Industry Proposes ‘Energy Security’ Fee-for-Service Plan (UPDATED)
Large military contractors such as The Boeing Co. are seeking to tap into this emerging “energy security” market and they are looking for the Defense Department to embrace a new business model that would require the private sector to make upfront investments, but would commit the Pentagon to long-term service contracts.
The goal is to “change the way DoD buys energy” in ways that benefit the government and also ensures profits for industry, said Tim Noonan, vice president of Boeing Energy.
Companies could offer “energy security as a service,” Noonan said in an interview. The Defense Department would buy more than just electricity, he said. It would be a package of services including on-site power generation, energy-efficient buildings, and arrangements to participate with the commercial sector in selling electricity to the local community. Clean energy sources would be integrated via a secure microgrid that also would prioritize energy delivery during emergencies to ensure power is available for critical operations.
The concept is comparable to how the Pentagon buys weapons-maintenance services under “performance based logistics” contracts, Noonan said. “Instead of buying parts for an aircraft, the customer buys a level of reliability.”
How energy security would be measured remains to be seen. There would have to be some agreed-upon metric, he said. For the Defense Department, the benefit would be the ability to purchase energy at a fixed cost and to not have to pay for technology upgrades. There would be incentives for contractors to earn additional fees as they insert new technology and generate savings for the customers, Noonan said.
The U.S. government already employs “energy service performance contracts,” or ESPCs for building upgrades and other infrastructure projects. ESPCs allow federal agencies to launch energy savings projects without upfront capital costs and without special congressional appropriations. Vendors would like to see the ESPC concept expanded for the procurement of microgrids and for buying “reliable energy” as a service, Noonan said. “It would be a logical step. But the contracting mechanisms are not in place.”
The Army recently created an Energy Initiatives Task Force to work with the private sector in hopes of drumming up $7 billion in third-party private financing for large-scale energy plants that would be built on Army-owned property. The service owns half of the nearly 24 million acres of federal land, and would give energy providers free access.
The task force intends to provide administrative assistance to industry, such as helping expedite permits and environmental reviews. Army officials recognize that many of the “unknowns” associated with these projects will deter investors, said Paul P. Bollinger Jr., general manager of Boeing Government Solutions. “Projects are going to have to be viewed by the private sector as viable” in order to secure financing, he said.
“We’d be offering DoD a flat fixed cost for energy for the next 20-25 years, taking the power from clean renewable energy and providing them energy security as part of that, through the microgrid,” Bollinger said.
He said investors are expected to become more bullish about renewable energy as costs continue to drop. The price of solar panels has come down nearly 50 percent over the past 18 months, and continues to decline, said Bollinger. “Solar energy is going to become a lot more viable for renewable and secure energy.”
But none of these grand plans will work unless the Defense Department changes its contracting rules and gives industry long-term “energy security performance” deals, Noonan said.
Boeing recently partnered with energy giant Siemens to develop and market "smart grid" technologies for military and commercial customers. “It will take other companies to change the way the customers buys. That is why we teamed with Siemens,” he said.
Major defense contractors and commercial energy firms such as Siemens see this sector as the perfect market niche for a civilian-military industry team because it requires expertise in renewable energy and in cybersecurity. Smart, or intelligent, microgrids are small-scale versions of a centralized electricity system. They generate, distribute, and regulate the flow of electricity to consumers, but unlike conventional grids, smart microgrids bring renewable resources into the mix, and match supply and demand of energy in ways that reduce overall consumption.
One significant obstacle for industry, however, is the government’s budgeting process. When the Congressional Budget Office “scores,” or provides cost estimates for a Defense Department program, the cost of a project, even for energy services performance contracts, has to be paid upfront, rather than spread over the life cycle of the project. With Pentagon budgets under pressure, it might be difficult to convince skeptical lawmakers that these green-energy investments are worth funding.
“Are we swimming against the tide? No. But it’s going to be tough,” Noonan said. “If DoD wants the type of energy security that was laid out by the Defense Science Board, these are the actions that they are going to have to take,” he said. “The economic incentives have to be aligned for companies like Boeing, Siemens and others to make the investment and get a fair return.”
Military contractors from several sectors of the defense industry will be participating in a study that will recommend a “business model” to the Defense Department for the procurement of energy services. The study will be overseen by Business Executives for National Security, or BENS, a nonpartisan industry group.
BENS spokeswoman Laura Keehner Rigas said the study will examine “best practices” for how DoD can use microgrids in installations. It is expected to be completed in 2012, she said. “We intend to present unbiased information and not push specific products.”
CLARIFICATION: BENS spokeswoman Keehner Rigas said BENS is not an industry group but rather a nonprofit, member-driven organization.