Defense Infrastructure: Additional Data and Guidance Needed for Alternatively Financed Energy Projects
Published: 2017-06-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: DOD, the largest energy consumer in the federal government, has been addressing its power needs by diversifying its power resources, reducing demand, and implementing conservation projects. To address its goals for energy projects, DOD also has been using alternative financing from private-sector contracts rather than relying solely on annual federal appropriations to fund projects upfront.
The House and Senate reports accompanying their respective bills for the National Defense Authorization Act for 2017 included provisions that GAO review DOD's alternatively financed energy projects. This report (1) evaluates the military services' use of alternative financing arrangements since 2005 and data collected and provided to DOD on those projects; (2) assesses reported project savings and verification of reported performance, and (3) describes benefits and disadvantages and potential other costs of using alternative financing rather than up-front appropriations. GAO analyzed and reviewed DOD data, relevant guidance, and project documentation; interviewed cognizant officials; and reviewed a nongeneralizable sample of projects.
section_title: What GAO Found
paragraphs: The military services have used alternative financing arrangements—entering into about 38 private-sector contracts annually from 2005 through 2016—to improve energy efficiency, save money, and meet energy goals. However, the military services have not collected and provided the Department of Defense (DOD) complete and accurate data, such as total contract costs and savings. For example, GAO was unable to identify and the military services could not provide total contract costs for 196 of the 446 alternatively financed energy projects since 2005. Furthermore, some data provided on select projects did not include the level of accuracy needed for planning and budgeting purposes. According to officials, the military services did not always have complete and accurate data because authority for entering into these projects has been decentralized and data have not been consistently maintained. As such, neither the military departments, which include the military services, nor DOD have complete and accurate data on the universe of these projects. Without complete and accurate data on all alternatively financed energy projects, decision makers will not have the information needed for effective project oversight or insight into future budgetary implications of the projects, including impacts on utility budgets.
DOD's alternatively financed energy projects that GAO reviewed reported achieving expected savings. Specifically, GAO's review of 13 operational alternatively financed energy projects found that all 13 projects reported achieving their expected savings. However, the military services have varying approaches for verifying whether projected savings were achieved for all utility energy service contracts (UESC)—an arrangement in which a utility arranges financing to cover the project's costs, which are then repaid by the agency over the contract term. DOD guidance requires the military services to track estimated and verified savings and measurement and verification information for all energy projects, but DOD's guidance is inconsistent with more recent Office of Management and Budget guidance. This inconsistency and DOD's interpretation of Office of Management and Budget guidance have resulted in the military departments developing varying approaches for verifying savings of UESC projects. Without clear guidance from DOD on how the military services should be taking steps to verify savings associated with UESC projects, the military services will continue to interpret guidance differently and are likely to take inconsistent approaches to verifying the savings of UESC projects spanning potentially a 25-year duration.
DOD and military service officials identified benefits and disadvantages, as well as other potential costs, of using alternative arrangements to finance energy projects rather than using up-front appropriations. According to officials, benefits include the ability to fund projects that would not otherwise be funded due to budgetary constraints, to complete projects more quickly, and to have expert personnel available to implement and manage such projects. However, officials also identified disadvantages, including higher costs and the risks associated with long-term financial obligations. In addition, GAO found that some potential costs for these alternatively financed energy projects, such as costs associated with operation and maintenance and repair and replacement of equipment, add to overall project costs and may not be included in the total contract payments.
section_title: What GAO Recommends
paragraphs: GAO recommends that the military services collect and provide DOD complete and accurate data on all alternatively financed energy projects and that DOD update its guidance to clarify requirements for verifying UESC savings. DOD concurred with the first recommendation and nonconcurred with the second. GAO continues to believe its recommendation is valid, as discussed in this report.

section_title: Letter
paragraphs: The Department of Defense (DOD) is the largest energy consumer in the  federal government, spending $3.9 billion on facilities energy in fiscal year  2015. DOD has reported that it considers energy to be a critical resource  across the full range of military operations and has found that ensuring  the availability of energy is a substantial expense that competes with the  department’s other investments in manpower and equipment. To  address its power needs, DOD has diversified its power sources to  include renewable and alternative sources of energy and has reduced its  demand for installation energy by investing in efficiency and conservation  projects on its installations. The department has used alternative  financing arrangements in addition to using up-front appropriations to  fund a portion of its infrastructure related to renewable energy generation,  energy efficiency, power generation, and energy security on military  installations. These alternative financing arrangements include energy  savings performance contracts (ESPC), utility energy service contracts  (UESC), power purchase agreements (PPA), and some forms of  enhanced use leases. These arrangements rely on the private capital  obtained by energy service companies, utilities, and private developers to  fund the up-front investment of such projects. The installation generally  repays the cost of the project using appropriated funds based on the  savings attributable to the energy project, such as those resulting from  lower utility bills, or on the utility rates paid by DOD in accordance with  the power purchase agreement. DOD has increasingly relied on  alternative financing arrangements to decrease energy intensity on  military installations and to fund energy projects as the agency attempts  to implement such projects at a time when constrained budgets have  limited the appropriated funding available to meet increasing energy  efficiency goals.
We have previously reported on DOD’s use of alternative financing  arrangements for its energy projects. In 2012, we reported on DOD’s use  of up-front appropriations and alternative financing arrangements for  renewable energy projects and recommended that DOD issue  comprehensive guidance on completing business case analyses of  different financing options and improve information-sharing resources,  including best practices and lessons learned, on financing such projects.  DOD generally concurred with the recommendations and has taken steps  to implement them. Specifically, DOD and the military services have  issued guidance on developing business case analyses, and DOD has  established a renewable energy integrated process team where officials  from the Office of the Secretary of Defense meet regularly with officials  from the military services to discuss DOD renewable energy plans and  processes. Moreover, in 2015, we found that in 14 out of 20 ESPC  projects that we reviewed, contractor reports overstated some cost and  energy savings of these contracts. We made three recommendations to  DOD aimed at improving the oversight of its ESPC projects through  clearer reporting of savings, among other things. DOD generally  concurred with our recommendations, and officials told us that they sent  additional guidance on measurement and verification reports to the  energy service companies. In addition, in 2016, we reported that DOD  used various approaches to analyze the financial costs and benefits of 17  renewable energy projects. We made eight recommendations, including  that DOD should clarify guidance for project documentation, such as  including information on land values and how projects will help DOD meet  its energy security objective. DOD concurred with our recommendations  and to date has implemented one of the recommendations by issuing  revised guidance on renewable energy projects involving long-term power  purchase agreements.
The House and Senate reports accompanying proposed bills for the  National Defense Authorization Act for Fiscal Year 2017 included  provisions for us to review DOD energy projects funded with alternative  financing arrangements. In this report, we (1) evaluate the extent to  which the military services have used alternative financing arrangements  to fund energy projects since 2005 and collected and provided DOD  complete and accurate data on those projects; (2) assess the extent to  which the military services reported achieving expected savings and  verified the reported performance of selected projects; and (3) describe  the benefits and disadvantages reported by the military services—as well  as potential other costs—of using alternative financing arrangements for  selected energy projects rather than using up-front appropriations.
To evaluate the extent to which the military services have financed  energy projects with alternative financing arrangements since 2005 and  collected and provided DOD complete and accurate data on those  projects, we reviewed available data and documentation on the  alternatively financed projects from fiscal years 2005 through 2016 that  were previously reported by DOD in the Annual Energy Management  Reports or we collected during previous reviews. We focused on this  time frame because, with the passage of the Energy Policy Act of 2005,  the military services began contracting for more alternatively financed  energy projects. We included 2016 data as they capture the most recent  complete fiscal year of data. We used this information to develop pre- populated spreadsheets for each of the military services on their alternatively financed contracts and then requested that they verify the  information and add new projects, as appropriate, in order to obtain data  on the universe of these projects for the specified time period. We  assessed the reliability of the data we received by interviewing DOD  officials and comparing the multiple data sets we received from the  military services with data reported in the Annual Energy Management  Report and obtained through prior reviews to ensure that there was  consistency in the data provided. We determined that the data were  sufficiently reliable for our purposes of meeting our objectives. We  reviewed the statute requiring DOD to report data on alternatively  financed energy projects and DOD’s guidance requiring the military  departments to maintain a utility energy reporting system to prepare data,  including data on energy consumption and costs, for the Annual Energy  Management Report. We compared the military services’ tracking of  their data, such as total contract costs, estimated cost savings, and the  length of the contract, on alternatively financed energy projects to DOD’s  guidance and statutory requirements for tracking such data. We also  compared DOD’s data collection efforts with Standards for Internal  Control in the Federal Government, which identify standards for collecting  and providing accurate and complete data. We also interviewed Office  of the Secretary of Defense and military department officials to discuss  the availability of data related to their alternatively financed energy  projects.
