Department of the Navy: Mesquite 3 Solar PPA

Today the Navy is again taking steps to make itself an energy leader by developing new tools and institutional capabilities that will allow them to easily meet and exceed the renewable energy requirements of Executive Order 13693.

“Our ability to innovate and embrace new technologies and new concepts will help ensure that the Navy and the Marine Corps can continue to protect the American people and do the work of our nation around the world." — U.S. Secretary of the Navy Ray Mabus

Navy’s Ambitious Clean Energy Goals

Under the leadership of Secretary of the Navy Ray Mabus, the Navy established a series of ambitious energy goals for reducing oil use, improving energy efficiency, and increasing the use of alternative energy sources.

In May 2014, Secretary Mabus issued a stronger, electricity specific target that challenged on-shore leadership to secure one gigawatt of renewable energy by late 2016, enough energy to meet half of the needs of its onshore facilities. Although the Navy is a seagoing agency, land based facilities make-up a significant portion of its energy use. This goal significantly advanced an earlier 2020 one gigawatt goal and notably comes several years before comparable goals set by the Army and Air Force.

Proudly reiterating the high expectations he has for his agency at the 2015 GreenGov Symposium, Mabus stated, “We’re going to be at that gigawatt... We’re going to be five years early.”

What is a Gigawatt?

If you are a fan of the movie Back to the Future, you may remember that Doc’s DeLorean needed 1.21 gigawatts to initiate time travel. While the term gigawatt might have seemed made-up for the movie, it actually means a billion watts of energy, which Assistant Secretary of the Navy for Energy, Installations & Environment Dennis McGinn said equates to the amount of electricity produced by 6.7 million solar panels, generated by 400 wind turbines, consumed by Disney World over 17 days, or can be produced by five nuclear-powered Nimitz-class aircraft carriers. It is also enough to power about 750,000 homes!

Role of the Renewable Energy Program Office

One of the keys to the Navy’s success was the establishment of an office with the clear mission, authority, and budget to figure out how to meet these ambitious targets. Launched in May 2014, the Renewable Energy Program Office (REPO) was charged by Secretary Mabus to have a “laser-focus to identify cost-effective renewable energy projects for Department of Navy installations.” REPO operationalized these goals by using three key criteria for any renewable energy procurement they pursued:

Be cost-effective, mission-compatible and leverage third-party financing
Stabilize long-term operational costs
Be complemented by smart microgrid technology and utility infrastructure upgrades.

“Buy It, Book It, and Build It”

Realizing that successful procurement processes were essential to meeting the Navy’s renewable energy goals, REPO developed three procurement models which REPO Deputy Director John Kliem described as “buy it, book it, and build it.”

The first “buy it” model calls for off-base generation for on-base consumption. This benefits the Navy by providing price stability and a diversified energy portfolio. Note, as with any offsite energy source, the electrons consumed at the DON Installation cannot be directly tied to those produced at a corresponding offsite renewable source, but can be counted towards renewable energy targets because any fuel free electricity generated will necessarily displace fossil fuel generated sources on the same grid.

The second “book it” model develops on-base renewable energy generation for off-base consumption. This benefits the Navy because it can generate value from underutilized land and often the lease terms integrate additional energy security provisions for the base in the case of a supply disruption. The Navy has relatively more onsite opportunities than many other federal agencies because it owns 3.5 million acres of land and 117,000 buildings.

Under the “build it” model, the Navy produces on-base renewable energy for on-base consumption. All the energy produced through this model would be consumed on the base and it allows the Navy to try and meet one of its other goals of supporting onsite microgrid development and infrastructure upgrades.

Case Study: Mesquite 3 Solar Power Purchase Agreement

On July 16, 2015, the Navy signed a 25-year public-private agreement to procure 210 megawatts DC (direct current) of renewable power generated by a solar farm in the Arizona desert. Representing the largest single purchase of renewable energy ever made by the Federal Government, the project will deploy over 650,000 photovoltaic panels fixed on ground-mounted, horizontal single-axis trackers. Falling under the “buy-it” model, the amount of clean energy generated will cover (although not directly supply) one third of the demand of 14 shore-based Navy and Marine facilities in California. This marks a milestone towards the Navy’s ambitious goal of having renewable energy purchases account for half of the demand across all its facilities by late 2016. As Assistant Secretary McGinn put it, “it’s a really big deal.”

Power Purchase Agreement

The deal is based on a fixed price Power Purchase Agreement (PPA) between the buyer, in this case the Navy, the seller Sempra U.S. Gas and Power, and the federal Western Area Power Administration (WAPA) who will distribute the resulting electricity.

