Investing in Innovation

Public-private partnerships will become an increasingly important tool to help U.S. military installations achieve greater energy security and surety, and meet federal renewable energy goals.

  

By Peter Y. Flynn 

  


 

By leveraging the expertise and resources of the public and private sectors, public-private partnerships (P3s) are enabling the U.S. military to modernize and develop critical energy infrastructure, including cogeneration, microgrid, energy efficiency, and renewable energy projects.

While there is never a “one size fits all” solution, P3s offer a broad strategy with distinct financing and contracting options that allow installations to achieve immediate and long-term energy security goals.

 
solar panels at DOD installation

EVALUATING THE BENEFITS

The National Council for Public-Private Partnerships defines P3s as “a contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public.”

P3s can range from complex teaming arrangements to straightforward lease agreements. What they do not represent is a privatization of government resources or infrastructure. These partnerships are intended to be a tool that allows the government to determine the form a project will undertake, including the allocation of risks and responsibilities between all parties.

Although it is often most efficient to delegate the development, management and financing to private firms or entities, the government can retain or acquire ownership of the plant or equipment. In general, a successful P3 allocates risk among the parties best suited to bear the risk. It shares revenues or cost savings between a private entity and a government entity. It allows the public sector to maintain control of the project. And it incentivizes the private sector to perform and deliver.

 

ENERGIZING PROGRESS

Energy security has become a major focus of the federal government. P3s allow for progress toward energy security goals without negatively impacting the budget at the agency or installation level. As increasing infrastructure demands compete against tightening budgets, innovation beyond traditional funding options is paramount.

Through a P3, the government is not required to provide the upfront capital. Investment costs are spread over the lifetime of the asset, which often results in a lower cost of infrastructure, transfers certain risks to the private sector, and creates incentives for long-term maintenance and operation. P3s also allow projects to move through approval and development more efficiently than traditional appropriations, which can result in faster project completion. P3s have a strong track record of on-time and on-budget delivery, and reduced construction and lifecycle costs. 

There may be a misperception that P3s are more costly than the use of traditional appropriations. Such evaluations are often focused on interest rate analyses that do not include the entire savings that can be achieved over the lifespan of a project. A thorough and proper evaluation of a P3 assessment involves a Value for Money (VfM) analysis, which includes the following key components: a public sector comparator to assess and compare cost of traditional delivery; full lifecycle cost and revenue analysis for each option; determination of the most appropriate risk sharing scenario; and an assessment of public opinion and maintenance of transparency.

A white paper from the National Council for Public-Private Partnerships, “Testing Tradition: Assessing the Added Value of Public-Private Partnership,” reveals that cost savings are possible through P3s, with many estimates showing 7 percent to 10 percent savings over the life of the project.

Although financing and procurement costs may be higher initially, savings are achieved through reduced costs associated with risk allocation, design, construction and long-term operations and maintenance. A VfM analysis of energy improvements at the U.S. Food & Drug Administration’s White Oak Research Campus in Maryland reveals more than $200 million in estimated cost savings over 20 years using a P3 when compared to traditional delivery methods. In addition, the deal mitigated construction and financing risk, improved the campus’ Central Utility Plant, and freed up over $90 million to meet other mission critical and functional requirements.

 

ESTABLISHING GOALS

The federal government, the nation’s largest energy consumer, continues to establish ambitious goals for energy performance and management, as well as water conservation. Executive Order 13514 mandates federal agencies to reduce energy consumption in federal buildings 30 percent by FY2015, as compared to the FY2003 baseline. The order also requires agencies to reduce potable water consumption 26 percent by the end of FY2020 compared to FY2007.

The U.S. Army, Navy and Air Force, as part of the Department of Defense’s commitment to increase the use of on-site renewable energy, and reduce reliance on fossil fuels and electricity received from the commercial grid, each have set targets of 1-GW of installed renewable energy capacity by 2025.

As the services pursue their goals, they will benefit from considering all financing and contracting tools, as each installation may require its own and unique funding solution. Power Purchase Agreements (PPAs), Utility Energy Service Agreements and Energy Savings Performance Contracts (UESCs and ESPCs), and Enhanced Use Leases (EULs) thus far have proven most effective. These tools are well-understood and accepted among private sector developers and financial institutions—and they can be used to take action immediately. 

  • PPAs enable an installation to secure fixed, long-term pricing to purchase electricity from a privately owned, developed and operated power source.
  • UESC and ESPC authorities allow agencies to access private capital and development expertise in order to fund and implement long-term energy conservation measures, which may be significant enough to help support more expensive but also more sustainable renewable energy technologies and microgrids.
  • EULs are most effective when an installation has underutilized land and an immediate need for additional energy development, or in some cases, real estate or other infrastructure development.

  


Without question, energy security and surety will remain long-term priorities for the nation. Given the complexity of conceiving and executing energy projects, it is crucial to undertake an analysis of the funding tools, including P3s, early in the process to identify the best path forward. 


 


ENABLING ACTION

The Department of Defense has established ambitious goals to increase on-site renewable energy use to increase energy security and meet federal energy goals. According to a report published in September 2012 by Pike Research, the department is expected to spend $1.8 billion on clean energy by 2025. The military services are utilizing a number of alternative methods to finance renewable energy projects.

  • U.S. Navy. A 13.8-MW solar array at Naval Air Weapons Station China Lake, Calif., was financed using a 20-year PPA. The deal required no upfront capital or maintenance obligations from the government. It matched conventional project financing terms for solar power facilities and has allowed the Navy to secure electricity at up to 30 percent below the rate available through shorter duration 10-year PPAs.
  • U.S. Army. White Sands Missile Range in New Mexico utilized ESPC authority to develop a 4.5-MW solar array and additional energy conservation measures, which helped to support the initial cost of the solar array. The solar facility produces 10-million-kWh of electricity and $930,000 in cost savings each year, helping the base achieve 10.8 percent renewable energy, compared to 0.5 percent previously.
  • U.S. Air Force. Robins AFB in Georgia is utilizing an EUL to lease excess land to a private energy developer and build a 10-MW solar array. The developer will sell the energy to the local utility through a 20-year PPA and make lease payments to Robins during the 20-year term. Robins will reinvest the lease payment in renewable energy or energy efficiency on the base, which will count towards the installation’s alternative energy goals and mandates.

 

REALIZING THE OPPORTUNITY

Without question, energy security and surety will remain long-term priorities for the nation. Given the complexity of conceiving and executing energy projects, it is crucial to undertake an analysis of the funding tools, including P3s, early in the process to identify the best path forward.

As markets, incentives and technologies continue to drive project success, it is important to understand the federal and state incentives, standards and energy prices, as well as the most suitable technologies for unique geographic conditions. The opportunities are out there. So too is the financing. It is just a matter of bringing it all together.

  


 

Peter Y. Flynn is Executive Vice President, Bostonia Partners LLC; 617-226-8103, or This email address is being protected from spambots. You need JavaScript enabled to view it..