Defense Energy: Observations on DOD's Investments in Alternative Fuels
Published: 2015-07-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: DOD is the single largest consumer of energy in the federal government, spending billions of dollars annually on petroleum fuels to support military operations. One of DOD's strategic operational energy goals is to expand its energy supply options. Investing in alternative fuels—liquid fuels, derived from non-petroleum feedstocks, whose use does not necessitate any modifications to platforms and equipment—represents one means of potentially achieving this goal.
GAO was asked to examine aspects of DOD's investment in alternative fuels. GAO reviewed the extent to which DOD (1) has purchased alternative fuels, and has demonstrated these fuels can meet its safety, performance, and reliability standards; (2) has a process for purchasing alternative fuels for military operations that takes into consideration any cost differences between alternative and conventional fuels; and (3) has used the DPA authorities to promote the development of a domestic biofuel industry.
GAO reviewed past alternative and conventional petroleum fuel procurements, as well as statutes, regulations, and DOD guidance related to fuel purchases. Also, GAO reviewed various documents on biofuel projects initiated under the DPA authority and interviewed cognizant DOD officials involved with purchasing and using fuel and administering the biofuel projects.
GAO is not making recommendations in this report. DOD provided technical comments on the findings, which GAO has incorporated where appropriate.
section_title: What GAO Found
paragraphs: The Department of Defense (DOD) has purchased small quantities of alternative fuels—jet and naval distillate (known as F-76, to power ships)—for testing and demonstration purposes, but has not done so yet for military operations. DOD's testing process validates the ability of alternative fuels to meet safety, performance, and reliability standards for military equipment and platforms. From fiscal years 2007 through 2014, DOD purchased about 2.0 million gallons of alternative fuel for testing purposes, at a cost of about $58.6 million. Over the same period, it purchased about 32.0 billion gallons of petroleum fuel at a cost of about $107.2 billion. DOD has approved alternative fuels made from two production processes for use in certain items and is continuing to test others.
DOD is currently required by law to ensure alternative fuel purchases for operational purposes are cost-competitive with conventional fuels and has a standard process to purchase large-scale volumes of all fuels. Proposals are evaluated according to technical acceptability and price. To help the Navy purchase alternative jet and naval distillate fuels blended with conventional fuels, the Department of Agriculture plans to provide funding directly to alternative fuel vendors that meet certain requirements and receive awards from DOD. These funds are intended to defray some of the alternative fuel producer's extra costs—such as costs of domestic feedstocks. Per DOD, no alternative fuel vendors have received awards so none of these funds have been paid out yet.
DOD has used financial incentives provided for by Title III of the Defense Production Act (DPA) to help facilitate the development of commercially viable plants for producing biofuels for the military and commercial sectors. To date, DOD has used this authority for two ongoing projects: Bio-Synthetic Paraffinic Kerosene and Advanced Drop-In Biofuels Production Project and the federal government's cost share for these projects was about $234.1 million.

section_title: Letter
paragraphs: The Department of Defense (DOD) is the single largest consumer of  energy in the federal government. A majority of DOD’s energy usage  goes toward its operational energy needs—that is, the energy required for  training, moving, and sustaining military forces and weapon platforms for  military operations. DOD largely depends on petroleum fuels for military  operations. In fiscal year 2014, the Departments of the Navy, Air Force,  and Army purchased about 3.8 billion gallons of petroleum fuel and other  fuel products at a total cost of about $14.4 billion (not adjusted for  inflation). Given the realities of global oil markets, according to DOD’s  Operational Energy Strategy, a disruption of oil supplies is plausible and  increasingly likely in the coming decades and the volatility of oil prices will  continue to pose a budgetary challenge.
According to DOD, one of the department’s strategic operational energy  goals is the expansion of its energy supply options. One means of  potentially achieving this goal is DOD’s investment in alternative fuels— an investment that DOD cites as a prudent insurance policy against future  oil supply disruptions and high prices. DOD’s primary alternative fuels  goal, according to DOD policy, is to ensure operational military readiness,  improve battlespace effectiveness, and further the flexibility of military  operations through the ability to use multiple, reliable fuel sources.  Further, DOD policy indicates alternative fuels can serve as a mechanism  for mitigating anti-access/area denial effects, and for enabling flexibility  in supply chain logistics. In addition, the 2014 Quadrennial Defense  Review notes that energy improvements enhance range, endurance, and  agility, particularly in the future security environment where logistics may  be constrained.
You asked us to examine aspects of DOD’s investment in alternative  fuels. This report discusses the extent to which DOD (1) has purchased  alternative fuels and has demonstrated that these fuels can meet its  safety, performance, and reliability standards; (2) has a process for  purchasing alternative fuels for military operations that takes into  consideration any cost differences between alternative and conventional  fuels; and (3) has used the Defense Production Act (DPA) authorities to  promote the development of a domestic biofuel industry.
To determine the extent to which DOD has purchased alternative fuels,  and has demonstrated that these fuels can meet its safety, performance,  and reliability standards, we obtained and analyzed the military  departments’ alternative fuel purchase data—including quantities, costs,  and funding sources—covering fiscal years 2007 through 2014. Through  reviews of DOD guidance, reports, publications, and briefings and  interviews with DOD officials, we obtained information about the  reason(s) why the military departments purchased alternative fuels and  how these fuels were put to use. To assess the reliability of the data, we  reviewed the information and met with the DOD officials involved with  purchasing alternative fuels about the source of the data. We concluded  that the purchase data are of sufficient reliability to describe the order of  magnitude of DOD’s funding toward alternative fuels. In addition, we  obtained data on the military departments’ conventional petroleum and  other fuel product purchases from fiscal years 2007 through 2014 based  on database queries that DOD officials conducted from March through  April 2015. To assess the reliability of the data, we analyzed the data and  gathered information on the source of the data and the functionality of the  database—including data entry and monitoring processes. We also  reviewed any inconsistent information (e.g., negative values) with DOD  officials to understand any issues identified with the data. Based on an  interview with DOD officials and our review, we determined that the data  are of sufficient reliability to provide context about the quantities and cost  of petroleum purchases within DOD. We selected the fiscal year 2007  through 2014 time frame for each of the data series above after  assessing their availability and reliability to maximize the amount of data  available for us to provide information and context.