To assess the extent to which the military services reported achieving  expected savings and verified the reported performance of selected  projects, we reviewed DOD, Department of Energy, and Office of  Management and Budget guidance on the different levels of  measurement and verification or performance assurance that are required  for alternatively financed energy projects. Using the data on the  alternatively financed energy projects that we obtained from the military  services, we then selected a non-generalizable sample of 17 projects—13  of which were in operation at that time—as case studies to discuss and  observe during our site visits to the 11 installations where the projects  were in operation. We selected these projects to obtain a cross section of  projects by military service; type of alternative financing arrangement;  year the contract was awarded; and contract vehicle (Army, Department  of Energy, General Services Administration area-wide, or stand-alone  contract). We then compared measurement and verification efforts for the  13 operational projects in our sample with DOD guidance requiring  measurement and verification for all energy projects to determine the  extent to which installation officials followed guidance requiring  verification of savings. We also collected and analyzed data and  documentation on the expected and reported savings for the 13  operational projects in our sample, and we documented reasons for any  differences. We assessed the reliability of the project data by reviewing  the internal controls DOD officials used to observe and corroborate the  data contractors reported in their annual measurement and verification  reports; the data collection and monitoring the officials did for  performance assurance; and the data the officials used to assess project  savings. We determined that the data were sufficiently reliable for our  purposes of describing the extent to which the military services reported  achieving expected savings and verified the reported performance of  selected projects. Additionally, we interviewed officials at the 11  installations in our sample and their contracting or engineering commands  to discuss these projects and their latest measurement and verification  report or other assessment, and officials at the Office of the Secretary of  Defense and the military departments to discuss guidance on assessing  the performance of UESCs during the contract performance period.
To describe the benefits and disadvantages reported by the military  services—as well as potential other costs—of using alternative financing  arrangements for selected energy projects rather than using up-front  appropriations, we reviewed DOD, Department of Energy, and military  service guidance on the use of alternative financing arrangements and  the cost-effectiveness of those arrangements to determine the  requirements for life-cycle cost analyses. For the 17 projects in our  nongeneralizable sample, we collected project planning documentation  and reviewed available life-cycle cost analyses and contract  documentation. Additionally, we interviewed officials at the installations in  our sample, their contracting or engineering commands, or their military  service headquarters to discuss the projects in our sample, including the  benefits and disadvantages of using alternative financing arrangements  for those energy projects. We also discussed how the individual contracts  identified the costs to operate and maintain the energy conservation  measures or power-generating equipment. Finally, we interviewed  officials from the Department of Energy’s Federal Energy Management  Program to discuss federal policies and guidance related to alternative  financing arrangements for energy projects and officials from the General  Services Administration to discuss the agency’s area-wide contracts with  utility companies to gain an understanding of issues related to the  benefits and costs of such projects. Further details on our scope and  methodology can be found in appendix I.
We conducted this performance audit from June 2016 to June 2017 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: Roles and Responsibilities for Installation Energy Management and Reporting
paragraphs: The Deputy Assistant Secretary of Defense (Installation Energy), under  the Office of the Assistant Secretary of Defense (Energy, Installations and  Environment), has the role and responsibility for, among other things,  overseeing DOD’s installation energy program. The office also is  responsible for issuing installation energy policy and guidance to the DOD  components and serving as the primary adviser for matters regarding  facility energy policy. In addition, the office provides management for  energy conservation and resources, including establishing goals for the  department’s energy conservation program, developing procedures to  measure energy conservation, and developing policy guidance for  reporting energy use and results of conservation accomplishments  against goals for federal energy conservation and management. These  goals and requirements are found in, but are not limited to, the Energy  Independence and Security Act of 2007, the Energy Policy Act of 2005,  and Executive Order 13693, Planning for Federal Sustainability in the  Next Decade. Also, the military departments have established goals  related to developing renewable energy projects. For example, the  Secretary of the Navy has established goals to obtain half of the Navy’s  energy from alternative sources and to produce at least half the shore- based energy requirements from renewable sources, such as solar, wind,  and geothermal. Further, each military department has issued  department-level guidance to develop 1 gigawatt of renewable energy, for  a total of 3 gigawatts by 2025.
In addition, DOD’s instruction on energy management states that the  Secretary of a military department is responsible for developing an energy  program management structure to meet DOD requirements, with the  primary objectives of improving energy efficiency and eliminating energy  waste, while maintaining reliable utility service. Each military service has  assigned a command or headquarters to provide guidance and funding,  with regional commands or military installations managing site-specific  energy programs. According to DOD’s instruction, DOD component  heads are to provide facilities with trained energy program managers,  operators, and maintenance personnel for lighting, heating, power  generating, water, ventilating, and air conditioning plants and systems.  At the installation level, the departments of public works, general facilities,  or civil engineering oversee and manage the day-to-day energy  operations.
Each year, DOD is to submit the Annual Energy Management Report to  the congressional defense committees, as required by section 2925 of  title 10 of the United States Code. This report describes the department’s  progress toward meeting its energy performance goals and, among other  items, provides information on all energy projects financed with  alternative financing arrangements. The Annual Energy Management  Report is required to contain the following information on DOD’s  alternatively financed projects: the length of the contract, an estimate of  the financial obligation incurred over the contract period, and the  estimated payback period. The DOD components maintain a utility energy  reporting system to prepare the data for submission of this report, which  DOD describes as the primary vehicle by which it tracks and measures its  performance and energy efficiency improvement.
section_title: Types of Alternative Financing Arrangements
paragraphs: DOD has used partnerships with the private sector as a tool for  alternative financing arrangements to further energy efficiency efforts and  allow installations to improve infrastructure through upgrades to existing  systems and the purchasing of new equipment. Each financing  arrangement leveraged by private capital has distinct requirements and  legal authorities, and sometimes DOD components combine  arrangements to finance the same project. Table 1 summarizes the main  alternative financing arrangements that are available to DOD for funding  its energy projects.
In December 2011, the President challenged federal agencies to enter  into $2 billion in performance-based contracts, including ESPCs and  UESCs, through the President’s Performance Contracting Challenge to  meet the administration’s goals of cutting energy costs in agency facilities  as part of a broader effort to reduce energy costs, cut pollution, and  create jobs in the construction and energy sectors. In May 2014, the  President expanded the challenge by an additional $2 billion, bringing the  total goal to $4 billion in performance-based contracts across the federal  government by the end of calendar year 2016. According to DOD, as of  December 31, 2016, the three military departments and the other defense  agencies combined had awarded 194 ESPCs and UESCs that totaled  over $2.28 billion. DOD reported that these results exceeded its target  of awarding over $2.18 billion in such contracts over this period.
section_title: Related DOD and Military Service Audits
paragraphs: DOD and military service audits have examined the development and  management of DOD’s alternative financing arrangements. For example,  in May 2016, the DOD Inspector General found that the Air Force Civil  Engineer Center did not effectively manage the Air Force’s existing  ESPCs and made recommendations to improve controls and validate  energy savings. In January 2017, the DOD Inspector General found that  the Naval Facilities Engineering Command did not effectively manage the  Navy’s 38 ongoing ESPCs that were in the performance phase. The  DOD Inspector General stated that management was not effective  because the command did not appoint contracting officer’s  representatives for 31 of the ongoing projects and did not develop a  quality assurance surveillance plan for any of them. Additionally, the DOD  Inspector General reviewed five other projects in more detail and found  questionable contract payments. The DOD Inspector General  recommended the appointment of contracting officer’s representatives for  ESPCs and that the Naval Facilities Engineering Command Expeditionary  Warfare Center—which oversees the Navy’s ESPCs—document the  validity of prior year energy savings for the selected ESPCs. In addition,  in September 2014, the Army Audit Agency found that the Army’s  renewable energy projects were generally operational and contributed to  renewable energy goals. However, the audit also identified the need for  improvements to ensure projects were performing as intended and that  installations were reporting renewable energy output sufficiently to help  the Army meet federal mandates and the DOD goals for renewable  energy. At the time of the Army Audit Agency review, the Army was not  meeting the federal and DOD renewable energy goals.
section_title: The Military Services Have Used Alternative Financing for Hundreds of Energy Projects since 2005, but Have Not Collected and Provided Complete and Accurate Data to DOD
paragraphs: Since 2005, the military services have used alternative financing  arrangements for hundreds of energy projects to improve energy  efficiency, save money, and meet energy goals; however, the military  services have not collected and provided DOD complete and accurate  data to aid DOD and congressional oversight of alternatively financed  energy projects.
subsections: section_title: Military Services Have Used Alternative Financing Arrangements for Hundreds of Energy Projects since 2005
paragraphs: Based on the data provided by the military services, the services have  used alternative financing arrangements for 464 energy projects or  contracts since 2005, entering into about 38 contracts annually from fiscal  year 2005 through fiscal year 2016. The Army entered into the most  alternatively financed contracts (305), followed by the Navy (90), the Air  Force (50), and the Marine Corps (19). Military service officials attributed  the continued use of alternative financing to three separate factors. First,  officials cited the President’s Performance Contracting Challenge, issued  in December 2011, which challenged federal agencies to enter into $2  billion in performance contracts, such as ESPCs and UESCs. Second,  officials stated that they did not have sufficient appropriated funds to  accomplish many of these projects, making alternative financing an  attractive option for addressing needed repairs, obtaining new equipment  designed to improve operations, and reducing energy consumption. Third,  service officials stated that alternative financing reduces the risk for  equipment maintenance and budgeting. Specifically, many contracts  include a cost-savings guarantee, which requires that the contractor  maintain the equipment in good working order over the life of the contract.  Additionally, many contracts have fixed annual payments regarding  projects, so the services have certainty in terms of budgeting for portions  of an installation’s annual energy costs.
