The U.S. Army’s Hunt For Electricity – Part III

This week’s Industry Current is the final installment of a transcript of a panel of industry officials focused on the U.S. Army’s solicitation for renewable projects. Last week, panelists discussed options for these projects when they reach the end of their contracts and enhanced uses leases. This week, the panelists examine excess generation and other potential issues in the solicitation.

Keith Martin, partner at Chadbourne & Parke in Washington D.C., moderated the panel, which included:

- Nate Butler, manager of government pro­grams at SunEdison,

- John Finnerty, government channel man­ager for Standard Solar,

-Robert Franson, a v.p. at Energy Investors Funds,
-Kevin Johnson, manager of mergers and acquisitions and federal markets for Acciona Energy North America,
-David McGeown, a principal with McGeown Associates, a consultancy that is assisting the U.S. Department of Defense, and
-Kevin Prince, project development manager for federal pro­grams for SunPower.

Excess Electricity

MARTIN: Do you expect the Army to buy all the output or just what it needs? Do you expect to be able to sell any excess electricity to the grid? Do you expect to be able to build a larger project than the Army requires and earn additional revenue by generating electricity for export?

FRANSON: If the base wants to take 100% of the output, that’s great. If it does not want to take it, then we will need the ability to sell that power off-base to a utility. It would be even better if the base will allow us to build a bigger project and gen­erate electricity from the start for export.

Kevin Prince

PRINCE: It is the responsibility of the developer to look at the load data for the base and size of the system for the best economics or net present value. Utilities buying from larger scale projects generally do not want any excess electricity sold to someone else. There is usually a requirement from investors that 100% of the output be purchased whether or not the base consumes it. The issue of generating more electricity than the base needs might be resolved by establishing a baseline for consumption, calculated on historical usage, and if the pur­chase falls below that baseline, then there would be some sort of equitable adjustment. MARTIN: What happens if the project is curtailed? Will the Army pay for the electricity anyway?

Nate Butler

BUTLER: The contract should explain what happens if the project is curtailed. The answer will depend on who caused the curtailment and the reason that it happened. If it is a gov­ernment-caused issue, then that might be a government liability. The contract will also have to allocate liability where the proj­ect is curtailed due to force majeure or a problem with the transmission grid. As long as you know what will happen, you can manage the risk. It is only where you do not know what will hap­pen that the real problems begin.

MARTIN: Some utility contracts increase the electricity price if the project misses deadlines to qualify for tax subsidies. Do you expect the Army to allow such adjustments?

FINNERTY: It would be wonderful if they did, but we have not seen that flexibility.

JOHNSON: We could also run up against the retail rate cap. What we are seeing is that the utility sets the price of elec­tricity in a particular location. Other Points

MARTIN: What other issues do you see with the Army procurement?

BUTLER: I would say to the Army that the cleaner the process, the better. If you can avoid it, do not add to the require­ments as we go along. Have realistic expectations for the value of what you are bringing to the table, whether it is land, sun­light, biomass or wind. It makes it hard when we bid at one price and on one set of terms and then there are lots of things on which we also have to give. It makes it more difficult for a project to be successful.

Time is another big deal for us. You have incentives that are running out all the time. You have financing where rates come and go and if we can move quickly and get the best terms, the government benefits. Timing is a lot bigger issue than I think the government appreciates.

PRINCE: The Army is operating under two types of authorities. It has section 2922a, which authorizes it to pur­chase electricity, or it has EUL authority, which allows it to lease underutilized land to earn revenue. It is usually an either-or situ­ation. There is not enough value in the deal to get revenue from the land and also to get electricity savings. That is an important consideration.

MARTIN: Are there other issues with the procurement? 

Kevin Johnson

JOHNSON: There is a bit of a fatigue factor for those of us competing globally. There is a hurry-up-and-wait pattern to military procurements. It is hard to keep the management teams, both here and abroad, engaged and ready to react when we sit for a while and then, suddenly, an RFP comes out right before Thanksgiving or over the holidays.

MCGEOWN: I have one that relates directly to each of the procurements, but is my big nightmare because I am often the one saying, “This is not going to work.” It is a general com­ment that may not relate to my fellow panelists, but when we see 150 people come talk to the military brass about what they can do, we hear too much rubbish. Tell the truth. Equally, if you think what the Army is requesting is nonsense, tell the top brass. Tell them what it takes to get these deals done, and we will go and get some deals done.

MARTIN: The North American Windpower article said there were both advantages and disadvantages to bidding into a DoD procurement compared to a utility RFP. What are the advantages?

BUTLER: I think number one is marketing. The govern­ment pays up to $4 billion a year for electricity. That’s a big pay­off even if you can get a small part of that. I would say the barriers to entry are high, but once you clear those, it can be a less crowded field. The fact that the Army procurement has hundreds of applicants is not typical for a government or DoD procurement. Once you figure out how to work with the DoD, I think you can make a business of it.

MARTIN: Rob Franson, you get the last word. What’s the advantage of this?

Robert Franson

FRANSON: The main advantage is the potential for five to 10 years’ worth of transactions using the same template. However, unfortunately there are still a lot of issues that need to be resolved before we can participate in this space. The Industry Current is a feature written by power industry professionals that highlights and clarifies key issues in the sector. PI runs the feature periodically and is now accepting submissions. For details and guidelines on writing an Industry Current, please call Sara Rosner at (212)224-3165 or email srosner@iinews.com.