To determine the extent to which DOD has a process for purchasing  alternative fuels for military operations that takes into consideration any  cost differences between alternative and conventional fuels, we reviewed  relevant statutes, regulations, and DOD directives and other guidance  that provide direction on buying fuel. In addition, we obtained and  analyzed documentation about an interagency initiative related to  alternative fuel purchases. We reviewed briefings and fuel contract  solicitations for information about how DOD would address any cost  differences between alternative and conventional fuels during the fuel  purchase process. We also interviewed DOD officials responsible for and  involved with fuel acquisitions.
To determine the extent to which DOD has used the DPA authorities to  promote the development of a domestic biofuel industry, we reviewed  relevant statutes, a DOD directive, and other guidance generally related  to the DPA authorities. We interviewed DOD officials who implement and  oversee the implementation of the authorities about the instances where  they have been used to promote the development of a domestic biofuel  industry. We obtained and reviewed documentation on related biofuel  projects that DOD has initiated under the authorities including a  memorandum of understanding, budget estimate submissions for fiscal  years 2011 to 2015, project documentation submitted to congressional  committees, project solicitation and agreement documents, and related  statutes—such as related provisions in authorization and appropriations  acts. In addition, when we met with DOD officials, we obtained  information on how ongoing biofuel projects were initially evaluated,  funded, and monitored.
We conducted this performance audit from September 2014 to July 2015  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Types of Fuel Used in Military Operations
paragraphs: Military operations generally rely on petroleum-based fuels that power  communication equipment, forward deployed bases, tactical and combat  ground vehicles, aircraft, naval vessels, and other platforms. For military  operations, DOD primarily uses jet and naval distillate fuels. With regard  to jet fuel, until recently DOD predominately used two types: Jet  Propellant-8 and Jet Propellant-5. Jet Propellant-8 is the primary fuel  used in DOD land-based aircraft, tactical and combat ground vehicles,  and ground support equipment. Aircraft, ground vehicles, and support  equipment deployed aboard maritime vessels (such as aircraft carriers)  use Jet Propellant-5 since this jet fuel—which is stored in large  quantities—is less combustible than other types of jet fuel, which is  important for fire safety reasons. The standards for these two fuels are  listed in the DOD technical fuel specification documents maintained by  the Departments of the Air Force and Navy, respectively, and approved  for use by all DOD departments and agencies. Jet Propellant-8 fuel is  similar to commercial jet fuels—known as Jet A and Jet-A-1. The  standards for these fuels are listed in the technical fuel specification  document issued by ASTM International. As of the end of calendar year  2014, DOD reported completing conversion from Jet Propellant-8 fuel to  Jet A—with the inclusion of specific additives for military unique  requirements—at military installations within the United States. DOD uses  naval distillate fuel, known as F-76, to power nonnuclear ships. This fuel  can be burned in shipboard boilers, diesel engines and gas turbines. The  standards for this fuel are listed in the DOD technical fuel specification  document maintained by the Department of the Navy. Unlike the case of  jet fuel, according to DOD officials, there is no commercial equivalent that  meets the Navy’s maritime needs.
section_title: DOD Guidance on Alternative Fuels
paragraphs: DOD Directive 4180.01, DOD Energy Policy, among other things,  establishes that DOD will diversify and expand its energy supplies and  sources, including alternative fuels.responsibilities for various matters, including the following:
The Assistant Secretary of Defense for Operational Energy Plans and  Programs for development, certification, qualification, field demonstration, and  ongoing purchases of alternative fuels for operational platforms in  accordance with the U.S. Code;   is to develop policy and guidelines and provide oversight
The Director, Defense Logistics Agency is to (1) manage energy  commodities and related services to support the qualification of alternative fuels and support field  demonstration activities; and  ; and (2) provide energy expertise
The Secretaries of the military departments are to develop and  implement doctrine, guidance, and strategies consistent with the  directive and implementing instructions.
This position was recently merged with the former Deputy Under Secretary of Defense  (Installations & Environment) position to create the Assistant Secretary of Defense for  Energy, Installations, and Environment. See Carl Levin and Howard P. “Buck” McKeon  National Defense Authorization Act for Fiscal Year 2015, Pub. L. No. 113-291, § 901(f)  (2014) (amending 10 U.S.C. § 138(b)(9)). Many of the responsibilities of the Assistant  Secretary of Defense for Operational Energy Plans and Programs were transferred from  section 138c of Title 10, U.S. Code, to section 2926. See id. § 901(g).
This responsibility is to be carried out in accordance with Department of Defense  Directive 4140.25, DOD Management Policy for Energy Commodities and Related  Services (Apr. 12, 2004). This directive was reissued as Department of Defense  Instruction 4140.25 on June 25, 2015. alternative fuels are obtained using the DOD’s standard fuel alternative fuels for operational purposes are purchased when cost- competitive with traditional fuels and when qualified as compatible  with existing equipment and infrastructure; and  fuel systems are qualified to use available commercial-type fuels,  including alternative fuels.
DOD’s Alternative Fuels Policy for Operational Platforms lists the  department’s primary alternative fuels goal as, among other things,  furthering flexibility of military operations through the ability to use  multiple, reliable fuel sources. for the department’s investment in alternative fuels, to include: increasing  DOD’s resilience against strategic supply disruptions, reducing the effect  of petroleum price volatility, and increasing fuel options for operational  commanders. This policy indicates alternative fuels can serve as a  mechanism for mitigating anti-access/area denial effects, and for enabling  flexibility in supply chain logistics. The policy stresses that the desired  end-state of investments in alternative fuels is operational military  readiness and battlespace effectiveness.
Additionally, it articulates considerations  DOD’s Operational Energy Strategy and related Operational Energy  Implementation Plan identify the high-level goal of expanding DOD’s  operational energy supply options. Promoting the development of  alternative fuels—in the form of testing and approving them for use by  existing military platforms, and helping to catalyze a competitive biofuels  industry—constitutes one means for achieving this goal.
Department of Defense Alternative Fuels Policy for Operational Platforms (July 5,  2012).
