Challenges with Renewable Energy Projects Federal Bar Association Acquisition Symposium November 14, 2013 Margaret P. Simmons Counsel U. S. Army Corps of Engineers Huntsville, AL *Disclaimer: The views herein are those of the author and not of the Army or the Corps.
Renewable Energy Ø Congress has mandated that the Federal Government acquire 25% of its energy needs through renewable sources by 2025. For Do. D, this goal is codified at 10 U. S. C. 2911 (e). Ø In response to these mandates, Secretary of Army Mc. Hugh established the Army Energy Initiatives Task Force (EITF) in September 2011. The EITF’s goal is to implement renewable energy projects within the Army with a focus for projects that are 10 MW or larger. Ø Due to budget constraints, Army is seeking to leverage third party financing as part of the renewable energy initiative for these projects. Ø The Federal Acquisition Regulations (FAR) do not address this type of contractual relationship (third party financing). 2
Renewable Energy Ø The U. S. Army Corps of Engineers, Huntsville Center, has awarded approximately 60 base Multiple Award Task Order Contracts (MATOCs) for potential renewable energy projects to be constructed, operated and maintained by third parties on Army/Do. D lands with third party financing. Ø The procurement was valued at $7 Billion, which is the amount of energy that can be purchased over the next 30 years. Ø There are 4 types of technology involved: Solar (22 contracts), Biomass (13 contracts), Geothermal (6 contracts) and Wind (17 contracts). Awards were made between May 3 and Sep 23. Ø This presentation will discuss some of the challenges associated with this type of contractual arrangement. 3
Renewable Energy Ø The authority for this action is 10 U. S. C. 2922 a which states: § Contracts for Energy or Fuel For Military Installations: (a) Subject to subsection (b), the Secretary of a military department may enter into contracts for periods of up to 30 years – (1) under section 2917 of this title; and (2) for the provision and operation of energy production facilities on real property under the Secretary’s jurisdiction or on private property and the purchase of energy produced from such facilities. (b) A contract may be made under subsection (a) only after the approval of the proposed contract by the Secretary of Defense. (c) The costs of contracts under this section for any year may be paid from annual appropriations for that year. This 30 year authority is unique to the Department of Defense. 4
Renewable Energy Ø Approvals CRITICAL POINTS: § Before awarding any of the base contracts to pursue energy projects under the 10 USC 2922 a authority, the statute requires approval from the Secretary of Defense. The Do. D approval authority has been re-delegated to DUSD(I&E) – which is Under Secretary of Defense (Installations and Environment). § Since these were base MATOCs there was discussion on whether or not approval was even required for the award of the base contracts. Do. D determined that the approval was required. § The approval process took some time since there were no specific renewable energy projects identified. The USD(I&E) office had previously reviewed and approved contracts where a specific project was being awarded, and those actions had more specificity - such as terms, prices, and land agreements. Base MATOCs do not have this type of information, so there was much communication on the base contract language before approval was granted. § Moving forward, as specific renewable energy projects are identified and solicited on a task order basis, each task order will also have this approval before an award can be made. Mr. John Conger, the Acting Deputy, is currently the approving official. 5
Renewable Energy Do. D Policy Ø Financing of Renewable Energy Projects Policy, dated Nov 9, 2012, from DUSD(I&E) – If you are working a renewable energy project, be familiar with this policy. The policy addresses both enhanced-use leases found in 10 USC 2667 and “special agreement authority” provided by 10 USC 2922 a. Ø The policy does not apply to Energy Savings Performance Contracts (ESPC) or to Utility Energy Service Contracts (UESC) Ø READ THIS POLICY Ø Understand that the land interest currently being pushed is a lease (although this policy says “an appropriate real property out grant”) Ø There will have to be an appraisal of the lease for fair market value (FMV) Ø The land/lease value will factor into the cost of the renewable energy being procured 6
Steps/Process Leading to a Project Ø The EITF evaluates 8 factors in developing viable renewable energy projects (over 10 MW): Ø The project’s role in meeting a specific installation’s mission and energy security Ø Economic viability Ø Real estate availability Ø Regulatory factors Ø The amount of power that an installation will be able to off-take from a given project Ø The utility integration and interconnection requirements for the project. Ø Compliance with the National Environmental Policy Act (NEPA); and Ø Identification of the most suitable project acquisition vehicle 7
