DOD Renewable Energy Projects: Improved Guidance Needed for Analyzing and Documenting Costs and Benefits
Released: 2016-09-08T00:00:00

Letter

Background

Under federal statutes, executive orders, and department-level guidance, DOD is to meet various renewable energy goals. Statutory goals include the following:

Production. DOD is to adopt the goal to produce or procure not less than 25 percent of the total quantity of facility energy it consumes within its facilities from renewable sources beginning in fiscal year 2025. DOD can meet this goal by producing electricity using renewable sources on its installations or by procuring electricity produced using renewable sources that is produced in other locations.

Consumption. To the extent economically feasible and technically practicable, not less than 7.5 percent of electrical energy consumed by federal agencies is to come from renewable sources beginning in fiscal year 2013. According to federal guidance implementing the Energy Policy Act of 2005, to count toward the consumption goal, DOD must possess renewable energy credits for electricity it consumes.

Executive Order 13693 established additional goals, including directing agency heads to ensure that increasing percentages of electrical energy consumed in buildings be renewable electric energy where cost-effective, beginning with 10 percent in 2016 and climbing to at least 30 percent by fiscal year 2025.

In addition, the military departments have also taken steps to encourage renewable energy, and each has issued department-level guidance to develop 1 gigawatt of renewable energy—Air Force by 2016, Navy by 2020, and Army by 2025. The military departments have also established some unique energy goals. For example, the Secretary of the Navy established a goal to derive at least 50 percent of shore-based energy requirements from alternative sources, including renewable energy, by 2020. In addition, in its energy strategy, the Army established a goal to increase its use of renewable or alternative resources for power and fuel use.

To meet these goals, over a number of years, DOD has taken steps to develop renewable energy projects on its installations. Additionally, Congress requires that DOD report information on its progress toward these and other energy goals in its annual energy management report. DOD’s most recent report identifies more than 1,130 operational projects of varying generating technologies and capacities.

In addition to its renewable energy goals, DOD has also identified renewable energy projects as a possible way to contribute to its energy security objective. In particular, DOD has noted that its installations and missions can be vulnerable to disruptions of the commercial electricity grid and that renewable energy, combined with energy storage and other tools, can allow installations to maintain critical operations without electricity from outside the installations.

To develop renewable energy projects, DOD can either directly fund the construction or development of projects or work with private developers to help initially finance them. To directly develop renewable energy projects, DOD typically uses funds provided through its annual appropriations process—referred to in this report as up-front appropriated funding. Otherwise, DOD can finance projects through agreements with private developers and pay back the costs of the projects over time—referred to as alternative financing mechanisms.

In addition, when developing projects with private developers, DOD may use one of three types of land use agreements to provide developers with use of DOD land. Through such agreements, DOD allows developers the use of its land in exchange sometimes for revenues or in-kind consideration. Each type of land use agreement has different requirements for compensation for the use of DOD land, as follows:

Leases. Under 10 U.S.C. § 2667, the secretary of a military department (or the Secretary of Defense in certain contexts) may lease land in exchange for the payment of cash or in-kind consideration in an amount that is not less than the fair market value of the lease interest, as determined by the secretary.

Easements. Under 10 U.S.C. § 2668, the secretary of a military department may provide an easement for rights-of-way, upon terms that the secretary considers advisable, but is not required to include a cash or in-kind consideration.

Access licenses or permits. Depending on the structure of the agreement, DOD may provide contractors a license or permit, which allows access to and use of a site for the purposes of the contract, without compensation.

DOD Emphasized Working with Private Developers to Develop Larger Renewable Energy Projects but Builds Some Projects Using Up-Front Appropriated Funds

According to DOD officials and documents, in recent years, DOD’s approach emphasized developing larger projects and working with private developers to develop renewable energy projects with a generating capacity of greater than 1 megawatt on DOD installations in the United States. DOD used alternative financing mechanisms—that is, financing the initial capital investments in projects with private funding—to facilitate working with private developers. Nonetheless, DOD also directly developed some of these projects using up-front appropriated funds.

DOD Has Emphasized Larger Projects and Working with Private Developers

According to DOD officials and documents, the department has emphasized generally larger renewable energy projects—such as those greater than 1 megawatt—and working with private developers. In 2012, DOD testified before Congress that it planned to emphasize the development of large-scale renewable energy projects with private developers. In 2011, the Army began an initiative focusing on large-scale renewable energy, and in 2014, it established the Office of Energy Initiatives and issued supporting guidance for developing large-scale projects with private developers. According to the guidance, the Army forms relationships with project developers, utilities, and the renewable energy industry and leverages these relationships to identify, develop, and finance projects across its installations. Likewise, in 2014, the Navy established the Renewable Energy Program Office to provide a centralized Navy and Marine Corps approach to developing large-scale renewable energy with private developers. According to a Marine Corps official, there has been a shift toward larger projects in recent years, and the Marine Corps’ strategy for renewable energy will be to finance large- scale projects through private developers. Similarly, according to Air Force officials, the Air Force has been shifting its emphasis toward developing large-scale renewable energy projects with private developers, in part to avoid committing DOD resources to the ownership or operation of renewable energy projects. In March 2016, the Air Force announced the establishment of its Office of Energy Assurance to focus on developing large-scale renewable and other energy projects with private developers.

DOD officials told us that the recent focus on pursuing larger projects offers some key advantages. For example, officials said that the increasing emphasis on larger projects offers better opportunities to more efficiently reach DOD’s renewable energy goals and that projects that generate more electricity allow the installations to obtain larger amounts of renewable electricity to apply toward energy goals. According to DOD officials, because of recognition that larger projects can sometimes be more cost-effective, among other reasons, DOD has pursued projects that are larger than 1 megawatt, such as those 10 megawatts and greater. Ten of the 17 projects in our sample were 10 megawatts or larger.

According to DOD officials and our prior work, working with private developers when developing renewable energy projects offers several advantages for DOD, including the following:

Access to incentives. According to DOD officials, private developers can obtain federal, state, and local tax incentives, which can significantly lower their overall costs of developing renewable energy. These incentives are not generally available to DOD if it develops projects on its own. In particular, the federal government offers certain incentives, such as tax credits to encourage the development of renewable energy, but while private developers may claim these by filing tax returns, DOD cannot claim them because it does not pay federal income taxes.

Access to capital. Private developers can arrange their own funding for developing and constructing projects, which allows DOD to avoid seeking up-front appropriated funds. DOD officials told us that obtaining up-front appropriated funds for developing large-scale renewable energy projects can be difficult. Large renewable energy projects such as these can cost several million dollars. As we found in our April 2012 report, obtaining appropriations to finance projects can take longer than developing projects with alternative financing mechanisms. In that report, DOD officials told us that it can take 3 to 5 years to navigate the programming and budgeting process and to obtain military construction appropriations for the project. Up-front appropriation funding through the Energy Conservation Investment Program can also be difficult to obtain. Air Force officials told us that renewable energy projects over 1 megawatt would generally have a difficult time competing for Energy Conservation Investment Program funding against other types of energy conservation measures.

Better asset management. According to DOD officials and our previous work, working with private developers allows DOD to leverage private companies’ expertise in developing and managing of projects and limits the number of personnel DOD has to commit to projects.

Better risk management. According to prior work and military department officials, private developers can be held responsible for development and operational risks, depending on the contract terms.