Each of the three military departments has energy guidance documents  that address alternative energy or alternative fuels. Two of DOD’s  military departments—the Navy and the Air Force—have also established  usage goals for alternative fuels. The Department of the Navy’s guidance  sets a goal of deriving 50 percent of total energy consumption from  alternative sources—including alternative fuels—by 2020, which,  according to Navy estimates, would require using about 336 million  gallons of alternative fuels (both naval distillate and jet fuels) annually by  2020. In addition to setting quantitative goals, the guidance established a  goal of demonstrating (which the Department of the Navy completed in  July 2012) and deploying (by 2016) the Great Green Fleet—that is, ships  and aircraft fueled by alternative fuels and other alternative energy  sources or utilizing other energy conservation measures. The  Department of the Air Force’s guidance includes a goal of increasing, to  50 percent of total consumption, the use of cost-competitive drop-in  alternative jet fuel blends for non-contingency operations by 2025.  Although the Department of the Army uses jet fuel in its tactical and  combat ground vehicles, aircraft, and other ground support equipment  (such as generators) and engages in efforts to test and approve  alternative jet fuel for use in these platforms, the Army does not have  specific alternative fuel usage goals in its energy guidance. For additional  details about each military department’s guidance as related to alternative  fuels, see appendix I.
section_title: GAO’s Prior Work
paragraphs: ) Strategy (May 1, 2015). select federal agencies—including DOD—to sponsor research that  specifically targets alternative jet fuel development or provide direct  support for its future commercial production, or both. For example, we  described multiple non-DOD research and development projects that  provide federal support for helping to develop technologies and  processes necessary for the commercial production of biofuels.  Regarding DOD, we noted DOD’s activities to test and approve  alternative jet fuel, in particular. In addition, we underscored that while  federal government activities help to address the main challenge of  alternative jet fuel’s price-competitiveness, it is market factors that affect  the long-term commercial viability of alternative jet fuels.
section_title: Defense Production Act
paragraphs: The Defense Production Act (DPA) generally provides the authority to,  among other things, expedite and expand the supply of critical resources  from the U.S. industrial base to support the national defense. Title III of  the Act—Expansion of Productive Capacity and Supply—allows military  and civilian agencies to provide a variety of financial incentives to  domestic firms to invest in production capabilities, so as to ensure that the  domestic industrial and technological base is capable of meeting the  national defense needs of the United States.Title III authorizes the president to provide for the following in order to  create, maintain, protect, expand, or restore domestic industrial base  capabilities essential for the national defense: purchases of or commitments to purchase an industrial resource or encouragement of exploration, development, and mining of critical  and strategic materials, and other materials; development of production capabilities; and increased use of emerging technologies in security program  applications and rapid transition of emerging technologies.
Use of the authorities is subject to conditions and requirements  established by statute. For example, prior to using the above DPA  authorities, the president must determine that the industrial resource,  material, or critical technology item is essential to the national defense,  that U.S. industry cannot reasonably be expected to provide the capability  in a timely manner, and that purchases, purchase commitments, or other  actions are the most cost effective, expedient, and practical alternative  method for meeting the need. According to DOD officials, the focus of  Title III is to establish commercially viable industrial capabilities that will  continue to prosper after federal government assistance ends.
The DPA fund manager is the Secretary of Defense. Within DOD, the  Under Secretary of Defense for Acquisition, Technology, and Logistics  provides guidance to implement the DPA and monitors the Title III  program. III program and maintains a program office to manage and administer  aspects of individual Title III projects. Program Office activities include  conducting market research and analysis when assessing potential Title  III projects; monitoring the technical and business performance of firms  receiving Title III financial incentives; and overseeing aspects of  contracting for Title III projects.
See Department of Defense Directive 4400.01E, Defense Production Act Programs,  paras. 4.1.2, 4.1.10 (Oct. 12, 2001) (certified as current as of Sept. 14, 2007). According  to DOD, the Under Secretary of Defense for Acquisition, Technology, and Logistics is  assisted by the Deputy Assistant Secretary of Defense (Manufacturing & Industrial Base  Policy) and the Program Director of the Defense Production Act Title III Program.
section_title: DOD Purchases Alternative Fuels to Test and Validate that the Fuel Can Meet Safety, Performance, and Reliability Standards
subsections: section_title: DOD Has Purchased Small Quantities of Alternative Fuels
paragraphs: DOD has purchased small quantities of alternative fuels for research,  development, and demonstration purposes but not large quantities for  military operations yet. DOD’s energy and alternative fuels guidance  discusses the research and development aspects of alternative fuels—to  include testing and approving fuels, as well as demonstrating their use in  an operational environment—and DOD’s Operational Energy Strategy  lists conditions for investment in the research, development, testing, and  evaluation of alternative fuels. The guidance notes that DOD is currently  purchasing alternative fuels for testing purposes, at a premium price— that is, prices higher than those for conventional fuels. The marginal unit  cost of producing a commodity at small scale with new processes being  researched and developed is typically much higher than the cost of  producing the same or similar commodities using existing large-scale  commercial production facilities.
The military departments purchased about 2.0 million gallons of  alternative jet and naval distillate fuels from fiscal years 2007 through  2014 to conduct the department’s testing, approving, and demonstration  activities, at a total cost of about $58.6 million (adjusted for inflation to  fiscal year 2015 dollars using the gross domestic product price index).  This total amount includes about 450,000 gallons for the Department of  the Navy’s July 2012 Great Green Fleet demonstration with a group of  ships and aircraft fueled by alternative fuels in an operational environment  that was part of a larger, biennial multinational maritime exercise, known  as the Rim of the Pacific exercise.funding sources for the quantities of alternative fuels purchased include  each military department’s Research, Development, Test, and Evaluation  funds and the Department of the Navy’s Operations and Maintenance  funds—for the Great Green Fleet demonstration—as well as other funds  that DOD identified as being associated with the American Recovery and  Reinvestment Act of 2009.