Steps/Process Leading to a Project Ø Gathering the information required for economic viability is complicated and can take significant time. Data could include information such as how much wind or sunshine there was over the past 2 years on a daily basis. This is important if you are considering a wind or solar project. Ø Once the information for above 8 factors have been compiled, there are more steps and approvals that have to be obtained. Ø To move forward, a business case is briefed to an entity called the Realty Governance Board (RGB). The briefing is required for any renewable energy project that will involve some type of interest in Army land being granted to the contractor/developer. 8
Steps/Process cont. Ø The RGB was established by the Assistant Secretary of the Army, Installations and Environment (now Installations, Energy & Environment), by memo dated 6 April 2010, subject: Real Estate Business Clearance Process. Ø This memo “establishes a mandatory Business Clearance Process for actions, projects, and initiatives that involve the use, disposal or acquisition of real property in business relationships between the Army and private entities, non-profits or non Do. D governmental entities and have an estimated cumulative business value of greater than $750, 000. ” Ø The RGB is chaired by the DASA (I&H) – currently Mr. Paul Cramer – and members are appointed on an ad hoc basis depending on the project being presented. Ø The memo contains guidance on what has to be briefed to the RGB. READ AND BE FAMILIAR WITH THIS GUIDANCE. 9
Steps/Process cont. Ø The RGB will be interested in project details, to include the potential real estate involved. Within the Army, the local U. S. Army Corps of Engineers (USACE) District Real Estate Office has the responsibility to provide the appraisal for the land being considered. At this time, the Army has to receive fair market value for these projects. That value has to be included in the potential cost of the project, and will have an impact on the price of the renewable energy that the Army will be purchasing for up to 30 years. Ø The Army’s intent is also to have the required environmental assessments completed prior to soliciting a specific project. Army installations are using the Army Environmental Command (AEC), their own environmental offices, and USACE offices to help with the NEPA documentation. Ø States have different rules and regulations in place regarding the utility industry. The Army has to be knowledgeable of those different rules and how those rules will impact an identified renewable energy project. For example, Texas passed a law that limits a non-utility’s ability to provide a solar project greater than 2 MW in an area with a regulated utility. So at Ft. Bliss, we are working sole source with El Paso Electric to try to develop a 20 MW solar facility. 10
Procurement Issues Ø Things to be aware of: § You need to include a draft lease (or other land agreement) in your RFP. 10 USC 2667 requires “competition” for a lease. There is still on-going discussion if the competition for the contract satisfies competition for the lease. § Estimate of project: Army is entering a contract to buy the renewable energy only – not the assets. What is the true value of the procurement? § Since the Army is not going to own the facility, why do Davis Bacon wages apply to the construction (on Army land) § How much Quality Assurance should the Government perform? § Should the Government ask for final “as-built” drawings? 11
Procurement Issues Ø Renewable energy facility – Contract must provide for the facility to be dismantled and removed at end of contract – or allow Government to purchase at Fair Market Value. Failure to do this could result in scoring under OMB Circular A-11 – or have negative impacts on tax incentives for the contractor/developer Ø Since tax incentives factor into the cost of the project and have expiration dates, be aware of timelines that could affect these incentives. 12
Renewable Energy Projects Ø EITF § Focus is renewable projects 10 MW or higher Ø Army Installations § Can consider their own projects for projects below 10 MW – but do not necessarily have the resources to do this. There is some discussion focused on contract assistance from DLA/ACC/MICC/USACE, but these projects require more resources than just contracting. 13
Task Order Process Ø If a project is to be solicited under the USACE $7 B MATOCs Ø Task Orders: § When a specific renewable energy project has been through the initial approval stages, a solicitation (RFP) will be developed for that project. The RFP will be issued to the set of contractors holding base contracts for that particular technology. It will either go to the small business pool of contractors or to the entire pool based on the size of the project in accordance with the approved process set out in the contracts. § It is anticipated that a site visit will be scheduled and that the contractors will have at least 60 days overall to submit proposals for each specific project. § The Army’s goal is to provide as much specific information as it can in each RFP regarding each particular project. This would include historical energy usage, the potential location for the project, draft lease terms, environmental documentation, etc. 14