Previous reports and DOD officials we interviewed also identified drawbacks to entering into agreements with private developers, including the following:

The federal government incurs the cost of some incentives used to develop projects on DOD installations. Many of the financial incentives private developers use, such as federal tax credits, are paid for by other parts of the federal government, such as the Department of the Treasury. As we found in an April 2015 report, incentives for renewable energy projects like those in our sample have collectively cost taxpayers $13.7 billion in tax expenditures, such as tax credits, and an additional $16.8 billion in grants provided in lieu of tax expenditures from fiscal year 2004 through 2013. Because DOD’s analysis of cost-effectiveness solely focuses on the costs DOD incurs, these costs to the government are not included in DOD’s decision-making process. As a result, projects using such incentives may be more expensive to the government than the cost that DOD estimates it will incur on its own. In its comments on our draft report, DOD stated that in federal procurement, it is the norm for a business case to address the cost to the agency, not to the entire government.

Private financing of projects can increase overall cost. As we reported in a December 2004 report, and more recently in an April 2012 report, financing projects through private developers may be more expensive over time than using up-front appropriations because the federal government’s cost of capital is lower than that of the private sector.

Working with private developers can require significant DOD expertise. Army officials told us that working with private developers can require staff to help the developers understand specific requirements for development on installations. In particular, developing projects inside installations involves a complex combination of financing, regulatory requirements, ensuring that the projects are compatible with the installations’ military missions, and other needs that require DOD expertise.

DOD can face challenges in completing work to meet external deadlines. Air Force officials said that renewable energy projects incorporate a number of processes, including environmental reviews, procurement, renewable energy analysis, and real estate valuations. In some cases, these processes must be pursued concurrently to work within a time frame that is reasonable to successfully reach agreements with the private sector. Also, according to information provided by the Army, completing these processes in a timely manner can be important because projects with private developers may face a variety of external deadlines to remain viable, such as those imposed by lenders for private parties, when they obtain their own financing, or those to obtain organizational approval or timely access to incentives.

DOD Has Used Alternative Financing Mechanisms to Facilitate Working with Private Developers

DOD officials and documentation identified a range of alternative financing mechanisms DOD has used to work with private developers, singly or in combination, in developing renewable energy projects, including the following:

Power purchase agreement (PPA). An agreement negotiated between DOD and an energy supplier to purchase specified quantities of electricity at specified prices for a specific period of time. PPAs may be short term, 10 years or less, or long term, typically up to 30 years. Revenues developers receive under PPAs can be used to repay the costs of constructing and operating a renewable energy project on a DOD installation. According to DOD documentation, PPAs are becoming increasingly common. In some cases, these agreements can be used to purchase electricity from projects built on DOD land, but some can involve projects built elsewhere. DOD officials told us long-term PPAs can provide a cost-effective opportunity to repay private developers for the initial costs of building and the ongoing costs of operating these facilities.

Enhanced use lease. A long-term lease of property to a private developer for uses including the installation of renewable energy systems in exchange for cash or in-kind services. These leases are usually for 25 years or more, up to 50 years. In many cases, enhanced use leases do not include a specific provision to purchase electricity produced from the project. According to DOD documentation, DOD is increasingly using enhanced use leases, enabling installations to obtain revenue for the value of DOD land by leasing property to private developers for long periods, such as 50- years terms. In contrast to PPAs, which provide DOD with potential financial benefits through the purchase of electricity and leasing of the land for the project, the financial benefit derived from enhanced use leases is derived through payments received from private developers leasing DOD land for the project.

General Services Administration (GSA) areawide contract. A preexisting agreement negotiated between GSA and a local electricity supplier allowing government agencies in specified areas to purchase electricity and other utility services at established terms and conditions. These agreements are limited to no more than 10 years. Similar to PPAs, revenues received under these contracts can be used to repay the local electricity supplier to construct and operate a renewable energy project on a DOD installation. Army officials told us they have used GSA areawide contracts when PPAs are not economically viable or not allowed under state regulations. Army officials said that under some conditions, these types of agreements can be the easiest and fastest mechanisms for contracting for renewable energy projects because they extend existing GSA areawide contracts for the purchase of electricity from the existing supplier and merge this contract extension with an agreement with the local utility for the construction of a renewable energy project. According to Army officials, these contract extensions sometimes provide no cost savings because the purchase price of the electricity is unchanged, but the renewable energy projects may provide military installations other benefits such as providing a step toward obtaining energy security by building the renewable energy project on the installation.

Energy savings performance contract (ESPC). A contract with private companies to pursue installation of energy savings measures, such as more efficient equipment and renewable energy, where the savings are used to pay for the measures. In many cases, a single contract can combine multiple energy savings measures and can last for up to 25 years.

Utility energy service contract (UESC). A contract with a local utility to provide energy management services focused on energy efficiency or demand reduction, such as designing and installing renewable energy projects. These agreements have typically not exceeded 10 years.

DOD officials told us that DOD has not emphasized some alternative financing mechanisms because they pose difficulties; see the following examples:

Short terms. Short-term PPAs and UESCs are difficult to contract at prices competitive with existing electricity sources because of their short terms—no more than 10 years. For example, Navy officials told us that a 10-year—rather than a 25-year—PPA for the Hawaiian project would have resulted in the developer setting an unacceptably high electricity rate compared to electricity from the existing supplier. Army officials told us that short-term UESCs are mostly used for small projects because, except in some special cases, it may not be possible to develop larger projects—those greater than 1 megawatt— that can be cost-effective within the required 10-year payback period.

According to Army officials, the 1.9-megawatt solar photovoltaic project at Fort Campbell, Kentucky—a larger UESC project—was possible only because a $3 million grant from the state made the project cost-effective.

Access to incentives. Some ESPCs and UESCs may not allow private developers to capture federal tax incentives because Internal Revenue Service rules stipulate that only owners of the projects or those meeting certain standards are eligible to claim key tax expenditures. According to Army officials, the Army has structured ESPCs to allow private developers to capture federal incentives by owning the embedded renewable energy projects, but it stopped doing so after a 2012 Office of Management and Budget memorandum required government ownership of such renewable energy projects to avoid obligating the full cost of the project when the contract is signed.

DOD officials told us that they believed that developing renewable energy projects with private developers requires appropriate agreements that balance the interests of the federal government with the developers’ interests. To do this, DOD typically negotiates land use and other agreements with private developers. These agreements can be complex. Some agreements may address ownership of the assets of the project. For example, one agreement we reviewed immediately assigned ownership of the project to the Army, whereas some other agreements assigned initial ownership of the project to the private developer with provisions to potentially convert ownership over to the Army after a specific period of time.

DOD Used Up-Front Appropriated Funds to Develop Some Projects

In addition to using alternative financing mechanisms, DOD used traditional financing methods, such as up-front appropriated funds, to develop some projects. According to DOD guidance, appropriations can be an important source of funding for energy projects. In fiscal year 2014, DOD obligated about $99 million for 130 renewable energy projects. According to a DOD report, DOD generally uses appropriated funds for small-scale projects but in some cases has used them to develop projects over 1 megawatt. Unlike projects developed using alternative financing mechanisms, projects developed using appropriated funding are generally owned by DOD and built on DOD land and, as such, do not require the negotiation of financing and land use agreements.

DOD officials identified several sources of up-front appropriated funds for funding renewable energy projects over 1 megawatt. For example, officials identified potential sources to include funds made available through annual military construction appropriations. Another key source of funding officials identified within the military construction account is the Energy Conservation Investment Program. This program has historically received annual appropriations to fund energy conservation and renewable energy, among other things. According to DOD guidance, the amount of annual awards made depends on funding and DOD priorities, among other things. In fiscal year 2015, $160 million was provided to the program—$150 million for projects and $10 million for planning and design. Proposals for Energy Conservation Investment Program projects undergo a multistep selection process, beginning with DOD guidance outlining its priorities. DOD components, including the military departments then develop military construction proposals and cost analyses based on this guidance. Similarly, DOD officials noted that the department can also fund renewable energy projects with funds provided through annual operation and maintenance appropriations, (subject to certain limitations). DOD officials also cited other funding that Congress may periodically provide, such as funding appropriated through the American Recovery and Reinvestment Act of 2009, which could be used.

