capital investments made by the private sector — are similar to ESPCs, or energy-savings performance contracts, which have been employed by the Defense Department for years. In fiscal year 2010, the Defense Department awarded $323 million for energy efficiency and renewable energy projects that were financed with Energy Savings Performance Contracts.
Officials are optimistic that the privatization of energy will be as successful as a similar effort pursued for military housing.
“Energy is where privatized housing was 10 to 15 years ago,” Tritt said. “There’s about $25 billion in private sector investment in military housing, compared to $2.5 billion of Defense Department investment,” he said. “Some of the Army staff that worked on housing is now working on energy.”
One of the unknowns, however, is whether the cost of renewable energy will become competitive with fossil fuel. The Government Accountability Office cautioned in a report that green energy is often more expensive than nonrenewable energy and “using renewable energy can be at odds with Defense and Department of Energy guidance that calls for the Defense Department to invest in energy projects when cost-effective.”
Kidd said the Army expects most of the renewable-energy bids to offer cost parity with the current commercial grid.