According to DOD officials, the  By contrast, over the same period of time, the military departments  purchased approximately 32.0 billion gallons of jet and naval distillate  conventional petroleum fuel at a total cost of about $107.2 billion  (adjusted for inflation to fiscal year 2015 dollars using the gross domestic  product price index). Figure 1 shows the total quantities and costs of the military departments’ jet and naval distillate alternative and conventional  petroleum fuels purchases from fiscal years 2007 through 2014. For more  details on the quantity and cost of the military departments’ jet and naval  distillate alternative and conventional petroleum fuels purchases by each  fiscal year, see appendix II.
section_title: DOD’s Testing Process Validates Whether Alternative Fuels Can Meet Safety, Performance, and Reliability Standards of Military Equipment and Platforms
paragraphs: Before any alternative fuel can be used in military operations, DOD tests  the fuel to validate whether it can meet unique safety, performance, and  reliability standards of military equipment and platforms. These standards  reflect the disparate environments in which the military operates—from  extreme cold weather to desert geography—and the different types of  functionality present in military equipment and platforms—such as flying  at high altitudes for military reconnaissance purposes or the afterburner  thrust augmentation in military aircraft engines. Two examples of fuel  properties important to these standards include a liquid fuel’s flash  point—the temperature at which existing vapors will combust, or ignite— and its freeze point—the temperature at which it freezes, which affects  how it behaves at low temperatures. Jet fuel (specifically Jet Propellant-5)  used on military ships is required to have a substantially higher flash point  than other jet fuels for safety reasons, since this fuel is stored in large  quantities on aircraft carriers and other vessels. A liquid fuel’s freezing  point potentially can have an effect on certain long-range, high-altitude  missions during which extreme cold temperatures are encountered.  Requirements for alternative fuels are set out in the relevant DOD  technical fuel specification documents. For more details about fuel  properties, see appendix III.
The Departments of the Navy, Air Force, and Army test alternative fuels  to ensure that they can be used in and on tactical and combat ground  vehicles and ground support equipment, ships, aircraft, and fuel  distribution systems. The military departments follow a testing and  approval process that is similar to that used in evaluating whether to  include prospective alternative fuels in the commercial jet fuel standard  issued by ASTM International. captures technical data through laboratory, component, engine, and  weapon system platform tests that evaluate the effects of alternative fuels  on the performance and reliability of military hardware. The chemical  properties of an alternative fuel may be tested in a laboratory using small  quantities of fuel—as little as 500 milliliters. As that fuel progresses  through the testing process, however, fuel quantity requirements  increase. For example, testing alternative fuels in jet engines could  require 60,000 gallons of fuel. For more details about the overall testing  process, see appendix IV.
ASTM International, formerly known as the American Society for Testing and Materials,  develops and delivers international voluntary consensus standards. ASTM Standard  D7566 covers the manufacture of jet fuel containing blends of conventional and  synthesized hydrocarbons (those not derived from petroleum hydrocarbons) for  commercial use.
Departments of the Navy and Air Force. Consequently, according to DOD  officials, they do not duplicate tests previously conducted by another  military department; however, when necessary, a department may  conduct additional tests if there are fuel properties that are specifically  important in certain military applications. In addition, DOD officials stated  that they are streamlining the number of specific tests they conduct as  they gain more expertise with alternative fuels. Other DOD stakeholders  who need to know about fuel issues—such as platform program  managers—review the testing results and share their feedback. Once  these stakeholders concur that test results demonstrate the prospective  alternative fuel meets safety, performance, and reliability expectations  and share their approval, the applicable DOD technical fuel specification  documents are updated.
section_title: DOD Has Approved the Use of Alternative Fuels Made from Two Production Processes and Continues to Test Others
paragraphs: Certain alternative fuels made from the Fischer-Tropsch and  Hydroprocessed Esters and Fatty Acids production processes have been  tested and approved for use in Navy aviation and ship platforms, Air  Force aviation assets, and Army tactical and combat ground vehicles and  ground support equipment, but not yet for Army aviation assets. Under  the previously mentioned DOD technical fuel specification documents,  alternative fuels produced through these two processes are approved for  up to a 50 percent blend with conventional fuel. According to DOD  officials, the alternative fuels made from these production processes that  were used in the testing process included fuels derived from natural gas,  coal, and renewable biomass (such as camelina, algal oil, and tallow)  feedstock sources.
The military departments continue to have some alternative fuel testing  efforts underway. Currently, according to Department of the Army  officials, the testing process for alternative fuels made from the two  production processes discussed above, as well as fuel made from the  Alcohol to Jet production process, for use in Army aviation assets is  complete. Further, they stated that the test results are undergoing  review in order to decide whether to approve the use of these fuels in  Army aviation assets. Also, according to Department of the Army officials,  they plan to complete the testing of alternative fuels made from the  Alcohol to Jet production process for use in tactical and combat ground  vehicles and ground support equipment by the end of calendar year 2015.  They stated they plan to start considering, just for these platforms,  alternative fuels made from the Synthesized Iso-Paraffins and Catalytic  Hydrothermolysis production processes before the end of fiscal year 2015  by purchasing fuel and beginning some testing. According to a Navy  official, the testing for alternative fuel made from the Alcohol to Jet and  Synthesized Iso-Paraffins production processes in aviation platforms is  complete while testing of these fuels in ship platforms is ongoing. In  addition, the Department of the Navy has begun testing alternative fuels  made from the Catalytic Hydrothermolysis and Hydroprocessed  Depolymerized Cellulosic production processes. According to an Air  Force official, beyond updating previously conducted tests of alternative  fuels made from other production processes—such as Alcohol to Jet— there are no ongoing or planned efforts within the Department of the Air  Force to complete additional testing and approval. According to Air Force  officials, if other fuel production processes appear likely to become  commercially viable, the Air Force will revisit resuming its alternative fuel  testing and approval efforts.