DOD Used Various Approaches to Analyze the Financial Costs and Benefits of Selected Renewable Energy Projects, but Its Analyses and Documentation Were Not Always Clear DOD Used Various Approaches to Determine If Selected Renewable Energy Projects Were Cost-Effective

DOD used various approaches to analyze the financial costs and benefits of the 17 renewable energy projects we reviewed and determined that they were generally cost-effective. However, the project documentation DOD developed for the officials responsible for approving these projects did not always clearly identify the value of land used for the projects and in turn the compensation the department received for the land. In addition, key differences in DOD’s analyses and documentation for projects incorporating long-term PPAs raise questions about the information available to approving officials about projects’ estimated costs and benefits.

DOD used various approaches to determine that of the 17 projects we reviewed, 12 were cost-effective in producing electricity. DOD conducts business case analyses of potential renewable energy projects to determine whether they met DOD’s policy of encouraging investment in cost-effective renewable energy sources. In general, to do these analyses, DOD officials told us that DOD compares the estimated cost of the electricity from these projects over each project’s life or its contract terms with the estimated cost of continuing to purchase electricity from existing suppliers. If the estimated cost of purchasing electricity from a project is equal to or lower than the cost of continuing to purchase electricity from existing suppliers, DOD determines that the project is cost-effective, according to these officials. Figure 1 shows the locations, technologies and other information about the 17 projects in our sample.

Because of the differences in the ways these 17 selected projects were financed, DOD officials told us that they used various approaches to estimate electricity costs in their analyses. Specifically:

For 9 of the projects, including 7 projects developed using long-term PPAs and 1 using a short-term PPA—where DOD agreed to purchase specified quantities of electricity from a supplier at specified prices—as well as 1 project developed using an ESPC, DOD estimated the total cost of purchasing electricity from each project by using the developer’s proposed prices for and amount of electricity specified in the contract. DOD then compared this estimate to the cost of purchasing the same amount of electricity from its existing supplier at the prices it estimated the supplier would charge over each year of the term of the contract.

For each of the 2 projects developed using GSA areawide contracts— where DOD is granting only the use of its land for the project and will continue to purchase electricity under its existing arrangement with its supplier—DOD officials told us that because there would be no change in its electricity costs, DOD did not undertake a detailed analysis to compare the cost of the project with the cost of continuing to purchase electricity from its existing supplier.

For the project developed using an UESC—where DOD would immediately own the project and obtain the electricity generated from the project—DOD compared the amount it would pay for electricity from the project over each year of the 10-year contract term to its estimate of the cost of purchasing the same amount of electricity from its existing supplier at the prices it estimated the supplier would charge during each year of the same 10-year period.

For the 2 projects funded through up-front appropriations, DOD developed life cycle cost estimates—that is, estimates of the overall costs of developing, constructing, operating, maintaining, and ultimately disposing of these projects, as well as estimates of the amount of the electricity that would be produced over each year of the projects’ lifetimes. DOD then compared these estimates to the cost of purchasing the same amount of electricity from its existing suppliers at the prices it estimated the supplier would charge over the lifetimes of the projects.

For the 3 projects financed using enhanced use leases, DOD did not take steps to evaluate the cost-effectiveness of the electricity purchases since these projects were not designed to provide cost savings from purchasing electricity. Instead, DOD examined whether the leases for these projects provided compensation at least equal to the estimate of fair market value for the land used.

For the 14 projects for which DOD evaluated cost-effectiveness,

12 projects were determined to be cost-effective based on electricity

2 projects were determined to be not cost-effective solely based on electricity prices, but DOD pursued them for other reasons. Specifically,

DOD pursued a project at Fort Campbell, Kentucky, because, according to Army officials, while the project would not be cost- effective over the 10-year term of the contract, it would be cost- effective over the estimated 25-year lifetime of the project.

DOD pursued a project at Marine Corps Air Station Miramar, California, because according to a Marine Corps project document, it contributed to DOD’s renewable energy goals and energy security objective, which are discussed later in this report.

DOD’s business case analyses for the 12 projects it determined to be cost-effective showed a range of estimated cost savings. In some cases, DOD identified instances of relatively high expected cost savings. For example, DOD estimated the project serving Navy and Marine sites in Hawaii—Joint Base Pearl Harbor Hickam and Marine Corp Base Hawaii at Kaneohe Bay and Hawaii Camp Smith—would provide about $75 million in cost savings over 25 years. Other projects were expected to provide modest energy cost savings. For example, DOD estimated less than $100,000 in cost savings over 20 years for a project at Fort Drum, New York. Some projects were deemed cost-effective even if they provided no cost savings because DOD established the threshold for cost-effectiveness for energy cost savings at zero—that is, it considered projects to be cost-effective as long as electricity from the projects would not cost more than electricity from the existing supplier. For example, the Army designed the GSA areawide contracts at Fort Benning, Georgia, and Fort Huachuca, Arizona, to cost the same as continuing to purchase electricity from existing suppliers, thereby meeting the minimum cost- effectiveness threshold.

Project Documentation Available to Approving Officials Was Not Always Clear about the Value of Land Used and the Compensation DOD Received

The project documentation DOD developed for the officials responsible for approving the 14 of the 17 projects in our review that involved private developers and land use agreements was not always clear about the value of the land used and the compensation DOD received for granting such use. For these projects DOD used the following three types of land agreements, and compensation received varied widely. Specifically:

For the 6 projects that used leases—which require the government to obtain at least fair market value for the leased land—the agreements were structured to obtain cash or in-kind payments that DOD believed met this requirement.

For the 3 projects that used easements to grant the use of DOD land—which have less specific requirements regarding compensation—the levels of financial compensation varied, including $1 for the easement provided for the project at Edwards Air Force Base, California, and 2 projects that their documentation indicated they would be obtaining other benefits without specifying the financial value of those benefits.

For the other 5 projects that used access licenses or permits to grant the use of DOD land—which do not require compensation—DOD obtained no financial compensation.

The project documentation DOD prepared for approving officials for these 14 projects differed in how it presented information about the value of the land used and the compensation DOD received. Specifically:

For 6 projects in our sample involving leases, DOD’s project documentation presented information about the value of the land and the compensation the department received in return for granting the lease, but the documentation for 2 out of the 6 projects did not provide a clear comparison of these land values and compensation. For example, the documentation for a project at Nellis Air Force Base, Nevada, included information about the estimated market value of the land but did not clearly explain how the in-kind compensation it received for the land compared with that value. Approving officials agreed to receive in-kind compensation, including an electric substation and two lines to distribute electricity on the base. However, the project documentation did not explain how DOD estimated the value of the substation and additional distribution lines and how that value compared with the market value of the land.

For 8 projects in our sample involving other types of agreements, such as easements and access licenses or permits, project documentation did not always include information about the value of the land and the compensation DOD received. In particular, none of the project documentation for the 8 projects where land was granted using land use agreements other than leases included a discussion of how the value of the land compared with the compensation DOD received. For example, the documentation for the project that provided about 120 acres of land at Naval Air Weapons Station China Lake, California, using an access license and a long-term PPA did not discuss the value of the land or compare it with the value of any compensation. Similarly, the documentation for the project that provided over 150 acres of land at Fort Huachuca, Arizona, using an easement and a GSA areawide contract did not provide a comparison of the fair market value of the land with an estimate of the compensation DOD received in return.