The alternative financing contracts the military services awarded have  obligated the government to pay billions of dollars to contractors over the  next 25 years, as shown in table 2. According to military service officials,  these contractual obligations are must-pay items from their annual  budgets. In order to account for these must-pay items in their budgets,  they said that the military service headquarters must have visibility into  certain data, such as the costs of such projects. We found that from fiscal  years 2005 through 2016, the military services have used UESCs more  often than the other types of alternative financing arrangements we  reviewed. Specifically, the military services have entered into contracts for  245 UESCs compared to 201 ESPCs.
In addition to ESPCs and UESCs, the military services have also entered  into financing agreements through PPAs. We found that of the 18 PPAs  that either we or the military services identified as being awarded since  2005, 10 have been awarded since 2014. In these military power  purchase agreements, a private entity will purchase, install, operate and  maintain renewable energy equipment, and the military service will  purchase the electricity generated by the equipment.
Since 2005, the Army, Navy, and Marine Corps have reported contractor  project investment costs totaling almost $1.46 billion for PPAs. Some of  these projects, such as solar arrays, can have significant project  investment costs to the contractor, and the military services compensate  the contractors over time, either in part or in full, through payments for  their energy usage. However, we identified challenges in determining the  true costs of these PPA projects to the government for several reasons.  First, the future cost to the government could exceed $1.46 billion  because some of the PPAs are still in the design and construction phase  and cost data are not known. Second, minimum purchase agreements  are typically set in the contracts, but in some cases the service could  purchase more than the minimum amount of energy required, which  would increase the costs. Third, the energy providers have other ways of  recouping their project investment costs, which means the military  services may not be responsible for repaying all of the costs. In addition  to possible rebates and tax incentives, energy developers may be able to  take advantage of renewable energy credits, which can lower the up-front  costs of projects by reimbursing either the military or the energy  provider. Lastly, in some cases, the energy provider can take excess  energy produced by the equipment and sell it to other customers as  another means of recouping its investment costs and reducing the costs  to the military services.
section_title: Military Services Have Not Collected and Provided Complete and Accurate Project Data to DOD
paragraphs: Since 2005, the military services have not collected and provided  complete and accurate project data to DOD on alternatively financed  energy projects. Specifically, the military services provided partial data on  total contract costs, savings, and contract length related to their  respective alternatively financed energy projects during this time frame.  However, we were unable to identify and the military services could not  provide complete data on the range of their alternatively financed  projects, to include data on total contract cost for 196 of 446 ESPC and  UESC projects. In particular:
The Army could not provide total contract costs for about 42 of its 131  ESPCs. Moreover, the Army could not provide total contract costs  for about 142 of its 167 UESCs.
The Navy could not provide total contract costs for 1 of its 59 UESCs  and 2 of its 27 ESPCs.
The Navy also provided a list of Marine Corps projects and relevant  data related to total contract costs for those projects. However, we  identified discrepancies between the list of projects provided to us and  those that DOD reported receiving.
The Air Force could not provide total contract costs for 8 of its 38  ESPCs and 1 of its 8 UESCs.
Additionally, the military services could not provide data related to either  cost savings for 195 contracts or contract length for 232 contracts.
Furthermore, some of the data provided by the Army and Navy on their  alternatively financed energy projects did not include the level of accuracy  needed for better or improved planning and budgeting purposes. For  example, we contacted three installations where the Army had identified  UESCs in the Annual Energy Management Report to Congress, but  officials from two of those installations told us that no UESC existed.  The Navy provided data on most of its projects, but Navy headquarters  officials acknowledged that they had low confidence in the accuracy of  the data on three specific ESPCs because they had not actually reviewed  the contract documents, which were awarded by one of the Navy’s  subordinate commands. Also, cost and other data reported by Navy  headquarters for UESC projects at one of its installations did not match  the cost data and project details provided by the regional command  overseeing the installation’s contracts. Additionally, military service  headquarters and installations or other service entities provided  information that did not always match. For example, an Army official told  us about discrepancies in the service’s internal tracking documents that  officials had to resolve prior to providing their data to us.
According to the DOD instruction, the military services are required to  track and store data on energy projects, including data on all estimated  and actual costs, interest rates, and mark-ups, among others, as well as  any changes to project scope that may affect costs and savings.  Moreover, section 2925 of title 10 of the United States Code requires  DOD to report to Congress after each fiscal year on its alternatively  financed energy projects, to include information on the projects’ duration  and estimated financial obligations, among other things, which requires  that DOD have reliable information about these projects so that DOD and  the Congress will be better able to conduct oversight and make informed  decisions on programs and funding. Furthermore, Standards for Internal  Control in the Federal Government state that management should obtain  quality information that is, among other things, complete and accurate in  order to make informed decisions.
During the course of this review, military service and DOD officials stated  that one reason that the military departments and DOD headquarters  levels did not always have complete and accurate data is because the  military services have decentralized authority for entering into  alternatively financed projects and for maintaining associated data. Given  this decentralized authority, the data maintained are not always tracked in  a manner that captures the full range of data needed at the headquarters  level for oversight, nor are they consistently reported to the headquarters  level. Therefore, the military departments and DOD do not have complete  and accurate information on the universe of active alternatively financed  energy projects to aid oversight and to inform Congress. Specifically,  complete and accurate data are also necessary for DOD to meet its  requirement to report annually to Congress on the department’s  alternatively financed energy projects through the Annual Energy  Management Report, to include data on projects’ respective duration,  financial obligation, and payback period. Having complete data on total  contract costs, cost savings, and contract length are all necessary data  points in order for the military departments to also formulate accurate cost  estimates for annual budget requests and project expenses. Without  these data, the military departments also will not have a full  understanding of the cumulative impacts of these alternative financing  arrangements on their installations’ utility budgets over periods of up to 25  years. Furthermore, if the military departments do not provide complete  and accurate data to DOD, decision makers within the department and in  Congress may not have all information needed for effective oversight of  the projects, which could hinder insight into future budgetary implications  of the projects.
section_title: DOD Reported Savings on Selected Energy Projects, but the Military Services Have Not Consistently Verified Project Performance
paragraphs: DOD reported achieving expected savings or efficiencies on the  operational alternatively financed energy projects we reviewed; however,  the military services have not consistently verified project performance on  its ESPC and UESC projects to confirm that the reported savings were  achieved. Without more consistent verification of performance for all  alternatively financed projects, DOD cannot be certain that all projects are  achieving their estimated savings.
subsections: section_title: Selected Projects Generally Reported Achieving Expected Savings
paragraphs: In our review of a nongeneralizable sample of 17 alternatively financed  energy projects across the military services, we found DOD reported that  13 were considered operational and that all 13 of these projects—8  ESPCs, all 3 of the UESCs, and 2 PPAs—achieved their expected  savings. Installation officials measured savings for these projects  differently, depending on which type of alternatively financed arrangement  was used.
For the 8 ESPCs in our sample, we reviewed the most recent  measurement and verification reports provided by the contractors and  found that each project reported achieving its guaranteed savings.  The measurement and verification reports provided by the contractors  reported guaranteed savings of between 100 and 145 percent for the  ESPC projects we reviewed, as shown in table 3.
For the three UESCs in our sample, we found that installation officials  used various performance assurance methods to maintain energy  savings by ensuring that the installed equipment was operating as  designed. For UESCs, identification of project savings can include  either annual measurement and verification or performance  assurance. The authority for UESCs, unlike that for ESPCs, does not  have a requirement for guaranteed savings, but the agency’s  repayments are usually based on estimated cost savings generated  by the energy-efficiency measures. At Fort Irwin, California, officials  stated that they used efficiency gauges installed on the equipment to  verify that the equipment was operating properly. At Naval Air  Weapons Station China Lake, California, officials stated that operation  and maintenance personnel performed systems checks to ensure the  installed equipment is functioning properly. At Naval Base Kitsap- Bangor, Washington, officials used the energy rebate incentives  issued by the utility company as a proxy to ensure that savings were  being met. The officials stated that if they received the rebate, then  they were achieving the requisite energy and cost savings.