As discussed above, DOD recently reported converting from purchasing  military-specification Jet-Propellant 8 jet fuel in the United States to  purchasing commercial-grade jet fuel—Jet A—with specific additives for  military-unique requirements as a means for cost savings and broadening  the fuel provider supply pool. While commercial-grade jet fuels blended  with alternative fuels are not being produced on a commercial scale in the  United States, ASTM International has approved, for commercial aviation,  the use of three types of alternative fuels produced through the (1)  Fischer-Tropsch and Hydroprocessed Esters and Fatty Acids production  processes discussed above for up to a 50 percent blend with  conventional fuel and (2) Synthesized Iso-Paraffins production process  referenced above for up to a 10 percent blend with conventional fuel. In  addition, ASTM International continues to evaluate and consider  approving alternative fuels made from other production processes,  including those cited above for use in commercial aviation. Consequently,  DOD could use alternative fuels in the future via Jet A fuels once those  fuels are available on a commercial scale and a widespread basis in the  fuel marketplace. According to DOD officials, unless DOD continues to  test and approve additional alternative fuels that are being approved by  ASTM International, DOD runs the risk of having to develop a separate  supply chain for jet fuel—in other words, buying a specialty jet fuel  product—as it cannot be assured that commercial-grade jet fuel will meet  military safety, performance, and reliability standards.
section_title: DOD Has a Standard Process to Purchase All Fuels for Military Operations and is Currently Required to Ensure Alternative Fuel Purchases for Operational Purposes Are Cost-Competitive with Conventional Fuels
subsections: section_title: DOD Uses a Standard Process to Purchase Large-Scale Volumes of Fuel for Military Operations
paragraphs: DOD has a standard process in place for purchasing large-scale volumes  of fuel, including alternative fuels, for military operations. In support of  DOD’s large-scale fuel program, the Defense Logistics Agency Energy  (DLA-E) activity provides worldwide energy support, including for large- scale fuel purchasing, transportation, and storage for the military and   As depicted in figure 2 below, DLA-E  other government customers.purchases fuel worldwide in large volumes via four major regions:  Inland/East/Gulf Coast/Offshore; Rocky Mountain/West Coast/Offshore;  Atlantic/European/Mediterranean; and Western Pacific. DLA-E considers  two primary factors—technical acceptability and price—when evaluating  fuel vendors’ submitted proposals. The fuel must first meet DOD’s  technical fuel specifications and other technical evaluation factors as part  of the consideration. DOD officials indicated that DLA-E typically awards  multiple 1-year contracts in these purchase programs. Because the price  of energy commodities changes frequently, DOD documents indicate that  DLA-E and DOD establish fuel purchase contracts that are tied to market  price indicators with fixed margins. The fuel is moved through a  commercial distribution system (via tankers, railcars, barges, tank trucks,  and pipelines) to intermediary storage locations for redistribution, or  directly to the end use military customer.
DLA-E utilizes its Defense-wide Working Capital Fund for large-scale fuel  purchases for its military and other government customers. According to  DOD’s Financial Management Regulation, working capital funds were  established to satisfy recurring DOD requirements using a businesslike  buyer-and-seller approach. The fund covers DLA-E’s costs for purchasing large quantities of fuel and is reimbursed through its sale of  the fuel to the military at a standard price. The standard price is also  based on, among other things, an estimate for non-product costs such as  transportation and storage costs. The standard price is intended to  remain unchanged until the next fiscal year. To simplify cost planning and  budgeting, the standard price for a given fuel is the same globally.
section_title: DOD is Currently Required to Consider Whether Alternative Fuels Are Cost- Competitive with Conventional Fuels for Military Operations
paragraphs: As DOD seeks to purchase alternative fuels for military operations, it is  required to consider whether alternative fuels are cost-competitive with  conventional fuels. Under the previously mentioned DOD technical fuel  specifications, fuels produced through the Fischer-Tropsch and  Hydroprocessed Esters and Fatty Acids production processes are  approved to be used in Navy aviation and ship platforms, Air Force  aviation assets, and Army tactical and combat ground vehicles and  ground support equipment but not yet for Army aviation assets for a blend  of up to 50 percent with conventional fuel.  From a technical  requirements perspective, DOD can purchase and use alternative fuels  produced via these approved processes for military operations. However,  in conforming to the law and to departmental guidance, DOD must  currently consider whether alternative fuels are cost-competitive with  conventional fuels. For example, DOD may not obligate or expend funds  made available for fiscal year 2015 to make a large-scale purchase of  alternative fuel for operational purposes unless the fully burdened cost— that is, the commodity price of the fuel plus the total cost of all personnel  and assets required to move and, when necessary, protect the fuel from  the point at which the fuel is received from the commercial supplier to the  point of use—of that fuel is cost-competitive with the fully burdened cost  of conventional fuel. However, with the requisite notice to the  congressional defense committees, the Secretary of Defense may waive  this limitation and the Secretary is required to notify the congressional  defense committees no later than 30 days before the purchase date if  DOD intends to purchase an alternative fuel for operational use that has a  fully burdened cost that is in excess of 10 percent more than the fully  burdened cost of conventional fuel for the same purpose. A similar  provision was in effect for fiscal year 2014 funds, but it did not reference  the fully burdened cost of fuel, nor was the 10 percent notice requirement  included. DOD guidance also discusses consideration of cost with  regard to alternative fuel purchases for operational purposes, and DOD’s  Operational Energy Strategy indicates that the department will acquire  such fuels for military operations at prices that are competitive with the  market price for conventional fuels. DOD has also recently issued  updated guidance establishing it is DOD’s policy that alternative fuels for  operational purposes are purchased when cost-competitive with  traditional fuels and when qualified as compatible with existing equipment  and infrastructure.
In December 2013, the Secretaries of the Departments of Agriculture and  the Navy announced an initiative, called Farm to Fleet, which is intended  to help the Department of the Navy meet its alternative fuels usage goals.  Related to this initiative, DOD intends to purchase, through its regular  domestic fuel purchases, Jet Propellant 5 jet and naval distillate fuels  meeting DOD’s technical fuel specifications and that are blended with at  least 10 percent but no more than 50 percent alternative fuels— specifically biofuels—for the Department of the Navy’s use in military  operations. The Department of Agriculture plans, under the authority of  the Commodity Credit Corporation Charter Act, to contribute up to       $161 million to alternative fuel purchases to help defray some of the extra  costs—which may include the costs of feedstocks—that would have  caused the final alternative fuel to be more expensive than the price of  conventional fuels for DOD.  To be eligible for the Department of  Agriculture’s Commodity Credit Corporation funding, the specific amounts  per gallon of which are provided in DOD’s fuel solicitation documents, fuel  vendors have to provide an alternative fuel that was produced from an  approved domestic feedstock—such as crop and tree residues,  algae/algal oil, or animal waste and by-products of animal waste.
