The U.S. Department of Defense and military branches aim to obtain 25% of their energy from renewable sources by 2025. They are pursuing larger renewable energy projects through aggregated solicitations and a "systems installation" approach. This involves a combination of on-site and off-site generation, micro-grids, and potentially energy storage. While it creates opportunities for developers, it also presents challenges related to government contracting timelines, approvals between multiple agencies, and guaranteed energy purchase levels. Developers must ensure adequate protections are in place for underperformance given the government's inexperience with renewables projects and third-party financing.

1. 6 | VOL. XIX, NO. 23 / June 13, 2016 © Power Finance Risk 2015
Power Finance Risk www.powerfinancerisk.com
INDUSTRY CURRENT
he U.S. Department of
Defense and each of
the three major mili-
tary service branches
are committed to expanding
renewables purchases to meet
their energy needs over the next
decade. The National Defense
Authorization Act of 2007 requires
that DoD procure 25% of its energy
from renewable sources by fis-
cal year 2025. In 2012, President
Barack Obama buttressed this
goal by announcing a 2025 renew-
ables deployment goal of 3 GW for
DoD.
The service branches have each
made significant progress in pur-
chasing renewables from utility-
scale projects, including from
off-base and on-base (behind-the-
meter) projects.
To accelerate this progress, to
varying degrees, they are now
exploring larger-scale procure-
ments by relying on government
procurement offices such as the
Defense Logistics Agency. In
expanding the scope of renew-
ables purchases, they are moving
to a more comprehensive “systems
installation” approach as well as
aggregation of several projects (for
service to multiple locations) in
one solicitation.
These approaches could involve
a combination of on-site and off-
site generation, micro-grids and,
potentially, energy storage facili-
ties. While creating an interesting
opportunity for developers, the
moveto“systemsinstallation”and
project-aggregation approaches
creates certain challenges beyond
the usual set of risks related to
government contracting that
developers and financing parties
need to consider. This article high-
lights some of those key issues as
well as other unique issues and
risks associated with these types
of projects.
Project Timing and Coordination
The government does not act
like a private party in procuring
goods and services. In general,
(1) the government is often slow,
and delays are frequent; (2) gov-
ernment approvals take time and
necessitate coordination among a
number of parties; and (3) apart
fromafewpersonsinsidespecialty
agencies, the government has little
experience or expertise relating to
renewables projects or third-party
project finance.
As an example of the approval
and coordination challenges, for
a typical behind-the-meter solar
project, the developer may have to
negotiate a PPA with one govern-
ment agency and a site-land lease
with another; the developer will
also need the support of the rel-
Defense Energy
Projects: Latest Trends
In the first part of this Industry Current, three attorneys
at Orrick discuss the evolution of the U.S. Department
of Defense’s power procurement process and the
implications for sponsors seeking DoD power purchase
agreements. The authors are Harry Clark, a partner
in the firm’s international trade and compliance group,
Christopher Gladbach, a partner in the energy and
infrastructure group, and Evgeniya Shakina, an associate
in the international trade and compliance group.
T
Harry Clark Evgeniya ShakinaChristopher Gladbach
evant installation leadership. This
same developer will then have to
get approval of the PPA package
from the Office of the Secretary
of Defense, which, if not coordi-
nated appropriately, can result in
significant additional delay.
That said, DoD has gained broad
experience recently on renewables
projects and has learned some les-
sons. Each new project takes less
time and involves fewer govern-
ment-specific challenges than the
last. DoD agencies are proceed-
ing in a more coordinated way.
Agencies such as DLA that have
already been in charge of mul-
tiple contracts have significantly
improved their relevant process-
es over the last several years and
reduced project delays (but, of
course, there is room for further
improvement).
In pursuing amalgamated proj-
ects for multiple installations, the
service branches will need to take
special care in ensuring that the
multiple projects are coordinated
centrally and the approval pro-
cess is streamlined. Otherwise,
the risk of a development delay
may be too high for a developer
to absorb.
Guaranteed Energy Purchases
and Minimum Annual Production
Most DoD PPAs include com-
mitments that the government as
the power purchaser will pay for
a minimum annual production
level per year. Beyond this level,
the DoD typically commits only to
pay for energy consumed rather
than the total volume of energy
produced by the asset (common in
the utility PPA market).
For behind-the-meter projects
in states without net metering
schemes, this effectively means
that developers will only build
projects that meet the minimum
annual guaranty level since there
are no assurances that additional
generation will be paid for.
For off-site facilities, the devel-
oper should have a plan and obtain
requisite permits and approvals to
sell the energy in excess of the
government’s consumption in the
relevant market.
In parallel, developers generally
have to pay liquidated damages
to the government if generation
does not meet a certain minimum
annual production threshold.
When negotiating these thresh-
olds, developers should ensure
that they allow enough breath-
ing room for project underperfor-
mance.
As the government moves to
thinking about multiple projects
serving multiple loads, these
thresholds will continue to assume
paramount importance and invite
scrutiny by financing parties.
Check back next week for the sec-
ond part of this Industry Current,
in which the three attorneys dis-
cuss portfolio risk, state utilities
laws, and other topics that must be
considered in relation to projects
backed by DoD contracts.