For the two PPA solar array projects that we reviewed, officials  reported that purchasing power through the contract remained  cheaper than if they had to purchase power from non-renewable  energy sources. For PPAs, savings measurement does not include  annual measurement and verification. PPAs are an agreement to  purchase power at an agreed-upon price for a specific period of time,  and as such, they do not require continuous measurement and  verification. However, DOD officials informed us that their contracts  require such projects to be metered so that they can validate the  receipt of electrical power before payment for the service. Officials  also reported that they periodically assessed and reported on whether  the utility rates remained at levels that were profitable for the project.  Projects remained profitable when the prices to generate electricity  from the solar panels were below the market rate for electricity  obtained through the utility company. For example, through monitoring  of utility rates, one official reported that the installation’s PPA project  obtained a favorable rate for electricity of 2.2 cents per kilowatt hour,  well below the prevailing market rate of 7.2 cents per kilowatt hour.  This rate is fixed over the course of this 20-year contract, whereas the  current market rate fluctuates, and the official estimated that the  project saved the installation approximately $1 million in utility  payments in fiscal year 2016. For the other PPA project we reviewed,  installation officials reported that the project terms were still profitable  and estimated that without the PPA, the cost for electricity would be  about 80 percent higher than the cost they were getting through the  PPA. However, according to the officials, a state regulation governing  electricity usage requires that the installation obtain a specific amount  of electricity from the utility company. Installation officials told us that  they had to curtail some of the project’s own energy production to  meet this requirement, which resulted in the project not always  operating at the capacity they had planned. For example, contractor  documents show that from September 2013 through August 2014, the  electricity generated monthly by the project was curtailed by between  0.1 percent to 14.2 percent.
section_title: Two Factors May Have Affected Reported Savings of Selected ESPC Projects
paragraphs: In our review of eight military service ESPC projects that had reported  achieving or exceeding their guaranteed cost savings, we found that the  cost savings may have been overstated or understated in at least six of  the eight projects. Expected cost and energy savings for ESPC projects  are established during project development, finalized when the contract is  awarded, and measured and verified over the course of a project’s  performance period. These savings can include reductions in costs for  energy, water, operation and maintenance, and repair and replacement  directly related to a project’s energy conservation measures. ESPC  projects generally include two types of expected savings: (1) proposed  cost and energy savings, which contractors estimate will result from the  energy conservation measures installed, and (2) guaranteed cost  savings, which must be achieved for the contractor to be fully paid. For  five of the six projects where we found that cost savings may have been  overstated or understated, we identified two key factors that have affected  reported savings—project modifications and agency operation and  maintenance actions.
Project modifications—We found that the installations had modified  some of the energy conservation measures in at least 4 of the ESPC  projects for which cost savings may have been overstated or  understated. Specifically, we found instances where officials had  completed demolitions or renovations to facilities where energy  conservation measures were installed or had demolished equipment.  For example, at one installation, the most recent measurement and  verification report indicated that buildings associated with the project  savings were demolished or scheduled to be demolished in four of the  nine years following the project’s completion. Based on the  contractor’s report, we calculated that the building demolitions,  closings, and renovations negated approximately 30 percent of the  project’s annual cost savings for 2016. According to the report, these  changes have compromised the project to such an extent that the  contractor recommended the service modify the contract with a partial  termination for convenience to buy out portions of the project where  changes have occurred and savings were affected. At another  installation, the measurement and verification report indicated that  cost savings came directly from those cost savings that were  established in the contract and did not reflect equipment that had  been demolished or required repair. In its report, the contractor  verified that the equipment was in place and documented issues that  negatively affected the energy conservation measures, but it did not  adjust the savings to account for those issues. In both of these cases,  the contractor continues to report meeting guaranteed cost savings  levels and the service is required to continue making its full payment.  Project modifications can occur, such as when missions change at an  installation, but we found that these changes may prevent the  project’s cost savings from being fully realized.
Agency operation and maintenance actions—We found that such  agency actions were identified as an issue for the ESPCs in our  review and may have reduced the savings realized for five of the six  ESPC projects for which cost savings may have been overstated or  understated. Specifically, we found instances where the measurement  and verification reports identified that some replacement items were  installed incorrectly or left uninstalled and some light fixtures and  sensors were poorly maintained or removed. For example, at one  installation, the most recent measurement and verification report  showed that base personnel disabling installed energy conservation  measures, such as installing incorrect lamps or removing lighting  control sensors, coupled with abandoned or faulty equipment, have  reduced cost savings for this project. Contractors are not generally  required to reduce the amount of savings they report or measure the  effect of project changes for which the contractor is not responsible.  The contractor stated that the energy and cost savings in its  measurement and verification report were derived directly from the  calculated energy and cost savings negotiated as a part of the original  contract and do not reflect reductions due to abandoned equipment or  other factors outside of the contractor’s control. At another  installation, the most recent contractor measurement and verification  report indicated that some bulbs were burned out and lighting fixtures  were dirty. As a result, the contractor lowered the calculated savings  for the lighting energy conservation measure for that year, while also  noting that the savings still exceed the proposed savings for that  measure. Officials at one installation described the challenge of  preventing installation personnel from acting in ways that detract from  the projects’ energy savings, such as by removing low-flow shower  head controls, adjusting water temperatures, or removing or adjusting  heating and cooling controls.
In June 2015, we described similar factors as potentially reducing energy  savings on select ESPC projects in seven federal agencies, including the  Air Force, Army, and Navy. In that review, we found that the contractor  is generally not required to either reduce the amount of savings they  report or to measure the effects of such factors on reported savings when  factors beyond their control reduce the savings achieved. Further, we  reported that agencies were not always aware of the amount of expected  savings that were not being achieved among their projects, in part  because contractors generally do not provide this information in their  measurement and verification reports. In the 2015 report, the savings  estimates that were reported but not achieved ranged from negligible to  nearly half of a project’s reported annual savings. As a result, we  recommended then that the Secretary of Defense specify in DOD  guidance or ESPC contracts that measurement and verification reports  for future ESPC projects are to include estimates of cost and energy  savings that were not achieved because of agency actions, and DOD  agreed with our recommendation. Given similar findings with respect to  the ESPC projects we examined as part of this review, we continue to  believe that our 2015 recommendation is valid.
section_title: The Military Departments Have Varying Approaches for Verifying Savings for UESC Projects
paragraphs: The military departments have varying approaches for verifying whether  all of their alternatively financed UESCs are achieving expected savings.  Army, Navy, and Air Force officials described their processes and  guidance for verifying savings for their UESCs, and we found that they did  not consistently follow all requirements in both DOD and Office of  Management and Budget guidance. Alternatively financed UESCs must  meet certain requirements in order to allow the use of private sector  funding to develop the project and to have the ability to repay the project,  generally using appropriated funds over the contract term instead of  having to fund the entire project cost up front. Additionally, according to  DOD’s 2009 instruction, repayments for UESCs are based on estimated  cost savings generated by the energy conservation measures, although  energy savings are not necessarily required to be guaranteed by the  contractors. This instruction further requires DOD components to verify  savings to validate the performance of their energy efficiency projects,  thereby providing assurance that such projects are being funded with  generated savings or as agreed to in specified contracts. Specifically, the  instruction requires the military departments to track all estimated and  verified savings and measurement and verification information for its  energy projects. Tracking and verifying savings associated with such  alternatively financed energy projects is necessary because the projects  require a long-term investment from the department—in some cases  allowing the military services to budget for these projects for a period of  up to 25 years—and it is not until contractors have been fully repaid for  the costs of the energy conservation measures and related contract costs  that agencies retain any savings the project continues to generate.
In addition, DOD uses guidance issued by the Office of Management and  Budget. Specifically, in 2012, the Office of Management and Budget  updated guidance, stating that UESCs may be scored on an annual  basis if the UESC requires performance assurance or savings guarantees  and measurement and verification of savings through commissioning or  retro-commissioning. According to officials from the Office of the  Secretary of Defense, the department has interpreted the Office of  Management and Budget guidance as giving federal agencies the option  of requiring either performance assurance, savings guarantees, or  measurement and verification for UESCs. Each of the various techniques  provides a different level of assurance that the installed equipment is  functioning as designed and the project is performing as expected, but  the Office of Management and Budget’s guidance does not specify the  type of measurement technique required. Also, Office of the Secretary of  Defense officials stated that the military services are required to adhere to  the Office of Management and Budget’s guidance in order to determine  whether they can enter into an alternatively financed agreement, and then  adhere to the requirements for determining whether the project is  performing as expected.