In the event of a contract award with fuel vendors providing alternative  fuels, the vendors would receive separate payments from the Department  of Agriculture’s Commodity Credit Corporation and DOD. The Department  of Agriculture’s Commodity Credit Corporation would pay the incentive  amount per gallon indicated in the solicitation to the fuel vendors in order  to help them defray some of their costs, including domestic feedstock  costs. DOD would pay the remainder of these alternative fuel vendors’  prices. However, the incentive is not an additional sum paid to a fuel  vendor over and above the price submitted in its proposal, but rather  provides Commodity Credit Corporation funds to cover the portion of the  total submitted price that exceeds the price DOD would otherwise pay. In  no event would fuel vendors providing alternative fuels be paid more than  the price they submitted in their proposals. We note that such an  arrangement means that the cost of the alternative fuel to the federal  government as a whole may be higher than the cost of conventional fuel.  This is because, while DOD would be paying a price that is competitive  with the price of conventional fuel, the Department of Agriculture would be  paying an additional subsidy.
DOD’s first attempt to purchase alternative fuels for military operations,  through its large-scale fuel program, occurred in June 2014, when DOD  issued a solicitation, through its regular domestic large-scale fuel  purchase program for the Inland/East/Gulf Coast/Offshore region of the  United States, for the purchase of Jet Propellant-5 jet and naval distillate  fuels for which blended fuels with between 10 to 50 percent alternative  fuels were to be considered. The solicitation listed the estimated  maximum quantity of Jet Propellant-5 and naval distillate fuels as  approximately 392.5 million gallons. As such, the maximum amount of  biofuel to be blended into the desired fuel amount would be equivalent to  approximately 39 million gallons (at 10 percent blend) to 196 million  gallons (at 50 percent blend). The Department of Agriculture made  available approximately $27 million in Commodity Credit Corporation  funds to support successful biofuel contract awards. According to DOD  officials, proposals with biofuel bids for only naval distillate fuel but not Jet  Propellant-5 jet fuel were received. However, according to DOD officials,  none of the submitted proposals successfully met all of the technical  evaluation factors. The fuel contract awards under this solicitation were  announced on February 20, 2015. According to DOD officials, none were  for alternative fuels.
DOD’s second attempt to purchase alternative fuels for military  operations, through its large-scale fuel program, began in April 2015. At  that time, DOD issued a solicitation, through its regular domestic large- scale fuel purchase program for the Rocky Mountain/West  Coast/Offshore region of the United States, for the purchase of Jet  Propellant-5 jet and naval distillate fuels for which blended fuels with  between 10 to 50 percent alternative fuels were to be considered. The  solicitation listed the estimated maximum quantity of Jet Propellant-5 and  naval distillate fuels as approximately 290.6 million gallons. As such, the  maximum amount of biofuel to be blended into the desired fuel amount  would be equivalent to approximately 29 million gallons (at 10 percent  blend) to 145 million gallons (at 50 percent blend). The Department of  Agriculture has made available approximately $66 million in Commodity  Credit Corporation funds to support successful biofuel contract awards.  Fuel vendors had until May 18, 2015, to submit proposals, and DOD  plans to make contract awards before October 1, 2015.
According to a Navy official, the Department of Agriculture’s Commodity  Credit Corporation funds will not be available for DOD’s regular fuel  purchase programs for the Atlantic/European/Mediterranean and Western  Pacific regions because those are international rather than domestic fuel  purchases.
section_title: DOD Has Used Defense Production Act Authorities in Collaboration with Private Industry to Promote Domestic Biofuel Production
subsections: section_title: Defense Production Act Allows DOD to Provide Financial Incentives to Private Firms to Meet Critical National Defense Needs
paragraphs: Title III of the Defense Production Act (DPA)—Expansion of Productive  Capacity and Supply—generally allows military and civilian agencies to  provide a variety of financial incentives to domestic firms to invest in  production capabilities, so as to ensure that the domestic industrial and  technological base is capable of meeting the national defense needs of  the United States. Use of certain Title III authorities requires a  determination that, among other things, the industrial resource, material,  or critical technology item is essential to national defense and U.S.  industry cannot reasonably be expected to provide the capability needed   Title III financial incentives can reduce the risks for  in a timely manner.domestic suppliers associated with the capitalization and investments  required to establish, expand, or preserve production capabilities.  According to DOD officials, the focus of Title III is to establish  commercially viable industrial capabilities that will continue to prosper  after federal government assistance ends. Funding for Title III projects  comes from appropriations for DPA purchases, DOD components, or  other federal agencies.
section_title: DOD Has Used DPA Title III Authority for Two Biofuel Production Projects
subsections: section_title: Bio-Synthetic Paraffinic Kerosene Project
paragraphs: DOD first used Title III authority in relation to alternative fuels in 2010, for  the purpose of producing Bio-Synthetic Paraffinic Kerosene, an  alternative jet and naval distillate fuel made from the Hydroprocessed  Esters and Fatty Acids production process. Alternative fuels made from  this process can meet DOD’s technical fuel specifications when blended  with conventional fuels. The modified biorefinery resulting from this  project is to produce Bio-Synthetic Paraffinic Kerosene fuels and other  co-products from natural oils, fat, and grease feedstocks via the  Hydroprocessed Esters and Fatty Acids production process.
According to DOD officials, the project originated from the Department of  Defense Appropriations Act for Fiscal Year 2010. The explanatory  statement for that act listed Bio-Synthetic Paraffinic Kerosene Production  among the DPA projects for that year. In September 2009, the Air  Force, as Executive Agent for the DPA Title III program, issued a Request  for Information inviting the private sector to provide information about  establishing manufacturing capability for Bio-Synthetic Paraffinic  Kerosene fuel derived from renewable biomass feedstock sources.  According to DOD officials, only one private company responded to the  request. In December 2010, the Under Secretary of Defense for  Acquisition, Technology, and Logistics issued a determination that (1) the  industrial resource or technology item of Bio-Synthetic Paraffinic  Kerosene fuel is essential for national defense, and (2) U.S. industry  cannot reasonably be expected to provide this fuel in a timely manner  without action under the Defense Production Act. This written  determination was submitted to relevant congressional committees.Before awarding the Bio-Synthetic Paraffinic Kerosene production  agreement, DOD made a second attempt to identify other private  companies with expertise in this area. With no additional responses, DOD  entered into a technology investment agreement in September 2012 with  the sole private company that had previously responded to the Request  for Information.