DOD has guidance for presenting land values in project documentation; however, the guidance does not discuss all types of alternative funding mechanisms currently in use. Because the 2012 Office of the Secretary of Defense policy memorandum on alternative financing mechanisms does not apply to all types of alternative financing mechanisms, it is not certain that those projects to which it does not apply are obtaining the required fair market value for land, either in kind or in cash, required by 10 U.S.C. § 2667. For example, the guidance does not apply to 7 of the 14 selected projects involving alternatively financed mechanisms and land use agreements that we examined.

Under Standards for Internal Control in the Federal Government, agencies are to clearly document internal controls and the documentation is to appear in management directives, administrative policies, or operating manuals. While DOD has guidance for some alternative financing mechanisms used to work with private developers, the guidance does not clearly apply to all alternative financing mechanisms. Without modifying its guidance for presenting land values in project documentation to apply to the range of alternative financing mechanisms it has used, DOD does not have reasonable assurance that project documentation for approving officials will be consistent or complete for projects using these kinds of financing mechanisms.

In addition, the guidance does not direct project documentation to include a comparison of the value of the land used and the compensation DOD receives for it. Our 2009 cost-estimating guide states that one basic characteristic of a credible cost estimate is the recognition of excluded costs, so that any excluded costs should be disclosed and given a rationale. By clarifying the guidance to direct all project documentation for alternatively financed projects involving land use agreements to include the value of the land, the compensation DOD would receive for it, and how the value of the land compared with the value of the compensation, DOD approving officials would have more information for understanding the financial costs and benefits of a project. This information can be particularly important for approving officials for projects like Fort Huachuca and other GSA areawide contracts, where DOD provides the use of its land but obtains no energy cost savings because the cost of purchasing electricity remains the same.

Key Differences in Analyses and Documentation for Projects Incorporating Long-Term PPAs Raise Questions about Information Available to Approving Officials

Key differences in how DOD conducts business case analyses for renewable energy projects incorporating long-term PPAs—those with terms of up to 30 years—and how it documents these analyses raise questions about the information available to approving officials about projects’ estimated costs and benefits. First, differences in the assumptions DOD used to estimate electricity prices from existing suppliers could affect DOD’s conclusions about projects’ estimated cost savings. Second, DOD examined but did not consistently document the sensitivity of its estimates for some projects to changes in these assumptions. Third, DOD’s project documentation was not always clear or consistent about how compensation for the use of its land was reflected in its analyses of whether electricity produced by the projects was cost-effective.

Differences in Sources for Assumptions Used to Estimate Energy Prices Raise Questions about Estimated Cost Savings of Projects

For the seven projects in our sample involving long-term PPAs, DOD used different sources for the assumptions when it developed its estimates of the cost of continuing to purchase electricity from existing suppliers, and these differences raise questions about the estimated costs and benefits of these projects. Specifically, in developing its estimates of the costs of continuing to purchase energy from existing suppliers, DOD used different sources for assumptions, such as how existing suppliers’ electricity prices may change in the future—known as escalation rates. Escalation rates are a key assumption in these estimates because if the actual escalation rate turns out to be lower than the rate DOD assumed in its analysis, its estimates of electricity prices in future years from existing suppliers would be overstated and make renewable electricity appear more cost-effective than it actually would be. Accordingly, any cost savings associated with purchasing electricity from the project instead of from existing suppliers would have been also overstated. Conversely, if the actual escalation rate turns out to be higher than the rate DOD assumed in its analysis, the estimated electricity prices in future years from existing sources would be understated and make renewable electricity appear less cost-effective than it actually would be.

Eleven of the 17 projects we reviewed required DOD to use escalation rates for electricity prices to estimate cost savings. DOD used assumptions in National Institute of Standards and Technology’s guidance for the 4 projects that involved financial mechanisms other than long-term PPAs. However, for 6 of the 7 remaining projects that required the use of escalation rates and involved long-term PPAs, DOD relied on assumptions from sources other than National Institute of Standards and Technology’s guidance.

GAO’s 2009 cost-estimating guide highlights the importance of obtaining valid data when preparing credible cost estimates and the need for consistency in how cost estimates are structured. DOD has not issued guidance for preparing cost estimates for projects involving all the financing mechanisms the department uses. For projects relying on up- front appropriated funds, DOD has issued guidance that calls for the use of assumptions stipulated in guidance from the Federal Energy Management Program and National Institute of Standards and Technology—including assumptions about the price of electricity from existing suppliers and escalation rates. However, according to DOD and Federal Energy Management Program officials, neither DOD nor the Federal Energy Management Program has issued guidance for such assumptions for projects that involve long-term PPAs. In the absence of guidance specific to projects involving long-term PPAs, DOD generally undertook special studies to develop assumptions for the analyses we examined, which means that the sources for the assumptions used for long-term PPAs may not be the same. According to DOD officials, they undertook these studies because DOD guidance did not specify the source for escalation rates to use for projects involving long-term PPAs, and DOD wanted to obtain input on developing reasonable estimates to use in its analyses.

Differences in the sources for the assumptions it used for escalation rates to estimate the costs of renewable energy projects involving the 7 long- term PPAs in our sample raise questions about the credibility of the estimated costs of these projects. For example, in reviewing the analyses of the projects involving long-term PPAs at Naval Air Weapons Station China Lake, California, and Marine Corps Air Station Miramar, California, we found that DOD used a higher escalation rate than the rate in National Institute of Standards and Technology’s guidance. DOD officials told us that they used the higher rate because industry representatives said the rate in the National Institute of Standards and Technology’s guidance was too low. Using the higher escalation rate made the price of electricity purchased from the renewable energy project appear more competitive compared to the estimated price of electricity from existing suppliers than if they used the rate in guidance from the National Institute of Standards and Technology. Using higher assumptions has, in turn, made the estimated cost savings appear higher. Questions about these projects’ estimated benefits, in turn, raise questions about the information DOD officials relied on when approving these projects. In contrast, 5 other projects in our sample that used an escalation rate followed DOD guidance to use assumptions developed by the National Institute of Standards and Technology. Without guidance for long-term PPAs that identifies the preferred source for assumptions for escalation rates, there is a risk that DOD’s estimates of cost savings could incorporate an escalation rate that is too high or low and DOD does not have a consistent basis for estimating the cost savings of projects developed using different financing mechanisms. If DOD developed guidance for renewable energy projects involving long-term PPAs that calls for consistent sources for assumptions for escalation rates, DOD officials charged with approving projects would have greater assurance that they had credible cost estimates on which to base these decisions and more consistency across projects developed using varied financing mechanisms.

Project Documentation Did Not Always Include Discussion of Sensitivity of Estimated Cost- Effectiveness to Changes in Assumptions

Project documentation for the seven projects in our sample that used long-term PPAs did not always include a discussion of how sensitive DOD’s estimates of cost and cost-effectiveness were to changes in key assumptions. Recognizing that changes in key assumptions could affect these estimates, DOD examined a range of potential values for key assumptions used to develop cost estimates for some projects to determine how sensitive they were to changes in these assumptions. These sensitivity analyses generally identified the escalation rate for electricity from existing suppliers as a key uncertainty affecting an estimated project’s cost savings, given the difficulties inherent in predicting electricity prices sometimes decades into the future.