As noted earlier, energy savings for UESCs are not necessarily required  to be guaranteed by contractors, and repayments are usually based on  estimated cost savings generated by the energy conservation measures.  We found that the guidance issued by both DOD and the Office of  Management and Budget require a verification of savings for UESCs,  though the requirements differ. The DOD instruction requires the military  services to track all estimated and verified savings and measurement and  verification information for its energy projects, while the Office of  Management and Budget requirement is for measurement and verification  through commissioning and retro-commissioning rather than ongoing  through the life of the project. We found that DOD’s interpretation of this  Office of Management and Budget requirement—which DOD officials said  gives the military departments the option of having either performance  assurance, savings guarantees, or measurement and verification at  certain points for UESCs—differs from the department’s own guidance.  Additionally, DOD’s interpretation of this guidance has resulted in the  military departments developing varying approaches for verifying savings  of their UESC projects. The Navy has taken and the Air Force is taking  steps to require that all UESC projects be assessed to determine actual  savings, with approaches focused more on measurement and verification  as opposed to performance assurance, whereas Army officials told us  that they do not plan to require measurement and verification for their  UESCs. Specifically,
Navy: The Commander, Navy Installations Command, issued  guidance in March 2015 requiring Navy installation officials to assess  all Navy UESC projects to verify energy project savings through  measurement and verification. According to the guidance, the  installations will report on their energy and cost savings each year to  enable the Commander, Navy Installations Command, to monitor the  effectiveness of UESC projects because the Navy has significantly  increased its investment in ESPC and UESC projects and will use this  analysis to help manage risk. The Navy’s assessment will be  conducted with the Navy’s energy return-on-investment tool, which is  a set of project tools used to conduct analysis and track project  requirements.
Air Force: The Air Force has engineering guidance that addresses  management of UESCs, but headquarters officials told us that this  guidance requires only the standard requirement of performance  assurance for these projects. According to officials, the Air Force is  developing a UESC manual, which it expects to complete in  September 2017, to replace the existing guidance. These officials  stated that the manual will include a measurement and verification  requirement for UESCs that will adhere to the same levels required for  ESPCs. However, headquarters and engineering center officials  stated that the two alternative financing arrangements may continue  to have some differences in requirements.
Army: The Army had not issued guidance for its UESCs at the time of  our review, according to an Army headquarters official, and instead  was relying on its ESPC policy manual to guide its UESC projects.  The official told us that the Army is working to issue UESC guidance  that is similar to that for ESPCs, but stated that the guidance will not  include a requirement to perform measurement and verification of  these projects. The official stated that although the Army cannot be  completely certain that savings levels are being achieved using  performance assurance, the current approach provides an acceptable  level of assurance while avoiding the increased costs associated with  performing measurement and verification.
We found that the military services have taken different approaches to  verifying the savings associated with UESCs because DOD has not  clarified requirements in guidance that reflect the intent of the department  and the Office of Management and Budget. Verification of savings to  validate project performance of all alternatively financed energy projects  across the department is necessary to ensure that the projects are  meeting expected energy and costs savings required to fulfill DOD’s  requirement that these projects be paid for entirely through the projects’  generated cost savings. This verification would help the military services  ensure they are appropriately budgeting for the projects over the life of  the contract, which are expected to increase in number. Specifically, in  2016, DOD issued a rule amending the Defense Federal Acquisition  Regulation Supplement that authorizes a contract term limit for UESCs for  a period up to 25 years, which is also the limit allowed for ESPCs.  Without updated and clear guidance about requirements on how the  military departments should verify savings associated with UESCs, the  military services will likely continue to interpret DOD guidance differently  and are likely to take inconsistent approaches to assuring the  performance of UESC projects, which could limit DOD’s visibility over  projects that commit the departments to long-term payments.
section_title: The Military Services Identified Benefits and Disadvantages, as Well as Potential Other Costs, of Using Alternative Financing for Selected Energy Projects
subsections: section_title: Officials Have Identified Benefits and Disadvantages of Using Alternative Financing Arrangements Instead of Up-front Appropriations for Energy Projects
paragraphs: Alternative financing arrangements provide the military services the  opportunity to partner with the private sector to finance energy projects;  however, there are benefits and disadvantages to these projects. DOD  and military service officials we contacted regarding their renewable  energy generation, energy efficiency, power generation, and energy  security projects identified benefits to financing energy projects through  alternative arrangements, including funding projects that otherwise would  not be funded through appropriated funding, shorter time frames, and the  availability and expertise of personnel to implement and manage such  projects, as described below.
Funding Projects—At the military department level, officials told us  that alternative financing arrangements enabled them to fund energy  projects they might not otherwise have been able to pay for due to  limited appropriated funding for developing and implementing such  projects and the need to use their service budgets for mission  requirements. We previously reported that implementing projects to  meet energy requirements and goals can be costly, and obtaining up- front appropriations for such projects has been particularly challenging  for agencies because of constrained federal budgets. The military  services’ reliance on alternative financing arrangements has enabled  them to more easily take on larger projects and combine several  different energy conservation measures or installations into one  contract rather than undertaking them individually over time. Of the  eight installations we contacted whose contracts had a renewable  energy component, officials at six of those installations told us that  they would not have been able to undertake those projects without the use of alternative financing arrangements or would have had to scale  down the scope of the projects. For example, one official told us that  the military service’s ability to fund its large solar arrays, which cost  over $1 million to develop, would not have been a viable option for the  installation with up-front appropriations because mission requirements  take priority over energy conservation or renewable energy  production. Some officials also said that power purchase agreements  are useful from a budget standpoint because the installation does not  have to provide financing for the project but rather pays for the energy  that is produced through its energy bill.
According to agency officials, alternative financing arrangements may  also save operation and maintenance costs because, in many cases,  using alternative financing arrangements results in the contractor  installing new equipment and sustaining that equipment during the  contract performance period. Officials from one service told us that  energy efficiency does not decline over the life of the project because  the contractor brings the project to industry standards and then  maintains the project over the course of the contract. Officials at two  military service headquarters told us that it would be challenging to  operate and fully maintain the equipment installed for energy projects  funded through up-front appropriations because funds for maintaining  equipment are also limited. Some officials at the installation level  stated that alternatively financed energy projects can assist with  budget certainty, as many of the contracts require the utility or energy  company to cover operation and maintenance costs for installed  equipment and equipment replacement costs over the life of the  contract, compared to funding those ongoing costs each year through  their appropriated funding. Further, some installation officials noted  that the initial assessments for large energy projects were generally  rolled into the costs of the contracts and the installation would have  had to pay those costs up front if they had to fund those aspects of  the projects. Other installation officials commented on the budgeting  certainty these alternative financing arrangements provide. For  example, according to one Marine Corps official, ESPCs provide a  benefit during the utility budgeting and programming process. With an  ESPC, a large portion of the utility budget is constant for many years  out, which decreases the number of variables, such as weather  conditions and usage, in the utility budget that must be considered in  the budget forecasting process, resulting in more accurate budgeting.
Time frames—We previously reported that officials told us, for  renewable energy projects funded through military construction  appropriations, it can take a military service three to five years from  project submission through the beginning of construction because of  the length of the budget and appropriations cycle. Some officials  representing installations in our sample also considered the reduced  time frames for developing an energy project to be another benefit of  using alternative financing arrangements. For example, through these  arrangements, officials can bundle several smaller projects together  into a single package as opposed to implementing the projects  individually over the course of several years. In addition, according to  some officials, working with a local utility or energy company to  develop large energy-saving projects can take much less time than  attempting to achieve the same results through the military  construction process. For example, officials at Naval Base Kitsap- Bangor, Washington, said its multiphase UESC, which includes  replacing exterior, street, and parking lot lighting on several  installations with new energy-efficient technology, has been  implemented faster than it could through another approach. Some  other installation officials said that using the indefinite-delivery,  indefinite-quantity ESPC contract vehicles awarded through the  Department of Energy or the U.S. Army Corps of Engineers or  working through the service engineering commands for ESPCs and  UESCs took much less time and is less cumbersome than going  through the services’ acquisition process for new equipment.
Expertise or Availability of Personnel—Officials we met with at six  installations said they often did not have personnel at the installation  level with the needed expertise or in sufficient numbers to assist in the  development, operation, and maintenance of such projects. For  example, officials at one installation said that the energy service  company had personnel with the technical expertise to do some  things, such as development of life-cycle cost analyses and  measurement and verification, better than installation officials.  Officials at another installation cited a shortage of personnel at the  time the contract was awarded that made it challenging to operate  and maintain energy projects. Installation energy managers were able  to work around some of these personnel constraints by including  requirements for contractors to operate and maintain the installed  energy conservation measures, including repairing and replacing  equipment as needed during the performance period. We reported in  2016 that working with private developers allows DOD to leverage  private companies’ expertise in developing and managing projects  and limits the number of personnel DOD has to commit to projects.
