Defense Energy Projects: Latest Trends

In this Industry Current, originally published in Power Finance & Risk, 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 L. 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.

The U.S. Department of Defense and each of the three major military 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 fiscal year 2025. In 2012, President Barack Obama buttressed this goal by announcing a 2025 renewables deployment goal of 3 GW for DoD.

The service branches have each made significant progress in purchasing 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 procurements by relying on government procurement offices such as the Defense Logistics Agency. In expanding the scope of renewables 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 facilities. While creating an interesting opportunity for developers, the move to "systems installation" 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 highlights 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) government approvals take time and necessitate coordination among a number of parties; and (3) apart from a few persons inside specialty 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 government agency and a site-land lease with another; the developer will also need...