However, DOD did not consistently describe the sensitivity analyses it conducted in the project documentation provided to approving officials for three of the seven projects that we examined involving long-term PPAs. For two projects—Davis-Monthan Air Force Base, Arizona, and Marine Corps Air Station Miramar, California—DOD did not include descriptions of the sensitivity analyses that had been conducted. For a third project— the project at Fort Drum, New York—DOD included a description of the sensitivity analysis in the project documentation but did not explain that relatively small changes in its estimates of future electricity prices from the existing source could reverse the estimated cost savings from purchasing project electricity to a loss.

DOD’s guidance for business case analyses states that a well- documented sensitivity analysis allows approving officials to understand how much confidence they should have in an analysis’s conclusions—in this case, whether the project will be cost-effective in the future, that is, the credibility of the cost savings estimate. In that regard, DOD guidance is consistent with Office of Management and Budget guidance and our 2009 cost-estimating guide, which identifies the characteristics of a high-quality—that is, reliable—cost estimate. Such an estimate would be credible, well-documented, accurate, and comprehensive, and documenting the estimate, which includes describing the sensitivity analysis, is among the 12 steps in our cost-estimating guide that, if followed correctly, should result in reliable and valid cost estimates that agency management can use for making informed decisions. However, DOD did not always include a description of the sensitivity analyses it conducted in the project documentation provided to approving officials.

One reason for this appears to be that DOD’s guidance for projects involving long-term PPAs does not specify how to describe sensitivity analyses in project documentation. Without clarifying in guidance how to describe sensitivity analyses in project documentation, DOD does not have reasonable assurance that DOD staff will consistently document such analyses for projects involving long-term PPAs to show whether changes in key assumptions would affect the conclusion that a project was cost-effective, and that approving officials know how much confidence to have in the cost savings estimate.

Project Documentation Did Not Always Reflect All DOD Costs in Analysis of Cost- Effectiveness

Project documentation for the seven projects in our sample involving long-term PPAs did not fully reflect all costs to DOD, often excluding the value of DOD land used by the project. DOD guidance on business case analyses calls for cost estimates to be complete, that is, to reflect the full cost of the resources used. However, for six of the seven projects incorporating long-term PPAs, project documentation did not reflect all costs, either because the project did not obtain compensation for the land used or DOD effectively returned compensation received for the land back to the developer, thereby excluding this compensation from the cost of electricity from the project when estimating the cost-effectiveness of the project. Specifically, for the four projects that involved long-term PPAs and used an instrument other than a lease, such as an access license or permit, in project documentation DOD did not include the valuation of the land in its cost estimate or obtain financial compensation for the use of its land. Because DOD was not obtaining financial compensation for the land, the estimated electricity costs for these projects did not reflect the value of DOD land used, helping to make the cost of electricity from the projects more advantageous than from existing suppliers. For these four projects, the discussion about the land used differed in the project documentation. For example, the documentation for a project at Navy and Marine Corps sites in Hawaii clearly stated that the value of the land was not considered when estimating cost savings, whereas the project documentation for the project at Naval Air Weapons Station China Lake, California did not discuss the value of the land in the cost savings estimate.

Even for the three projects where DOD received compensation for the use of its land, information in project documentation did not reflect a consistent approach for treating the compensation—which in the case of leases is required to be at least equal to the estimated fair market value of the land—in the cost savings estimate. For two of the projects—the projects at Davis-Monthan Air Force Base, Arizona, and Fort Detrick, Maryland—DOD used the compensation it was to receive for the use of land as a credit to payments it would have made for electricity. This approach had the effect of giving back to the developer the full compensation that had been owed to DOD for the land to reduce the amount DOD owed the developer for electricity. DOD then used the reduced amounts as the costs of electricity from the projects to compare with the costs of purchasing electricity from the existing supplier to determine whether the projects were cost-effective. This approach significantly affects the estimated financial costs of projects, helping to make projects’ electricity appear more financially cost-effective. For example, the Army is committing 67 acres valued at an annual rent of more than $400,000 over a 26-year lease to the Fort Detrick project. Including the fair market rental value of the land would raise the electricity prices of the project and, as a result, significantly reduce the estimated cost savings for project—by about 70 percent—compared to the analysis presented in project documentation where the value of the land was effectively excluded, according to information provided by Army officials. In contrast, for the project at Fort Drum, New York—where DOD obtained compensation equal to fair market value—DOD simply relied on the total cost of purchasing electricity as stipulated in the contract—without reducing this amount by the compensation owed to DOD for use of its land—to compare with the costs of purchasing electricity from the existing supplier, resulting in more accurate estimated cost savings.

DOD does not have guidance for long-term PPAs that specifies that DOD cost estimates are to reflect all costs, including the value of land to ensure that DOD analyses consistently treat and document the value of land in the estimated cost of electricity. The 2012 policy memorandum calls for these projects to generally utilize leases and for project documentation to include a statement of the fair market value of land in land use agreements as well as a business case analysis of the electricity purchased. However, this policy memorandum does not specify how to present information on how the value of the land or how any compensation that may have been owed to DOD should be considered when developing analyses of the cost-effectiveness of projects. In particular, this document does not specify how to reflect the value of lands used for projects for which DOD was not compensated. The document also does not specify whether the determination of cost- effectiveness of projects should reflect the total costs for purchasing electricity or whether it is allowable to reduce this amount by treating compensation provided to DOD for granting the use of its land as a credit toward future electricity purchases.

Some DOD officials we interviewed did not think obtaining compensation for land involving PPAs benefits the government because such payments would simply increase the price of electricity from a project and make the project look less cost-effective. For projects involving long-term PPAs— where DOD is both buying electricity from the project and providing the use of DOD land on which a developer will install, operate, maintain, and own the project—these officials believed all costs associated with the project would be recovered through payments made by DOD for the electricity produced by the project. As such, DOD officials told us that any compensation provided by the developer for use of DOD land provides no net financial benefit for DOD since it would result in higher DOD payments to the developer. According to these officials, the primary financial benefit of these projects is obtained through energy cost savings. However, not providing information about the full costs of DOD contributions, both in terms of electricity purchases and the value of the land and any compensation, can make electricity from the projects appear more cost-effective than purchasing electricity from existing suppliers. Our 2009 cost-estimating guide states that one basic characteristic of a credible cost estimate is the recognition of all associated costs, so that any excluded costs should be disclosed and given a rationale.

Without clarifying guidance on how documentation should present information on all costs of a project, including the value of the land and compensation received for it and in turn how that value and compensation affect the estimated costs and benefits of purchasing electricity from projects involving PPAs, DOD officials approving such projects may lack credible information about costs for those projects. As DOD pursues larger renewable projects on its land, the amount of land used may be larger, more valuable, and committed for longer periods of time and unavailable for other purposes—making this land an increasingly significant project resource.

Some Selected Projects Advanced DOD’s Energy Goals and Security Objective, but Documentation of Project Contributions Was Not Always Clear and Consistent Some of the Selected Projects Advanced DOD’s Energy Goals, but Project Documentation about Contributions toward the Goals Was Not Always Clear

Some of the 17 projects we reviewed advanced DOD’s energy goals and energy security objective, but project documentation was not always clear about how each project was expected to (1) contribute to the department’s production and consumption goals or (2) advance the department’s energy security objective or estimate the value of energy security provided.