According to DOD officials, the modified biorefinery project began in  September 2012 and the biorefinery is expected to be completed and  operational in September 2015. They stated that it has an end goal of  producing alternative fuels and co-products in a volume between 20 and  28 million gallons per year as of when DPA Title III assistance ends, and  will have the capability to blend the alternative fuel with conventional  petroleum fuel for its customers. DOD’s financial contribution for this  project comprises approximately $4 million of its total cost, with the  awarded private company paying the remainder. A commercial airline has  announced that it has entered into an agreement with the biofuel refinery  to purchase 15 million gallons of the jet fuel produced by this project over  3 years. Also, the biofuel refinery announced that it has a strategic  partnership with a fuel distributor that supplies aviation fuel. DOD officials  noted that, although the department has not entered into any agreement  to purchase alternative fuel from this modified biorefinery, the biofuel  refinery would be able to compete for a fuel contract with DOD via      DLA-E’s existing large-scale fuel purchase process.
section_title: Advanced Drop-In Biofuels Production Project
paragraphs: DOD’s second use of Title III authority in relation to alternative fuels  began in 2012 with the Advanced Drop-in Biofuels Production Project.  The goal of the project is to establish one or more domestic integrated  biofuels production enterprise capable of annually producing at least 10  million gallons of alternative jet and/or naval distillate fuel that can meet  DOD’s technical fuel specifications. This enterprise would include  feedstock acquisition and logistics, conversion facilities (Integrated  Biorefineries), and fuel blending, transportation, and logistics. The effort  would include the design, construction or retrofit, validation, qualification,  and operation of a domestic commercial-scale integrated biofuels  production enterprise.
In June 2011, the Department of Agriculture, Department of Energy and  Department of the Navy signed a memorandum of understanding that  initiated a cooperative effort to assist in the development and support of a  sustainable commercial biofuels industry. This occurred in response to  the president’s March 2011 Blueprint for a Secure Energy Future, which  challenged the Secretaries of these three departments to investigate how  they might work together to speed the development of drop-in biofuels  substitutes for diesel and jet fuel. The Blueprint noted that competitively  priced drop-in biofuels could help meet the fuel needs of the Navy, as well  as the commercial aviation and shipping sectors. The memorandum of  understanding explained that given the current economic environment,  significant start-up risks, and the competitive barriers posed by the firmly  established conventional fuels market, private industry would not assume  all of the uncertainty and risk associated with providing a commercially  viable production capability for drop-in biofuels. Accordingly, it was  necessary for the federal government to cooperate with industry to create  a strong demand signal and to make targeted investments to achieve the  necessary alternative fuels production capacity. The stated objective was  to construct or retrofit multiple domestic commercial- or pre-commercial- scale advanced drop-in biofuel plants and refineries. Specific  characteristics for these facilities include the capability to produce biofuels  meeting DOD’s technical fuel specifications at a price that would be  competitive with conventional fuel, and that they would cause no  significant impact on the supply of agricultural commodities for the  production of food. Under the memorandum of understanding, the three  departments stated their intentions to equally contribute funding over a  period of 3 years. The Departments of Energy and the Navy plan to apply  their funds through the DPA. The Department of Agriculture plans to  provide its contribution via the Commodity Credit Corporation funds, as  discussed above.
In August 2011, the Air Force, as Executive Agent for the DPA Title III  program, issued a Request for Information to the private sector to obtain  information related to advanced drop-in hydrocarbon biofuels production,  including the technical, manufacturing, and market barriers to establishing  a viable business for producing biofuels. According to DOD officials, an  interagency team was formed to review the responses and use the  findings as guidance to develop the requirements for the biofuel project.  In June 2012, DOD announced the initiation of and a solicitation for the  Advanced Drop-in Biofuels Production Project, which would provide  awards for biofuels production facilities over two phases. Phase I  awards would be for planning and preliminary designs for biofuel  production facilities; and Phase II awards would be for constructing,  commissioning, and performance testing of biofuel production facilities. In  January 2013, the Under Secretary of Defense for Acquisition,  Technology and Logistics issued a determination that (1) an advanced  drop-in biofuels production capability is essential to the national defense;  and (2) without action under DPA authority, U.S. industry could not  reasonably be expected to provide the capability in a timely manner. This  written determination was submitted to relevant congressional  committees. In May and June 2013, DOD selected four private  companies to receive Phase I awards totaling $20.5 million, with private  industry contributing funds for the remainder of the Phase I costs (at least  50 percent).
Only Phase I awardees were eligible to apply for the Phase II awards. In  August 2014, three of the four Phase I awardees received Phase II  awards totaling $210 million, with private industry contributing funds for  the remainder of the costs (which are to be more than 50 percent). Phase  II awardees are currently performing activities in preparation for  constructing their biorefinery facilities, including conducting environmental  analyses and securing financing. According to DOD officials, DOD will  monitor the Phase II awardees by conducting biweekly teleconferences,  quarterly status reporting updates, and site visits. In general, monitoring  activities will monitor factors such as whether there are any changes to  the company’s project scope, implementation, or timelines; and if the  company’s amount of spending correlates to how much of the biofuel  production facility has been completed. As shown in Table 1 below, the  Phase II awardees will be making alternative fuel from different  production processes and deriving it from various feedstock sources.  According to DOD program officials, the Advanced Drop-in Biofuels  Production Project should provide, between 2017 to 2018, production  capacity for about 106 million gallons per year of alternative jet and naval  distillate fuels that meet DOD’s technical fuel specifications and are  available at a price that is competitive with that of conventional fuels.