In addition to some of the benefits they described, officials identified some  disadvantages of using alternative financing arrangements for their  energy projects, including higher overall costs, a delay in their ability to  take advantage of savings initially through funding with up-front  appropriations, and risks associated with long-term financial obligations.  First, some officials said that the overall costs over the contract term are  generally higher than those funded using up-front appropriations. For  example, for one of the ESPCs we reviewed, we found that the estimated  cost for using alternative financing was about 15 percent higher than if the  project had been funded using up-front appropriations. In 2004, we  reported that alternative financing arrangements may be more expensive  over time than full, up-front appropriations since the federal government’s  cost of capital is lower than that of the private sector. Second, some  officials noted that they would prefer to use appropriated funds for  projects because with alternative financing arrangements, the installation  pays the energy service company out of the savings rather than retaining  those savings. As a result, when relying on alternative financing for  energy projects, installations do not actually realize the savings until after  the contract is completed, which could be up to 25 years later for ESPCs  and UESCs. Similarly, although spreading costs over 25 years may  provide greater certainty for installation utility budgets, these  arrangements also tie up those funds over that period, resulting in less  flexibility in managing future budgets. Third, officials at one service  headquarters stated that the risk associated with a 20- to 25-year contract  can pose a disadvantage, such as in cases where a base realignment or  closure action occurs.
section_title: Contracts for Selected Alternatively Financed Energy Projects Varied in Their Treatment of Costs
paragraphs: There are different costs associated with the implementation of the  ESPCs and UESCs we selected for our review, and some potential costs  may affect the overall cost of a project or may not always be included in  total contract payments. However, we found some potential costs that  may add to the overall cost of a project or may not always be included in  total contract payments. In our review of the life-cycle cost analyses and  contract documentation for the selected ESPCs and UESCs in our  sample, we found that contracts varied in how they funded other potential  costs associated with the projects, such as operation and maintenance  and the repair and replacement of installed equipment, as well as some  other energy project costs that may or may not be included in the  payment to contractors.
Operation and maintenance costs—Officials representing installations  in our sample identified different approaches for how they manage the  costs for operation and maintenance of their alternatively financed  energy projects, and those costs may not always be included in the  total contract costs. As noted earlier, one benefit of alternative  financing arrangements that military service officials identified is the  reduced risk and savings in operation and maintenance costs that can  be achieved when a contractor installs and sustains the energy  conservation measures. According to officials, the ongoing and  periodic maintenance of the equipment by the contractor that is  generally provided by ESPCs can free limited installation budgets for  other maintenance requirements. Further, with UESCs, operation and  maintenance costs associated with the project may decrease, but it is  usually the responsibility of the agency, not the utility, to pay for these  decreased costs. Further, depending on the contract terms,  contractors are not always responsible for operation and maintenance  of all of the energy conservation measures for a project. In these  cases, an installation would provide manpower, spare parts, and  potentially replacement equipment during the life of the contract.  Based on our review of select projects, we found different ways in  which the installations approached the funding for these costs. For  example, officials at one installation decided not to include the costs  for operation and maintenance services in the contract. The officials  instead opted to have the contractor that was already providing  operation and maintenance support for the facility continue to provide  these services for all of the equipment. They also reported that the  cost of that operation and maintenance contract was reduced due to  the efficiencies that came with some of the measures installed  through the ESPC, which resulted in manpower savings. At another  installation, however, officials opted to have the ESPC contractor take  over maintenance not only of equipment installed as part of the  contract, but also of existing equipment in the same buildings that had  been maintained by the base operating support contractor so that the  installation would not have two contractors maintaining different parts  of systems within the same building.
Repair and replacement funds—Some contracts also establish and  manage repair and replacement accounts using either an installation’s  operation and maintenance funding or the savings from the energy  conservation measures. These accounts may allow the installation to  ensure the continued operation and maintenance of equipment  installed as part of the alternatively financed project for which the  contractor or utility may not have responsibility, such as items not  covered under their warranty or that are manufactured by another  company, by setting aside funds to cover the costs to repair or replace  equipment that fails during the contract performance period. These  accounts are included in the total contract costs. In our review of  select ESPC projects, we found different ways in which these  accounts were established and operated. For example, at one  installation, officials told us they set up two repair and replacement  accounts that are part of their monthly payments, which cover repairs  to installed equipment not covered under the contract, such as  equipment that was not manufactured by the contractor and controls  components that were integrated onto the existing system. Funding  for these two accounts is included in the installation’s annual payment  to the contractor, and unused funds in the larger contractor equipment  repair and replacement account roll over into the next year to cover  any required maintenance as well as the replacement of equipment at  the end of the contract term, if needed. At another installation, the  ESPC was established with an account for repair and replacement  funds to cover costs other than normal preventive maintenance, and  this account is also funded annually as part of the payment to the  contractor. According to installation officials, the purpose of this  account is to have funding available to pay for a larger piece of  equipment in case it needed to be replaced, and unused funding for  this account is also expected to roll over and be available in future  years. Installation officials told us that because labor is a large part of  the repair and replacement of equipment, the account has generally  been drawn down in full each year and there generally have not been  funds available to roll over into the next year.
Other energy project costs—There are some costs associated with  energy projects that installations may incur regardless of the funding  arrangement used—some of which may not be included in the total  contract costs—and potential other costs installations may pay to  bring down the total contract payments. For example, despite the  funding source used, a project may require land valuations or  environmental assessments. There are also project development  costs, such as design and engineering services, as well as preliminary  energy surveys for identifying potential energy conservation  measures, which the contractor or utility may prepare and fund.  Additionally, officials from the military service headquarters told us  that some alternatively financed energy projects are managed by  other DOD or federal entities, such as the Army Corps of Engineers or  the Department of Energy, which may require contract administration  fees that are paid either through a one-time up-front payment or at  least annually through the life of the contract. For example, at two  installations we visited, officials told us they would be paying either  the U.S. Army Corps of Engineers or the Naval Facilities Engineering  Command for items such as developing a request for proposal;  conducting life-cycle cost analyses; and providing supervision,  inspection, and overhead services whether they used up-front  appropriations or alternative financing arrangements for their energy  projects. These costs would not be included in the total costs because  they are paid to the contracting officer at the federal agency rather  than to the energy service company or utility. For example, officials  at one installation told us they paid approximately $23,000 to the  Naval Facilities Engineering Command for project management and  oversight of the installation’s UESC. Finally, we found instances  where installations used some up-front funds to reduce the amount  financed for their projects. These up-front payments were still included  in the total payments to the contractors, but the installations were able  to reduce the amount on which they had to pay interest, thereby  reducing the total amount they would have owed had they not made  the up-front payments. For example, at one installation, we found that  the total amount financed for the project was less than the cost to  implement the project because the installation paid almost $2 million  up front in pre-performance payments. According to an installation  official, the installation had planned to repair some mechanical  systems and had already set aside Facilities Sustainment,  Restoration, and Modernization funds for this project. With the ESPC,  the installation was able to use those funds to instead pay for more  energy-efficient technologies to replace rather than repair those  systems, using the funds to reduce the amount to be financed for the  ESPC.
section_title: Conclusions
paragraphs: DOD has taken various actions to meet its needs as the largest energy  consumer in the federal government, including diversifying power  sources, implementing conservation and other efficiency actions to  reduce demand, and relying on private-sector contracts through  alternative financing arrangements in lieu of using up-front appropriations  to fund energy projects. Since 2005, DOD has awarded 464 contracts for  alternatively financed energy projects. While DOD guidance requires the  military services to track and store data related to energy projects, the  military services have not collected complete and accurate data or  consistently provided the data to the military department or DOD  headquarters level on an annual basis to aid DOD oversight and to inform  Congress. If DOD does not require the military services to provide DOD  with complete and accurate data on all alternatively financed energy  projects, decision makers within the department and Congress may not  have all information needed for effective oversight of these projects,  which represent long-term budgetary commitments for periods of up to 25  years.
Confirming savings and validating project performance of all alternatively  financed energy projects are necessary to ensure that the projects are  meeting expected energy and costs savings and that the military services  are appropriately budgeting for the projects over the life of the contract.  The military services have taken some steps to verify project performance  and confirm savings, and the alternatively financed energy projects we  reviewed that were operational reported achieving expected savings or  efficiencies. However, because guidance on when verification of savings  is required is not clear, the military services have taken varying  approaches for confirming UESC savings and lack full assurance that  expected savings are being realized for the entirety of their UESC  projects. DOD’s guidance requires the military departments to track  estimated and verified savings and measurement and verification  information for all energy projects, whereas the Office of Management  and Budget guidance states that UESCs may be scored on an annual  basis if the UESC requires performance assurance or guarantees and  measurement and verification of savings at specific points in time— commissioning and retro-commissioning—rather than ongoing through  the life of the project. However, DOD’s interpretation of this Office of  Management and Budget requirement assumes that the military  departments have the option of conducting either performance  assurance, savings guarantees, or measurement and verification for  UESCs, which differs from the department’s own guidance on verification  of savings for all energy projects. Without updated and clear guidance on  how the military departments should be taking steps to verify savings  associated with UESC projects to validate project performance, the  military services will likely continue to interpret DOD guidance differently  and are likely to take inconsistent approaches to assuring the  performance of UESC projects, which could limit DOD’s visibility over  projects that commit the departments to long-term payments.
section_title: Recommendations for Executive Action
paragraphs: To assist DOD and Congress in their oversight of DOD’s alternatively  financed energy projects, we recommend that the Secretary of Defense  direct the military services to collect complete and accurate data on their  alternatively financed energy projects, including data on the services’  financial obligations and cost savings, and provide the data to DOD at  least annually to aid departmental oversight.