According to DOD project documentation and the DOD officials we interviewed, all 17 of the renewable energy projects we reviewed contributed to DOD’s renewable energy production goal, and 9 of these projects contributed to DOD’s consumption goal (see table 1). According to information provided by DOD, all of the projects claimed that the energy they produced counted toward DOD’s renewable energy production goal because DOD reporting guidance calls for crediting all renewable energy projects on DOD land as contributing to this goal. However, according to DOD project documentation and officials, 8 of the 17 projects did not contribute to DOD’s consumption goal because the military services did not retain or replace the renewable energy credits associated with the project. Under the Energy Policy Act of 2005, DOD has to retain ownership of these credits to claim the energy produced by these projects toward its energy consumption goal or purchase credits to replace them, but the ownership of these credits is often negotiated as part of the contract to develop the project, according to military department officials. These officials told us that in some locations renewable energy credits can be valuable. In some cases, developers directly use them to meet state requirements. In other cases, developers may be able to sell them to others. In either case, developers retaining these credits can typically offer lower prices for electricity, according to the officials. The military department officials noted that, because the price of renewable energy credits can vary widely across different parts of the country, it is sometimes possible to purchase replacement credits elsewhere in the country at a lower price and allow private developers to retain the credits where a project is developed.

Project documentation was not always clear or did not provide information about which of DOD’s energy goals a project was contributing to or important aspects of how that contribution toward goals was supported. For example, the documentation for the project at Camp Lejeune, North Carolina submitted to officials did not reflect that it would not contribute to the consumption goal. In interviews about this project, Navy officials told us that the project did not contribute to the consumption goal because the developer would retain renewable energy credits associated with the project. However, this information was not reflected in project documentation submitted to approving officials. In other cases, project documentation did reflect to which goals a project would contribute but did not reflect important aspects of how that contribution toward goals was supported. For example, project documentation for the renewable energy project at Davis-Monthan Air Force Base, Arizona, reflects that the project is expected to contribute to DOD’s consumption goal. Project documentation did indicate that the developer retained the renewable energy credits associated with this project. However, it did not explain that the Air Force would have to purchase renewable energy credits to claim the energy the project produces toward its consumption goal. Thus approving officials did not have access to all relevant information about the project and its contributions toward the energy goals.

Standards for Internal Control in the Federal Government states that information should be recorded and communicated to management and others within the entity who need it and in a form and within a time frame that enables them to carry out their internal control and other responsibilities. Without information in project documentation about the extent to which an individual project contributes toward DOD’s production and consumption goals, it is not clear that approving officials had access to all relevant information about the project before approving it.

Further, federal standards for internal control state that internal control and all transactions and other significant events need to be clearly documented; such documentation should be complete and available for inspection; and that documentation is to appear in management directives, administrative policies, or operating manuals. However, DOD’s guidance does not direct that all project documentation should identify the extent to which an individual project will contribute toward the department’s energy goals. Without DOD clarifying in guidance that projects should specify if they are contributing to DOD’s energy goals (i.e., production and consumption), approving officials may approve the development of renewable energy projects without fully understanding the projects’ potential costs and benefits. In particular, DOD officials may unknowingly approve projects that contribute only to DOD’s production goal, thereby rendering its land unavailable for other projects that could have contributed to both its production and consumption goals.

Documentation Was Not Always Clear about How Projects Advanced DOD’s Energy Security Objective or the Value of Energy Security Benefits Provided

The views of DOD officials and documentation for projects in our sample reflected a wide range of perspectives on energy security, but we found that only 2 of the projects were specifically designed to provide power to the installations in the event of a disruption of the commercial grid without additional investments. DOD officials told us that they believed all 17 of the projects in our sample provided an energy security benefit because the officials defined energy security broadly to encompass the diversification of fuel sources, among other things. However, this view was not consistently reflected in the documentation for the 17 projects in our sample. Specifically, of the 17 projects, the documentation for 5 projects either did not identify energy security as a project benefit or stated that the project would not provide an energy security benefit. For example, for a project at Navy and Marine Corps sites in Hawaii, documentation stated that the project would not incorporate energy security features because to do so would be cost prohibitive.

In contrast, the documentation for the other 12 projects identified a wide range of potential energy security benefits but did not use consistent definitions of energy security or consistently identify the need for additional investment. For 5 of the 12 projects, the documentation either did not clarify the specific energy security benefit or identified energy security benefits more broadly, such as promoting the use of nonfossil fuels. For example, documentation for the project at Naval Air Weapons Station China Lake, California, identified that the project would reduce reliance on electricity produced by natural gas, a fossil fuel; replace energy purchased from other suppliers; and be located on the installation as the energy security and independence benefits. For the remaining 7 projects, the documentation noted that the projects had the potential of providing power in the event of a commercial grid outage—a narrower definition of energy security benefits. However, we found that only 2 of these projects had the capability to provide electricity to the installation in the event of an outage of the commercial grid without additional steps. Specifically, documentation for a project at Fort Drum, New York, stated that the project would provide access to on-site electricity generation for all of the installation’s energy needs in the event of a grid outage. In addition, Marine Corps officials told us that the project at Marine Corps Logistics Base Albany, Georgia, would provide electricity to the maintenance center—the critical facility on the installation—during a grid outage.

The other 5 projects would require additional steps and investments, such as the installation of batteries or other energy storage equipment and the integration of improvements to the electricity delivery and control systems on the installation before they would be able to deliver electricity during a grid outage. For example, documentation for the project at Fort Benning, Georgia, noted that additional infrastructure would be needed to enable use of the energy produced by the project during a grid outage and estimated that this infrastructure would cost an additional $30 million to $40 million. Similarly, documentation for the project at Camp Lejeune, North Carolina, stated that the Department of the Navy would be investing up to $48 million more to achieve the project’s energy security benefits. One project did not provide any information about the additional investment required to provide electricity during a grid outage. Documentation for a project at Marine Corps Air Station Miramar, California, identified an energy security benefit of providing power during an outage of the commercial grid but did not clearly specify what additional investments were required or provide estimates of the costs of those investments. Navy officials told us that since the approval of the project, the Navy has developed a proposal for about $18 million in upgrades that will integrate this project as well as other emergency energy sources to enable it to provide this capability, but these improvements were not included in the project documentation that we examined.

Under federal standards for internal control, information should be recorded and communicated to management and others within the entity who need it and in a form and within a time frame that enables them to carry out their internal control and other responsibilities. However, the military departments and services did not consistently record in project documentation the type of energy security benefit projects would provide and whether any such benefit would be immediately available or would require additional investments and, if additional investment was required, provide a detailed estimate of those investments. Without specifying this information, project documentation did not convey a full understanding of the projects’ potential costs and benefits specific to energy security to approving officials. Table 2 describes the extent to which project documentation identified energy security as a benefit and whether additional investment would be needed to achieve this benefit for the 17 projects we reviewed.

Moreover, DOD did not consistently estimate or document the value of the energy security benefits associated with the 17 projects we reviewed. For example, the project at Fort Huachuca, Arizona, granted an easement to a private developer to use DOD land in exchange for energy security benefits but did not provide an estimated value for this benefit in documentation for the project. DOD officials we interviewed told us that they estimated the value of the energy security benefit as the developers’ full cost of the project—$46 million. However, it was not clear from the project documentation why the Army valued the energy security benefits as equal to the entire cost of the project. In contrast, for the Navy project at Camp Lejeune, North Carolina, documentation contained the Navy’s estimate of the value of the energy security benefit as the government’s projected cost of alternatively obtaining the same amount of electricity capacity with diesel generators plus the developer’s cost of providing project studies, site preparation, and connection infrastructure, which totaled about $23 million.