DOD applied $100 million in fiscal year 2012 procurement funds to this  project. For fiscal year 2013, the explanatory statement for the  Consolidated and Further Continuing Appropriations Act, 2013, listed    $60 million for this project. The National Defense Authorization Act for  Fiscal Year 2013 provided that amounts made available to DOD under  the DPA for fiscal year 2013 for biofuels production could not be obligated  or expended for the construction of a biofuel refinery until matching  contributions were received from the Department of Energy and  equivalent contributions from the Department of Agriculture. For fiscal  years 2014 and 2015, the Department of Energy received authorization to  transfer up to $45 million each year for DPA purposes. The Department  of Energy has contributed those funds to the DPA fund for this project.  For the Department of Agriculture’s equivalent contribution, it has  committed to expenditures of Commodity Credit Corporation funding  through the initiative described above. Two commercial airlines have  announced they are entering into fuel purchase agreements with two of  the Phase II awardees. The third Phase II awardee, according to DOD  officials, is also in talks with potential non-DOD customers. DOD officials  noted that, although the department has not entered into any agreement  to purchase alternative fuels from these private companies, they would be  able to compete for a contract with DOD via DLA-E’s existing large-scale  fuel purchase process.
section_title: Agency Comments
paragraphs: We are not making any recommendations in this report. We provided  DOD with a draft of this report for review. DOD provided technical  comments on our findings, which we have incorporated where  appropriate.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense; the Deputy Assistant Secretary of  Defense (Manufacturing & Industrial Base Policy); the Assistant Secretary  of Defense (Installations, Energy, and Environment); the Director,  Defense Logistics Agency, and the Secretaries of the Army, Navy, and Air  Force. In addition, the report is available at no charge on the GAO  website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-5257 or merritz@gao.gov Contact points for our Office of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix V.
section_title: Appendix I: Military Department Guidance on Alternative Fuels
paragraphs: The Department of the Navy includes two military services—the Navy and the Marine  Corps. the Air Force purchased more than 2 billion gallons of petroleum- based jet fuel in fiscal year 2014. This was about 97 percent of all of  the Department of the Air Force’s fiscal year 2014 petroleum and  other fuel product purchases. The plan indicates that using  alternative jet fuels could help to diversify the types of energy and  obtain the quantities of energy that are needed to perform the Air  Force’s missions, which are currently “heavily dependent” upon  petroleum and petroleum-derived fuels, thereby posing significant  strategic and security vulnerabilities.
The Department of the Army uses jet fuel in its tactical and ground  combat vehicles, aircraft, and other ground support equipment (such  as generators) and engages in efforts to test and approve alternative  jet fuel made from different production processes for use in these  platforms. However, the Army does not have specific alternative fuel  usage goals in its energy guidance. The Department of the Army’s  2015 Energy Security and Sustainability Strategy includes the  strategic goals, among others, of: optimizing use and assuring  access.  To accomplish these goals, the Department of the Army  plans to minimize overall energy demand and improve efficiency,  while securing access to renewable/alternative energy sources to  diversify and expand its resource supply, among other actions. The  Department of the Army purchased more than 350 million gallons of  petroleum-based jet fuel in fiscal year 2014. This was about 76  percent of all of the Department of the Army’s fiscal year 2014  petroleum and other fuel product purchases. ) Strategy (May 1, 2015).
section_title: Appendix II: Detailed Quantity and Cost Data of Military Departments’ Alternative and Conventional Fuel Purchases
paragraphs: Tables 2 and 3 show detailed quantity and cost data by fiscal year of the  alternative and conventional petroleum jet and naval distillate fuels that  the military departments purchased from fiscal years 2007 through 2014.
section_title: Appendix III: Fuel Properties
paragraphs: Before any alternative fuel can be used in military operations, it is tested  and approved to meet unique safety and performance standards. Listed  below are examples of fuel properties important to these standards.  Requirements for alternative fuels are set out in the relevant DOD  technical fuel specification documents.
Flash point – A liquid fuel’s flash point indicates the temperature at  which existing vapors will combust, or ignite. Fuels with higher flash  points contribute to a less flammable, less hazardous fuel for better  safety and combat survivability. Jet fuel (specifically Jet Propellant-5)  used on military ships is required to have a substantially higher flash  point than other jet fuel for safety reasons since this fuel is stored in  large quantities on aircraft carriers and other vessels.
Energy density is evaluated for both the mass and volume of fuel required. the components coming in contact with the liquid fuel can remain.  Also, it can affect the rate of deposits forming when the fuel  temperature is elevated; these deposits on components can affect  their performance, such as reducing the fuel flow through fuel filters.
Lubricity – A liquid fuel’s lubricity refers to its effectiveness in reducing  friction between moving parts in equipment such as pumps and fuel  control units.
Viscosity – A liquid fuel’s viscosity—which is critical to proper  equipment operations—is a measure of its internal resistance to  motion or flow.
section_title: Appendix IV: Alternative Fuel Testing Protocols
paragraphs: The Departments of the Navy, Air Force, and Army test alternative fuels  to ensure that they can be used in and on tactical and combat ground  vehicles and ground support equipment, ships, aircraft, and fuel  distribution systems. In general, the military departments use the test  protocols listed below, which are similar steps to those used in evaluating  whether to include prospective alternative fuels in the commercial jet fuel  standard issued by ASTM International.
Specification properties – This laboratory testing protocol evaluates  how a prospective alternative fuel’s basic chemical and physical  properties—such as its freezing and flash points—compare with the  baseline properties of conventional jet or naval distillate petroleum  fuel. These required properties are outlined in the associated  technical fuel specification documents.
Fit for purpose – This laboratory testing protocol involves evaluating  additional properties that are inherent to conventional jet or naval  distillate petroleum fuel, such as how compatible a prospective  alternative fuel is with specific metallic and non-metallic materials and  various additives that, among other things, inhibit corrosion and  dissipate static.
Component/Rig testing - This testing protocol involves evaluating how  a prospective alternative fuel performs in major components found in  the military department’s ground vehicles and support equipment,  ships, and aircraft. Examples of these components include injectors  and the section of an engine where combustion occurs.
Full scale testing – This testing protocol involves evaluating how a  prospective alternative fuel performs in engines of ground vehicles  and support equipment, ship and aircraft engines, auxiliary power  units, and fuel handling systems.
Platform testing - This testing protocol involves evaluating how a  prospective alternative fuel performs when different types of ground  vehicles and support equipment, ships, aircraft, and fuel support  equipment run on the fuel. Typically, these equipment and platforms  are the military department’s assets that are running on alternative  fuel in settings and under conditions that mimic environments where  military operations may occur.
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Marilyn K. Wasleski, Assistant  Director; Jerome A. Brown; Nirmal Chaudhary; Lindsey M. Cross; Philip  G. Farah; Shvetal Khanna; Michael Shaughnessy; Amie Steele; Cheryl  Weissman; and Alexander Welsh made key contributions to this report.