To help ensure that the military departments conduct the level of  assessment required to assure the performance of their UESC projects  over the life of the contract, we recommend that the Secretary of Defense  direct the Office of the Assistant Secretary of Defense (Energy,  Installations and Environment) to update its guidance to clarify the  requirements for the verification of savings for UESC projects.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report for review and comment to DOD and  the Department of Energy. In written comments, DOD concurred with our  first recommendation and nonconcurred with our second  recommendation. DOD’s comments on this report are summarized below  and reprinted in their entirety in appendix II. In an e-mail, the audit liaison  from the Department of Energy indicated that the department did not have  formal comments. DOD and the Department of Energy also both provided  technical comments, which we incorporated as appropriate.
DOD concurred with our first recommendation that the Secretary of  Defense direct the military services to collect complete and accurate data  on their alternatively financed energy projects, including data on the  services’ financial obligations and cost savings, and provide the data to  DOD at least annually to aid departmental oversight.
DOD nonconcurred with our second recommendation that the Secretary  of Defense direct the Office of the Assistant Secretary of Defense  (Energy, Installations and Environment) to update its guidance to clarify  the requirements for the verification of savings for UESC projects. In its  response, DOD stated that UESCs are service contracts for utility  services and that the only financial requirement on federal agencies is the  obligation of the annual costs for these contracts during each year that  the contract is in effect. The department stated that there is no statutory  requirement for annual measurement and verification of the energy,  water, or cost savings, or a contractual guarantee of those savings as  there is for ESPCs. However, the department noted that DOD will  continue to require its components to accomplish necessary tasks to  assure continuing performance of the equipment or systems installed in a  UESC to ensure expected energy and/or water consumption and cost  reductions.
We agree that UESCs do not include guaranteed cost savings. In  response to DOD’s comments, we made changes to the draft report to  emphasize that, while UESCs do not include guaranteed cost savings,  repayments for UESCs—which can commit the department to a contract  term limit for a period of up to 25 years—are based on estimated cost  savings generated by the energy conservation measures. Thus,  verification of savings to validate project performance is necessary to  ensure that the projects are meeting expected energy and costs savings  required to fulfill the requirement that these projects be paid for entirely  through the projects’ generated cost savings. We further noted in our  report that guidance from DOD does not align with that of the Office of  Management and Budget, and this misalignment results in the military  services taking different approaches to validating achievement of benefits  expected from these UESC projects. In addition, we did not recommend  that the department annually measure and verify UESC projects. Rather,  we recommended that DOD clarify and update its guidance for verifying  savings for these projects to help the military services appropriately  budget for the projects over the contract’s life. Without updated and clear  guidance about requirements on how to verify savings associated with  UESCs, the military services will likely continue to interpret DOD  guidance differently and take inconsistent approaches to assuring the  performance of UESC projects. Doing so could limit DOD’s visibility over  projects that commit the departments to long-term payments.
We are sending copies of this report to appropriate congressional  committees; the Secretary of Defense; the Secretaries of the Air Force,  Army, and Navy; the Commandant of the Marine Corps; and the  Secretary of Energy. In addition, the report will be 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) 512-4523 or leporeb@gao.gov. Contact points for our Offices  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 III.
section_title: Appendix I: Scope and Methodology
paragraphs: To evaluate the extent to which the military services have financed  energy projects with alternative financing arrangements since 2005 and  collected and provided the Department of Defense (DOD) complete and  accurate data on those projects, we reviewed available data and  documentation on the alternatively financed energy projects that had  previously been either reported by DOD or the Department of Energy in  its published documents or collected by us or other audit agencies during  previous reviews. Based on these criteria, we scoped our review to focus  on the following types of alternatively financed energy projects for which  the military services had awarded contracts from fiscal years 2005  through 2016: Energy Savings Performance Contracts (ESPC), Utility  Energy Service Contracts (UESC), and Power Purchase Agreements  (PPA). We focused on this time frame because with the passage of the  Energy Policy Act of 2005, the military services began contracting for  more alternatively financed energy projects. Moreover, we reported in  2005 that data prior to this time was incomplete. We included 2016 data  as they capture the most recent full fiscal year of data. We reviewed data  on projects awarded for installations in the United States and excluded  the territories and other overseas installations.
We developed a data collection instrument to confirm the completeness  and accuracy of data we already had on existing alternatively financed  energy projects, obtain any missing or revised data on those projects, and  gather information on projects that had been awarded since our previous  reviews. We pre-populated our data collection instrument for each of the  military services using data from the following sources:
Project level data from DOD’s Annual Energy Management Reports  for fiscal years 2011 through 2015;
A list of 10 USC 2922a PPA projects provided by Office of the  Secretary of Defense officials;
Data from our prior reviews on renewable energy project financing  using both appropriated funding and alternative financing  arrangements and on ESPCs for the military services; and
Publicly available data from the Department of Energy on DOD  projects funded using its indefinite-delivery, indefinite-quantity  contract.
In order to obtain consistent data among the services, for each  spreadsheet in the data collection instrument, we developed separate  tabs containing the pre-populated data on the three types of alternative  financing arrangements on which we focused our review. For each type of  arrangement, we also developed a separate definitions sheet that  explained the data we were requesting so that the services would be  responding with consistent data. We provided these pre-populated  spreadsheets to the military services and requested that they verify  existing information, provide additional information, and add new projects,  as appropriate, in order to obtain data on the universe of these projects  for the specified time period. We then discussed with those officials any  questions we had about the quality and completeness of the data that  were provided. While we took these steps to identify all of DOD’s  alternatively financed energy projects since 2005, the data reflected may  not represent the entire universe of projects.
In addition to the data above, we reviewed key guidance that DOD  provides to the DOD components on managing installation energy,  including DOD Instruction 4170.11, Installation Energy Management, and  DOD guidance letters on developing energy projects. We also reviewed  the DOD instruction to learn about the requirement for the military  departments to maintain a utility energy reporting system to prepare data,  including data on energy consumption and costs, for the Annual Energy  Management Report to determine DOD’s visibility over the energy  projects. We reviewed guidance from the Department of Energy’s Federal  Energy Management Program on alternative financing arrangements, including its overviews of the different arrangements and national lab  reports on agencies’ use of these arrangements. We reviewed the  relevant statute to determine what, if any, requirements applied to DOD’s  data collection efforts related to energy projects. We then reviewed the  project information provided by the military services for the presence of  certain data points, such as total contract costs, estimated cost savings,  and the length of the contract, and compared the military services’  tracking of their data on alternatively financed energy projects to DOD’s  guidance and statutory requirements for tracking such data. We reviewed  the data we collected for completeness and accuracy and estimated the  total number of ESPCs, UESCs, and PPAs for each of the military  services as well as the total contract costs, where available. We excluded  from our analysis those UESCs for which the military departments had  identified a contract term of one year or less or for which a project had  previously been identified in DOD reporting but had not ultimately been  funded as an alternatively financed energy project. We assessed the  reliability of the data we received by interviewing DOD officials and  comparing the multiple data sets we received from the military services  with data reported in the Annual Energy Management Report and  obtained through prior reviews to ensure that there was consistency in the  data provided. We determined that the data were sufficiently reliable for  meeting our objective.
We compared DOD’s data collection efforts with Standards for Internal  Control in the Federal Government, which identify standards for collecting  and providing accurate and complete data. We also reviewed guidance  documentation from the military services on developing and managing  energy projects, including the Army’s guide for developing renewable  energy projects, the Air Force’s instructions on cost analyses and  business case analyses, and the Navy and Marine Corps energy project  management guide. We met with officials from Office of the Secretary of  Defense; the military departments; and the military departments’  engineering, installation, or contracting commands to discuss their  guidance and policies on how they managed and tracked their  alternatively financed energy projects and the availability of data on such  projects. Finally, we spoke with Office of the Secretary of Defense  officials about the President’s Performance Contracting Challenge, which  challenged federal agencies to enter into a total of $4 billion in  performance-based contracts, including ESPCs and UESCs, by the end  of calendar year 2016, to gain an understanding of the results of DOD’s  participation in this effort.