Task Order Process Ø (continued) § Once proposals are received, they will be reviewed and evaluated. The Contracting Officer will have the discretion to determine if clarifications or discussions are required, or if an award can be made from the initial proposals received. § Renewable Energy Credits (RECs) – will be addressed at the task order level in accordance with Army policy. Army has a policy on RECs that you also need to be familiar with. It was issued by ASA (IE&E) and is dated May 24, 2012. The memo states that it establishes Army policy regarding the retention, replacement and purchasing of RECs for renewable energy generating facilities on Army installations for the purposes of satisfying federal mandates. Ø The policy recognizes REC swapping. Ø BE FAMILIAR WITH THIS POLICY. 15
Other Procurement Matters § Third Party Financing ü Tax Breaks – May require establishment of LLC’s who will actually construct, own and operate the renewable energy facility. If this occurs, there is a potential that the contract may have to be novated to the LLC – which could take the contractor who holds the base contract out of the MATOC pool of contractors. The RFP issued by the Huntsville Corps has outlined an innovative approach to deal with this situation in order to keep as much competition as possible for the various renewable energy technologies. § Interconnection Agreements – ü Within the utility industry, most model interconnection agreements have indemnification language. The Government views indemnification language as a potential violation of the Anti-Deficiency Act, and generally will not sign the standard agreement. There is currently on-going dialogue with the utility industry on this particular issue. There is some indication that the developer can enter into the interconnection agreement, in which case the indemnification language would not be a problem. § Land Access Agreements – ü The Army is required to provide the minimum real estate interest to meet the need. The Army could allow a site license, an easement or a lease for these types of projects. At this time it appears that a lease will be the preferred land access agreement (per DOD policy). 16
Policy/Guidance Ø Army Guidance – Look at the Army Energy Page: § http: //army-energy. hqda. pentagon. mil/ Ø DOD Guidance (there are links from the Army Energy Page) Ø Leases – We are working to have a base template Ø Interconnection Agreements – We don’t know all the challenges yet 17
General Information Ø The MATOCs awarded by Huntsville Corps are only one acquisition tool Ø EITF is working on a “Renewable Energy Service Agreement” template that could be used for stand alone projects or with the MATOC Ø Everyone needs to get involved for Do. D to meet the 25% goal 18
Resources/Info Ø Article: Contract Management Magazine, November 2013: Shades of Green: New Department of Defense Renewable Energy Commitment Presents Significant Opportunities (and Risks) for Developers, by Ellen S. Friedman & Tiana M. Butcher Ø Website: DSIRE – Database of State Incentives for Renewables & Efficiency http: //www. dsireusa. org/ (Do not use d. Esire) 19
DSIREUSA PAGE Ø Example of the information available on Alabama: Ø Incentives/Policies for Renewables & Efficiency § See Federal Incentives § See All Summaries § See Residential Incentives Only Ø Financial Incentives § Local Rebate Program § Performance Based Incentives § State Grant Program (Biomass Energy Program) § State Loan Program § Utility Rebate Program Ø Rules, Regulations & Policies Ø Related Programs & Initiatives 20 THERE IS DIFFERENT INFORMATION FOR EACH STATE
Renewable Energy Ø CONCLUSIONS § Army is committed to attaining the goals established by Do. D to acquire 25% of its energy through renewable sources by 2025. § There are many ways to purchase energy. § There are many challenges involved when seeking to use third party financing to allow construction, operation and maintenance of renewable energy facilities within an installation’s boundary when Army does not intend to take ownership of that facility. § The Army views the utility industry, developers/construction companies, and financial institutions as partners in achieving these goals with renewable energy. 21
Renewable Energy Ø CONCLUSIONS (continued) § Although there are some renewable projects that have been executed on the “eaches, ” this is the first time Army has used a programmatic approach to execute numerous renewable energy projects simultaneously. § Army understands there will be challenges, but the goal is to work through the challenges and meet the renewable energy goals. 22
Caution Ø Not everyone is a fan of renewable energy: § Cherokee residents file suit to block wind farm Cherokee County residents have filed a lawsuit to block the proposed wind farm on Lookout Mountain, according to official court documents. (Gadsden Times Oct 21, 2013; Huntsville Times Oct 27, 2013) 23
Energy Huntsville Ø There is an Energy Huntsville initiative § See the solar panels at Airport Road and Memorial Parkway § Look at NASA and new energy exhibits § Redstone Arsenal has used renewable energy for 20 years (steam from household waste) § So – this is not really new – just a new focus! 24
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