As delineated in the Mesquite 3 PPA, Sempra will construct and operate the solar facility which will supply power into the power grid managed by WAPA. The Western Area Power Administration will then begin to sell electricity to the DON by the end of 2016. While the deal’s exact pricing terms are proprietary, the Navy estimates that the project will result in savings ranging from $90 million up to $450 million over the course of the 25-year contract.

Lessons Learned: Empowering Managers

Beyond the clearly articulated vision and support of the Navy’s top leader, one of the key to the Navy’s success in ramping up their renewables portfolio so quickly, including huge procurements like the Mesquite 3 Project, was empowering a strong and cohesive team with the resources and authority it required to execute agency goals. In this case, Secretary Mabus assigned an experienced manager and procurement official, Senior Executive Service member Robert M. Griffin, to lead REPO and made sure he had the financial and staffing resources necessary to succeed. That included hiring a team of outside expert contractors instead of relying solely on Navy personnel with an already existing heavy workload.

Griffin was also provided with the mandate to coordinate and direct the many other Navy offices that needed to be involved with these types of procurements. That authority served to expedite decision-making and internal review that can often slow initiatives in any large bureaucracy. REPO was also granted considerable flexibility to determine how to best meet the Navy’s ambitious targets including working closely with the private sector. As Mr. Griffin stated in an 2014 interview, one of the key lessons that stand out was “the value of the private sector to bring innovation and ingenuity to a mission.”

Lessons Learned: Cost Still an Overriding Consideration

It is important to note that even with the clear targets and leadership support, any new Navy renewable energy procurement still needs to be cost-effective because no additional funding is available to pay for any premiums that might be associated with contracting for cleaner electricity supplies over historic sources. In other words, no new dollars were allocated to meet the one gigawatt goal, and if the Navy signed a higher priced renewable energy contract those additional costs would have taken away funding from other critical operations and maintenance needs. This dynamic is common throughout the Federal Government.

Fortunately, while this requirement would have likely been a considerable barrier in years past, the rapid decline in wind and solar costs means that today renewable resources are often less expensive than their “brown power” competitors. That is true even without factoring in the benefits of a long-term fixed price contract or, in some cases, onsite generation. The ability of new onsite renewable energy capacity to make bases more energy secure, resilient, and independent were very important to the Navy and its mission. However, these benefits were not typically assigned a financial value when being compared to historic energy supplies.

Lessons Learned: Importance of Fixed Price Contracts

Under most PPAs, the customer agrees to pay a single rate over a set period of time, typically either 20, 25, or 30 years. Other models exist with shorter terms, or with predetermined price escalators, but long-term fixed price contracts are the norm.

The PPA price for the Mesquite 3 Solar project was fixed for the entire two and half decades, which should serve to insulate the Navy from future price increases which are expected to occur in the conventional energy supply market. As saving don’t come automatically, a competitive procurement process may be needed both before and after selecting a vendor. According to Monica DeAngelo, Director of Facilities and Energy Program Integration, the Navy found it had to spend a few months sitting at the “negotiating table day in and day out,” before they were able to get a rate that was cost competitive with the rates they were paying in 2015. Further deliberations were needed to secure a fixed rate with no escalation over the full 25 years.

As with any hedge, there is a risk that electricity prices could fall over this period, but the determination was made that was highly unlikely and the benefits of a fixed price contract greatly outweighed any potential relative losses.

Project developers typically also favor fixed price contracts for renewable energy projects because, combined with the fact that renewable energy has a fairly predictable annual output and is not subject to fuel price fluctuations, it makes it easier for them to secure financing for these capital intensive projects.

Generally, the longer the contracted PPA, the greater the financial opportunity. A long contract guarantees the developer will recoup their initial investments, while the customer gets a guaranteed payback period, allowing all parties to benefit financially. At the end of the contract term the buyer is usually given the choice to extend the contract, buy the system, or have the system removed.

Lessons Learned: Challenge of Locking in Long Term Contracts

While the PPA and the resulting price savings hinged on a long-term contract, meeting that prerequisite proved difficult under legal restrictions that limit federal agency electricity contracts to just 10 years in most cases. Since renewable energy projects often need more than a decade to pay off the upfront capital costs, this restriction has proven to be a major barrier to federal agencies and often results in higher PPA prices.