As we mentioned earlier, under federal standards for internal control, information should be recorded and communicated to management and others within the entity who need it and in a form and within a time frame that enables them to carry out their internal control and other responsibilities. However, DOD used different approaches to estimate the value of the energy security benefit of providing assured access to power during a grid outage and did not consistently record the approach used in project documentation. Without a consistent approach to estimating the value of the energy security benefits and a description of the approach used to estimate that value in project documentation, approving officials may not have reasonable assurance about the value of projects’ energy security benefits.

The primary reason for the lack of consistency and completeness in project documentation concerning projects’ contributions to DOD’s energy security objective and the value of the energy security benefits provided is that DOD has not issued guidance on how to document projects’ contributions to its energy security objective. Available guidance does not directly apply to estimating and documenting projects’ energy security benefits. While 10 U.S.C. § 2924 points toward a narrower definition of energy security, specifically the ability to provide power during a disruption of the commercial grid, DOD’s directive that calls for improving energy security, among other things, does not specify how to identify the type of energy security provided by projects or how to otherwise document these contributions. In addition, we were not able to identify any other guidance that directs the military departments and services on how information about the need for additional investment to obtain an energy security benefit should be presented in project documentation. DOD officials we interviewed were also not aware of any guidance on how to value the energy security provided by renewable energy projects.

Finally, DOD officials were not able to identify specific documented guidance on valuing energy security that applies to projects relying on energy sources that are intermittent—such as solar sources that vary throughout the day and are unavailable at night. As mentioned earlier, under federal standards for internal control, agencies are to clearly document internal controls and the documentation is to appear in management directives, administrative policies, or operating manuals. In the absence such specific guidance, DOD officials took different approaches to estimating the value. Specifically, with regard to the project at Fort Huachuca, Arizona, Army officials estimated that the energy security value was equal to the cost of the renewable energy project. In contrast, for the project at Camp Lejeune, North Carolina, Navy officials estimated that the value was equal to the cost of obtaining the comparable amount of capacity from a standard technology for providing backup power supplies, in this case backup diesel generators—a technology that can produce specified amounts of energy whenever called upon. It is inherently difficult to estimate the value of energy security. However, it is not clear that either of the two approaches they used—namely, equal to the total cost of the project or equal to the cost of obtaining diesel generators of an equal capacity to produce electricity—is valid for estimating the value of energy security provided by the renewable energy projects in our sample. Officials we interviewed from all three military departments stated that it was difficult to develop such estimates without guidance. For example, Marine Corps and Navy officials discussing the project at Air Ground Combat Center Twentynine Palms, California, told us that they were wary of estimating the value of energy security without specific guidance from DOD on how to estimate such value for renewable energy projects because they were concerned that their valuation would be critiqued. Further, approving Army officials told us that they had an option in the request for proposals for the project at Fort Detrick, Maryland, to consider energy security benefits but did not know how to evaluate them, and thus they did not consider them in the proposals they reviewed. Without guidance for estimating and documenting the contributions of renewable energy projects to DOD’s energy security objective, approving officials may continue to see inconsistent and incomplete project documentation and may approve the development of renewable energy projects without fully understanding the projects’ potential costs and benefits specific to energy security.

Conclusions

By emphasizing larger projects and working with private developers, DOD is making strides toward various federal renewable energy goals and its own energy security objective. As DOD has worked more frequently with private developers using alternative financing mechanisms to further its renewable energy goals and energy security objective, its guidance for analyzing the financial costs and benefits of these projects appears to have lagged, particularly for projects involving long-term PPAs for which DOD grants the use of its land.

DOD has guidance for presenting land values in project documentation, but the guidance does not discuss all types of alternative funding mechanisms currently in use. As a result, the project documentation DOD prepared for approving officials differed in how it presented information about the value of the land used and the compensation DOD received for the use of its land. Without modifying its guidance for presenting land values in project documentation to apply to the range of alternative financing mechanisms it has used, particularly long-term PPAs, DOD may not have reasonable assurance that project documentation for approving officials is consistent or complete. If DOD clarifies the guidance to direct all project documentation for alternatively financed projects involving land use agreements to include the value of the land, the compensation DOD would receive for it, and how the value of the land compared with the value of the compensation, DOD approving officials would have more information for understanding the financial costs and benefits of a project.

Further, for projects involving long-term PPAs, DOD’s guidance provides few specific details for conducting its business case analyses of these projects’ costs and benefits, in particular, the key assumptions that DOD departments, services, and installations use for escalation rates. Differences in the sources DOD used as the basis for assumptions about escalation rates raise questions about the credibility of the estimated costs of projects provided to approving officials. Developing guidance that calls for drawing upon consistent sources for assumptions for escalation rates would provide DOD officials charged with approving renewable energy projects involving long-term PPAs more assurance that they had credible cost estimates on which to base these decisions. In addition, although DOD’s guidance for business case analyses states that a well- documented sensitivity analysis allows approving officials to understand how much confidence they should have in an analysis’s conclusions, DOD’s guidance for renewable energy projects does not specify how to describe sensitivity analyses in project documentation. Without clarifying its guidance on how to describe sensitivity analyses in project documentation, DOD may not have reasonable assurance that it will consistently document such analyses for projects involving long-term PPAs to show whether changes in key assumptions would affect the conclusions that projects were cost-effective.

Moreover, DOD does not have guidance for long-term PPAs that specifies that cost estimates reflect all costs, including the value of land that DOD forgoes the use of for renewable energy projects, to ensure that DOD analyses consistently treat and document the value of land in the estimated cost of electricity. Without DOD clarifying its guidance on how documentation should present information on all costs of a project, including the value of the land and compensation received for it and in turn how that value and compensation affect the estimated costs and benefits of purchasing electricity from projects involving PPAs, DOD officials approving such projects may lack credible information about costs for those projects.

Finally, limited guidance regarding how to prepare documentation for renewable energy projects has resulted in project documentation that is not always clear as to which projects are contributing toward DOD energy goals and its energy security objective. Without information in project documentation about the extent to which an individual project contributes toward DOD’s production and consumption goals, approving officials may not have access to all relevant information about the project when making decisions before approving it. Regarding energy security, DOD’s project documentation did not always clearly define the energy security benefits associated with projects and whether additional investment would be required to obtain these benefits. If project documentation does not specify the type of energy security benefit projects would provide and whether any such benefit would be immediately available or would require additional investments and, if additional investment was required, provide a detailed estimate of those investments, approving officials may not fully understand the projects’ potential costs and benefits specific to energy security. In addition, lack of guidance on how to value energy security provided by renewable energy projects such as those we reviewed has resulted in inconsistent approaches to estimating the value of the energy security benefits associated with each project. Without a consistent approach to estimating the value of the energy security benefits and a description of the approach used in project documentation, approving officials cannot have reasonable assurance about the value of projects’ energy security benefits.

Recommendations for Executive Action

We are recommending that the Secretary of Defense direct the Assistant Secretary of Defense for Energy, Installations and Environment and the Secretaries of the Army, Navy, and Air Force to take the following eight actions: To improve DOD’s analyses of the financial costs and benefits of renewable energy projects, modify guidance for presenting land values in project documentation to apply to the range of alternative financing mechanisms DOD has used and clarify the guidance to direct all project documentation for alternatively financed projects involving land use agreements to include the value of the land, the compensation DOD would receive for it, and how the value of the land compared with the value of the compensation.

To improve DOD’s analyses of the financial costs and benefits of renewable energy projects involving long-term PPAs on its land, revise guidance to develop consistent sources for assumptions for escalation; clarify how to describe sensitivity analyses in project documentation; and clarify how project documentation should present information on all costs of a project, including the value of the land and compensation received for it and in turn how that value and compensation would affect the estimated costs and benefits of purchasing electricity from the project (e.g., whether compensation could be used to reduce electricity costs for the project when estimating cost-effectiveness).

