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Budget Scoring Continues to Impede Industry Participation in Renewable Energy Projects

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  • October 27, 2011
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The military’s push to rely on private sector investment to boost its use of renewable energy is running smack into federal rules governing how deals with industry to locate energy development projects on installations are counted against the services’ budgets.

Resolving the conflict would go a long way toward helping the Defense Department meet its goal of acquiring 25 percent of its electric energy needs from renewable sources by 2025, according to industry experts. Unless DOD abandons its stated strategy of leveraging private sector financing to build new energy infrastructure — echoing the approach it favored to upgrade family housing over the past decade — the Office of Management and Budget’s (OMB) scoring rules for measuring how federal spending obligations are counted toward a service’s appropriations will need to be addressed.

“The alternative energy initiative of DOD is destined for disappointment if we cannot come up with an appropriate new set of scoring rules,” said Steve Sorett, senior counsel with McKenna Long & Aldridge.

The existing scoring rules discourage most public-private ventures — through an enhanced use lease, for example — intended to develop a supply of alternative energy on a military installation slated for the base’s use. Under that arrangement, the scoring rules would consider the project a capital lease, forcing the military service to have sufficient budget authority to cover the lease’s entire cost in the first year of the lease.

That prohibitive barrier has resulted in very few large-scale, public-private renewable energy development projects from going ahead on military installations. One of the most prominent projects under way is the 500-megawatt solar farm a development team is constructing at Fort Irwin, Calif., via an enhanced use lease. Only a small portion of the project’s power is slated to be used on base, however, according to several industry sources.

To be considered an operating lease, an energy development project would need to pass a strict, six-part test in OMB Circular A-11. Several of the criteria trip up most proposals. The requirement that the lease term not exceed 75 percent of the asset’s estimated life is problematic, for example.

That rule forces the government to enter into shorter leases than are economically advantageous, Sorett said. Developers try to acquire leases lasting from 20 to 25 years, which is more than 75 percent of the life of a typical energy project.

Another tricky criterion for energy development projects is one requiring there to be a private sector market for the asset. While energy generated on a base could be distributed to the commercial grid, in many cases the private sector may not be interested in operating an energy facility on a military installation for that purpose.

DOD, for its part, does not believe OMB’s scoring criteria are inhibiting its initiative to embrace clean energy. “The DOD is not impeded from meeting its renewable energy goals by legal constraints nor by budget scoring rules,” a spokeswoman said in a written statement.

Eluding OMB

While industry finds the current scoring rules “unworkable,” they have been in place since 1990. Federal agencies, including DOD, are afraid to speak out regarding the consequences of scoring, leaving the private sector as the best avenue to resolve the issue, according to Sorett.

“The private sector is more than willing to sit down with the White House and the director of OMB to discuss what would be appropriate scoring rules going forward that are consistent with the principles of full disclosure and transparency in the budget process,” he said.

Change wouldn’t require an act of Congress, Sorett stressed. The president could issue an executive order to break the impasse.

A separate issue that also had been a hurdle to private sector investment in energy development projects on military installations seems to have been resolved. Some activities within DOD had interpreted a federal statute as limiting the length of power purchase agreements the military struck with energy providers to 10 years. With developers’ need for longer agreements — typically 20 years or more — that constraint similarly ruled out large-scale, renewable energy projects from going ahead.

More recently, the Pentagon has determined the department has the authority to enter into power purchase agreements for up to 30 years, removing one obstacle to expanding opportunities for public-private ventures for energy development.

“The wildcard, [though], is how will OMB view long-term power purchase agreements …  I don’t know what the answer is to that; I don’t know if anyone else has the answer to that,” said Anita Molino, president of Bostonia Partners.

On Nov. 9-10, the National Council for Public-Private Partnerships will be hosting a conference in Arlington, Va., dedicated to real estate and energy projects. The first day will focus on the challenges OMB scoring presents to the public and private sectors; the second day will explore the roles partnerships can play in helping federal agencies meet their goals for the management of real estate assets, improved energy efficiency and expansion of renewable energy projects.

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