To assess the extent to which the military services reported achieving  expected savings and verified the reported performance of selected  projects, we reviewed agency-level guidance on the different levels of  measurement and verification or performance assurance that are required  for alternatively financed energy projects, such as DOD’s instruction on  installation energy management and the Department of Energy’s most  recent guidelines for measurement and verification and performance  assurance, to determine requirements for measuring savings for the  different types of projects. Using the data on the alternatively financed  energy projects that we obtained from the military services, we selected a  nongeneralizable sample of 17 projects as case studies to discuss during  our site visits and to evaluate how those projects reported achieving their  estimated savings and the extent to which installation officials verified  those reported savings. We then compared measurement and verification  efforts for the 13 projects in our nongeneralizable sample that were  already in operation with DOD guidance requiring measurement and  verification for all energy projects to determine the extent to which  installation officials followed guidance requiring verification of savings. We  also collected and analyzed data and documentation on the expected and  reported savings for the 17 projects in our sample to assess the extent to  which the estimated savings compared to the savings that were reported  and we documented reasons for any differences. We assessed the  reliability of the project data by reviewing the internal controls DOD  officials used to observe and corroborate the data contractors reported in  their annual measurement and verification reports; the data collection and monitoring the officials did for performance assurance; and the data the  officials used to assess project savings. We determined that the data  were sufficiently reliable for our purposes of describing the extent to  which the military services reported achieving expected savings and  verified the reported performance of selected projects.
For the eight ESPC projects in our sample that were operational, we  collected and analyzed the most recent measurement and verification  report to identify the guaranteed savings that were expected and the  savings that were being reported by the contractor. We then interviewed  military service officials at the installations we visited to discuss these  projects and the reported results of their latest measurement and  verification report or other assessment. We also talked with officials from  the installations and, in some cases, also with officials from the  installations’ supporting engineering or contracting commands, about how  they verified the savings for the three UESC projects and the two PPAs in  our sample and to learn about how they developed, managed, and  tracked these alternatively financed projects. For UESCs, we reviewed  DOD guidance outlining requirements to conduct measurement and  verification and compared that with the requirements outlined in Office of  Management and Budget guidance. We also contacted officials from the  Office of the Secretary of Defense and the military departments to discuss  their current and planned guidance related to measuring, verifying, and  reporting the performance of UESCs during the contract performance  period to assure that savings are being achieved.
To describe the benefits and disadvantages reported by the military  services, as well as potential other costs, of using alternative financing  arrangements for selected energy projects rather than using up-front  appropriations, we reviewed previously discussed DOD, Department of  Energy, and military service guidance on the use of alternative financing  arrangements and their cost-effectiveness to determine the requirements  for life-cycle cost analyses and how project costs are identified in  contracts and other documents. For the 17 selected projects in our  nongeneralizable sample, we collected project planning documentation  and reviewed available life-cycle cost analyses and contract  documentation for those projects to obtain information on how costs were  identified and where they were documented. Additionally, we interviewed  officials at the installations in our sample, their contracting or engineering  commands, or their military service headquarters to discuss the projects  in our sample, including the benefits and disadvantages of using  alternative financing arrangements for those energy projects. We also  discussed how the individual contracts identified the costs to operate and  maintain the energy conservation measures or power-generating  equipment for the selected energy projects in our sample as well as any  costs associated with the projects that might not be reflected in the total  contract costs. For one ESPC in our sample, we also compared the costs  of the alternative financing arrangement with the use of up-front  appropriations by calculating the present value of the costs had the  government directly incurred the debt to finance the amount that had  instead been financed by the energy service company. In addition, the  team interviewed officials from the Department of Energy’s Federal  Energy Management Program about federal policies and guidance  related to alternative financing arrangements for energy projects and from  the General Services Administration about that agency’s area-wide  contracts with utility companies to gain an understanding of issues related  to the benefits and costs of such projects.
In order to select installations and identify case studies from which we  gathered information for our objectives, we used data collected in  response to our request to the military services. We developed a  nongeneralizable sample representing 17 projects at 11 installations that  had awarded an ESPC, a UESC, or a PPA between fiscal years 2005 and  2016. Our case studies included 11 ESPCs, 3 UESCs, and 3 PPAs. We  selected our case studies to identify projects representing:
Each of the military services, including one from the reserve
The different types of alternative financing arrangements (ESPC,  UESC, and PPA);
The year the contract was awarded;
The different types of contracting vehicles (Army or Department of  Energy, General Services Administration area-wide, or standalone  contract); and
Different project types (energy efficiency, energy cost savings, and  power generation).
We included at least three large-scale renewable energy projects, which  we defined as projects with a generating capacity of 10 megawatts or  greater. We also attempted to include projects that were both operational  and had not been included in other recent audits by us or other audit  agencies. Finally, we considered geographic variation when selecting  sites. In addition to discussing these alternatively financed projects with  installation officials, we also observed selected energy conservation  measures that had been installed. Table 4 outlines the installations we  visited or contacted during our review.
In addition, for each of our objectives, we contacted officials and, when  appropriate, obtained documentation from the organizations listed below:  Office of the Secretary of Defense:
Office of the Assistant Secretary of Defense, Energy, Installations and
Assistant Secretary of the Army (Installations, Energy and  Environment), Deputy Assistant Secretary of the Army for Energy and  Sustainability and its Office of Energy Initiatives
Assistant Chief of Staff for Installation Management
Headquarters, U.S. Army Corps of Engineers
Director, Shore Readiness Division (N46)
Assistant Secretary of the Navy for Energy, Installations and  Environment, Deputy Assistant Secretary of the Navy (Energy)
Renewable Energy Program Office
Headquarters, Naval Facilities Engineering Command, and two  Facilities Engineering Commands–Northwest and Southwest
Air Force Installations, Environment and Energy
Air Force Civil Engineer Center
Marine Corps Installations Command, Facility Operations and Energy  We conducted this performance audit from June 2016 to June 2017 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.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Kristy Williams (Assistant  Director), Edward Anderson, Karyn Angulo, Michael Armes, Tracy  Barnes, William Cordrey, Melissa Greenaway, Carol Henn, Amanda  Miller, Richard Powelson, Monica Savoy, Matthew Spiers, Karla Springer,  and Jack Wang made key contributions to this report.
section_title: Related GAO Products
paragraphs: Defense Infrastructure: Actions Needed to Strengthen Utility Resilience  Planning. GAO-17-27. Washington, D.C.: November 14, 2016.
Renewable Energy Projects: Improved Guidance Needed for Analyzing  and Documenting Costs and Benefits. GAO-16-487. Washington, D.C.:  September 8, 2016.
Defense Infrastructure: Energy Conservation Investment Program Needs  Improved Reporting, Measurement, and Guidance. GAO-16-162.  Washington, D.C.: January 29, 2016.
Defense Infrastructure: Improvement Needed in Energy Reporting and  Security Funding at Installations with Limited Connectivity. GAO-16-164.  Washington, D.C.: January 27, 2016.
Defense Infrastructure: DOD Efforts Regarding Net Zero Goals.  GAO-16-153R. Washington, D.C.: January 12, 2016.
Defense Infrastructure: Improvements in DOD Reporting and  Cybersecurity Implementation Needed to Enhance Utility Resilience  Planning. GAO-15-749. Washington, D.C.: July 23, 2015.
Energy Savings Performance Contracts: Additional Actions Needed to  Improve Federal Oversight. GAO-15-432. Washington, D.C.: June 17,  2015.
Electricity Generation Projects: Additional Data Could Improve  Understanding of the Effectiveness of Tax Expenditures. GAO-15-302.  Washington, D.C.: April 28, 2015.
Defense Infrastructure: Improved Guidance Needed for Estimating  Alternatively Financed Project Liabilities. GAO-13-337. Washington, D.C.:  April 18, 2013.
Renewable Energy Project Financing: Improved Guidance and  Information Sharing Needed for DOD Project-Level Officials.  GAO-12-401. Washington, D.C.: April 4, 2012.
Defense Infrastructure: DOD Did Not Fully Address the Supplemental  Reporting Requirements in Its Energy Management Report.  GAO-12-336R. Washington, D.C.: January 31, 2012.
Defense Infrastructure: The Enhanced Use Lease Program Requires  Management Attention. GAO-11-574. Washington, D.C.: June 30, 2011.
Defense Infrastructure: Department of Defense Renewable Energy  Initiatives. GAO-10-681R. Washington, D.C.: April 26, 2010.
Defense Infrastructure: DOD Needs to Take Actions to Address  Challenges in Meeting Federal Renewable Energy Goals. GAO-10-104.  Washington, D.C.: December 18, 2009.
Energy Savings: Performance Contracts Offer Benefits, but Vigilance Is  Needed to Protect Government Interests. GAO-05-340. Washington,  D.C.: June 22, 2005.
Capital Financing: Partnerships and Energy Savings Performance  Contracts Raise Budgeting and Monitoring Concerns. GAO-05-55.  Washington, D.C.: December 16, 2004.