To improve the information available to approving officials on projects’ contributions to DOD’s renewable energy goals and energy security objective and to help ensure the consistency and completeness of project documentation, develop guidance to clarify that projects should specify their contribution to DOD’s energy production and consumption goals; clarify the type of energy security benefit that projects will provide and state whether any such benefit is immediately available or would require additional investments and, for projects that would require additional investment, provide a detailed estimate of those investments; and clarify that a consistent approach is to be taken to estimate the value of the energy security benefit of providing assured access to power during a grid outage and that a description of this approach is provided in project documentation.

Agency Comments

We provided a draft of this report to DOD for review and comment. In written comments, reprinted in appendix III, DOD concurred with all of our recommendations. In addition, DOD provided technical comments, which we incorporated as appropriate.

We are providing copies of this report to appropriate congressional committees; the Secretary of Defense; the Secretaries of the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; and the Secretary of Energy. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact Brian J. Lepore at (202) 512-4523 or leporeb@gao.gov or Frank Rusco at (202) 512-3841 or ruscof@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 members who made key contributions to this report are listed in appendix IV.

Appendix I: Objectives, Scope and Methodology

The objectives of our review were to examine (1) the Department of Defense’s (DOD) approach for developing renewable energy projects with a generating capacity greater than 1 megawatt (2) DOD’s approach for analyzing the financial costs and benefits of selected renewable energy projects contracted for or funded from 2010 through 2015 and (3) the extent to which selected projects addressed DOD’s renewable energy goals and energy security objective.

To address these questions, we examined 17 renewable energy projects built with a generating capacity greater than 1 megawatt on military installations in the United States with funding or contracts awarded from 2010 through 2015. We identified possible projects for examination from lists of approved but not necessarily operational projects and lists of operational projects the military departments provided. Including approved projects that were not necessarily operational enabled us to review more recent projects that are more revealing of DOD’s current efforts and emphasis on larger, alternatively financed projects. We selected projects that reflected a range of military departments and services, funding mechanisms, and renewable energy technologies. Because this was a nonprobability sample, our findings are not generalizable to other DOD renewable energy projects but provide illustrative examples of how DOD develops projects, analyzes costs and benefits, and addresses its goals and objective with such projects. For a complete listing of the projects in our sample, see appendix II.

To examine DOD’s approach for developing renewable energy projects with a generating capacity of 1 megawatt and greater, we reviewed applicable laws, DOD guidance for developing renewable energy projects, and DOD’s annual reporting on energy management, and interviewed officials with the Office of the Secretary of Defense and the military departments and services who were knowledgeable about DOD’s development of such projects, including our sample of 17 projects.

To examine how DOD analyzed the financial costs and benefits of selected renewable energy projects, we reviewed DOD’s guidance as well as Federal Energy Management Program and National Institute of Standards and Technology guidance for assessing cost-effectiveness of projects and examined whether DOD followed this guidance. We focused on the approaches DOD used to calculate the costs of various sources of energy and estimate cost savings derived from the project electricity, the source of assumptions for the analyses, any compensation from developers for the land used for the project, assessments of uncertainties with its long-term estimates, and the information conveyed in project documentation to approving officials about any government payments or compensation stipulated in project agreements. We reviewed the relevant project documentation for the selected projects, including business case analyses of cost savings and, for alternatively financed projects, the project contracts with developers and any associated agreements to allow developers temporary use of land for the project. We also interviewed key officials with the Office of the Secretary of Defense; military departments and services; specific installations with specific knowledge of projects; and Department of Energy, which provides federal agencies information and support when examining energy projects and related matters. Project documentation DOD provided us was not always clear about all aspects of the estimation process or the source of assumptions; moreover, DOD could not provide documentation for the business case analysis done for 1 of the 17 projects we examined, and we do not report on the estimation process for that project. Based on our interviews to confirm DOD’s estimation process described in project documentation, we determined that the DOD information was reliable for the purposes of examining how DOD determined the costs and benefits of these projects.

To examine the extent to which DOD addressed its renewable energy goals and energy security objective through the projects in our sample, we reviewed DOD guidance on renewable energy and energy security. We also reviewed project documentation prepared for project approval, as well as contracts and land use agreements to determine the extent to which renewable energy goal contributions and energy security benefits were identified in project documentation. In addition, to ensure that we reliably identified and understood the contributions to the renewable energy goals and the energy security objective for the projects, we interviewed DOD officials about each project. Based on our comparison of project documentation and interview responses, we determined that the DOD information was reliable for the purposes of examining the extent to which DOD addressed its renewable energy goals and energy security objective through selected renewable energy projects.

We conducted this performance audit from March 2015 to September 2016 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.

Appendix II: DOD Renewable Energy Projects in GAO Sample

Appendix II: DOD Renewable Energy Projects in GAO Sample Land use agreements refer to the types of ways that DOD provided the developer temporary use of land for a renewable energy project. These agreements include the following: Leases refer to agreements under which the secretary of a military department may lease land in exchange for the payment of a cash or in-kind consideration in an amount that is not less than the fair market value of the lease interest, as determined by the secretary. Easements are agreements under which the secretary of a military department may provide an easement for rights-of-way, upon terms that the secretary considers advisable, which might include a cash or in-kind consideration. Access licenses or permits refer to agreement provisions through which DOD provides contractors access to and use of a site for the purposes of the contract, without compensation. For some projects, where DOD owns the generating system on its own land, providing developers land to use for the project is not applicable. We are identifying the agreement for the site of the generating system and not necessarily for other lands such as for transmission lines, unless otherwise noted.

Appendix III: Comments from the Department of Defense

Appendix IV: GAO Contacts and Staff Acknowledgments

GAO Contacts

Staff Acknowledgments

In addition to the contacts named above, Jon Ludwigson (Assistant Director), Laura Durland (Assistant Director), Tracy Barnes, Emily Biskup, Lorraine Ettaro, Emily Gerken, Timothy Guinane, Terry Hanford, Alberto Leff, Alison O’Neill, Jodie Sandel, Kiki Theodoropoulos and Michael Willems made key contributions to this report.

Related GAO Products

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, DC: April 28, 2015.

High-Risk Series: An Update. GAO-15-290. Washington, D.C.: February 11, 2015.

Climate Change Adaptation: DOD Can Improve Infrastructure Planning and Processes to Better Account for Potential Impacts. GAO-14-446. Washington, D.C.: May 30, 2014.

Clear Air Force Station: Air Force Reviewed Costs and Benefits of Several Options before Deciding to Close the Power Plant. GAO-14-550. Washington, D.C.: May 12, 2014.

Climate Change: Energy Infrastructure Risks and Adaptation Efforts. GAO-14-74. Washington, D.C.: January 31, 2014.

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.

Renewable Energy: Federal Agencies Implement Hundreds of Initiatives. GAO-12-260. Washington, D.C.: February 27, 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.

Electricity Grid Modernization: Progress Being Made on Cybersecurity Guidelines, but Key Challenges Remain to be Addressed. GAO-11-117. Washington, D.C.: January 12, 2011.

Defense Infrastructure: Department of Defense’s Energy Supplemental Report. GAO-10-988R. Washington, D.C.: September 29, 2010.

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.

Defense Critical Infrastructure: Actions Needed to Improve the Identification and Management of Electrical Power Risks and Vulnerabilities to DOD Critical Assets. GAO-10-147. Washington, D.C.: October 23, 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.