For those of you who are tracking the U.S. Department of Defense’s (“DOD”) efforts to procure electricity from renewable energy projects, here are some numbers to think about with respect to project financing:
According to a Government Accountability Office report released last month, the four DOD services (Army, Navy, Air Force, Marines) are known to have used power purchase agreements (“PPAs”) to finance a total of 11 projects, including all those that were in design, under construction, or currently in operation in Fiscal Year 2011. The Army has negotiated two; the Navy has negotiated one; the Marine Corps has negotiated one; and the Air Force has negotiated seven. Because none of these projects was financed through up-front appropriations, we can expect the same will be true for contracts entered into by the Army pursuant to its recent draft RFP for $7 billion in wind, solar, biomass, and geothermal energy- all of which are anticipated to be long-term PPAs (NOTE: The Army has said repeatedly now that the final RFP should be released by June 30). Thus, the $7 billion number is not a projected appropriation amount as many were led to believe. Rather, the $7 billion represents the amount the Army expects will be brought to the table through third-party financing arrangements in order to facilitate its total kWh procurement targets. That raises an interesting question: Since $7 billion will not be appropriated, how do we know how much the Army will spend per kWh for the power?
At the ACORE-AEE 2nd U.S. Military and Renewable Energy Industry Forum on May 9, Kathleen Ahsing, Director of Planning and Development for the Army Energy Initiatives Task Force (“EITF”) was clear that the Army wants to procure renewable energy “at or below brown power prices” and keep the renewable energy certificates (“RECs”) associated with that power. For most developers, “brown power prices” means the wholesale price of electricity- right now pegged to the price of natural gas, a low number. However, in this case the Army’s (and, in general, the DOD’s) interpretation of “brown power prices” differs. Because individual bases are retail customers, “brown power prices” means their current retail price and the base’s electric bill represents the bottom line for savings.
Before we get too excited, though, we need to remember that the DOD is given very favorable rates- especially in the West, where many may receive power from the Western Area Power Authority (WAPA) for less than 3 cents/kWh. Similarly, bases served by the Bonneville Power Authority (“BPA”) directly, or by a utility that is a full-requirements customer of BPA, get preferential rates, too, that may be under 5 cents/kWh. Those numbers may be tough to beat, especially if the Army retains the RECs and the developer is not able to rely on REC sales as a supplemental income stream.
Where a base’s bottom line for savings is its own utility bill, certain technologies, like biomass, will have a distinct advantage on pricing. Where an on-site solar project could displace the “energy” component of the utility tariff, it would not replace the “demand” component. Because the base still would be subject to backup power rates, the Army would likely include the cost of the backup power in the total cost of energy. A biomass plant would be able to offset both the energy and demand charges, thus avoiding the “tack-on” charge faced by intermittent resources.