The Department of Defense, however, has unique “2922” authority under 10 USC 2922A (Contracts for Energy or Fuel For Military Installations) which allows it to sign electricity contracts for up to 30 years with the approval of the Secretary of Defense. While the “2922” process has its own complexities, it may in the future give the military branches a considerable advantage over other federal agencies in renewable energy procurement.

Monica DeAngelo spoke to this dynamic when characterized the Mesquite PPA as a “no brainer” but shared that “our biggest barrier was getting the use” of the 2922 Authority which allows the Navy in her words to “put our full faith, credit, and balance sheet behind” the project.

Mesquite 3 was the first DOD project to use 2922 Authority for a long term renewable energy project. DeAngelo emphasized the importance of educating senior DOD officials, which she described as an “18 month process… we educated the Office of the Secretary of Defense on why these comparative market places made sense and why buying electrons from the grid was truly beneficial as opposed to being directly connected.” Educating the Office of the Secretary of Defense played a major role in the eventual approval of the long term contract. Others involved in the project believe that delegating 2922 sign-off authority to a lower level than the Secretary of the Defense would also greatly facilitate its use for future DOD PPAs.

The inability to sign long-term PPAs is a challenge faced throughout the federal government. While there are ways to mitigate the 10 year limitation, for example starting the contract when the electricity starts flowing so the construction period is not counted towards the contract length, it one of the most widely cited barriers by federal energy managers. The General Services Administration (GSA) is working to develop a contracting vehicle termed “10 + 10” that mimics a 20 year agreement (the option provides for a 10 year contract with an additional 10 year extension option, see the Tools section for more information).

Senator Hirono (D-HI) introduced legislation in May 2015 to fix this problem by allowing federal agencies to sign 30 year PPAs, but due primarily to arcane scoring conventions the bill is considered unlikely to progress through the legislative process anytime soon.

Lessons Learned: No Upfront Costs

Another key advantage of the PPA procurement model is that it can be done without any upfront investments. Essentially all the upfront capital costs and subsequent operations and maintenance are baked into the contracted electricity prices, which in most cases still beats out open market electricity rates. While agencies still need to dedicate some personnel resources to the procurement process, such as managing a competitive bidding process and getting buy-in from other impacted agency offices, not needing upfront capital eliminates many historic barriers such as waiting for Congressional appropriations.

“PPA arrangements enable the host customer to avoid many of the traditional barriers to adoption for organization looking to install solar systems: high-upfront costs; system performance risk; and complex design and permitting process. In addition, PPA arrangements can be cashflow positive for the host customer from the day the system is commissioned”— EPA’s Green Power Partnership Program

Another critical benefit of having a third party manage all the financing aspects of a project is that, unlike the federal government, experienced developers can monetize incentives available to the private sector. These incentives can usually cut project costs in half or more and include the 30 percent federal investment tax credit, the production tax credit (used primarily for wind energy projects), accelerated depreciation allowances, and a myriad of state and local specific incentives (SeeToolbox for more background information).

In some cases, a project may also produce valuable renewable energy credits (RECs), which can further reduce PPA prices if the customer chooses not to keep them for themselves. While the Navy determined that keeping and retiring project RECs was not necessary to meet its renewable energy use targets, other federal agencies may reach different conclusions. If a federal agency is planning to use a renewable energy PPA to claim progress towards an emissions reduction goal, then they must retire or swap the associated RECs according to rules established by the Federal Trade Commission.

Conclusion

As demonstrated by the Mesquite 3 solar project, the PPA model is proving itself to be a robust method for procuring renewable energy, in this case the largest government renewable energy procurement in history.

Arguably the biggest benefit of using a PPA is that it requires no upfront costs, freeing federal agencies from the need to reallocate budgets at the expense of other programs or waiting years to secure the necessary upfront costs. Other important benefits of PPAs include locking in a fixed long-term price, usually saving millions of dollars over the contract period relative to purchasing electricity from traditional sources. PPAs also allow federal agencies to utilize valuable tax incentives like the investment tax credit and accelerated depreciation.

While still a relatively new contracting option for the federal sector, PPA use is increasing, but not without some obstacles. DeAngelo says that the Navy still has a lot to learn by “hearing from industry, partnering with industry, partnering with our utilities, and hearing from our colleagues in government,” which she thinks is the way “we can all get to the right solutions.”

The Mesquite PPA is significant because it points towards the direction the DON plans to take its renewable energy program. “It marks a real significant milestone to show what we can do with the kinds of partnerships we have with the Department of Energy, Western Area Power Administration and with industry with Sempra,” said Assistant Secretary McGinn, “we’re going to be doing more of it.”