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U.S. Army Issues US$7 Billion Solicitation for Renewable and Alternative Energy

August 10, 2012

 

On August 7, 2012, the U.S. Army Corps of Engineers issued a solicitation[1] to procure up to US$7 billion of reliable, locally-generated renewable and alternative energy through long-term power purchase agreements. The main purpose of the solicitation is to enable the Army to purchase electricity from solar, wind, biomass and geothermal generation plants that will be financed, constructed and operated by private-sector contractors. The program will assist the Army in complying with the Department of Defense (“DOD”) mandate to produce or procure at least 25% of its facility needs from renewable resources by 2025. Project locations under the program may be on private land or on installations under the jurisdiction of the DOD.[2]

This program offers a significant opportunity for developing new renewable energy projects, but participants in this program will need to address some issues that may be unfamiliar to project developers who do not have experience with selling energy to the federal government. Similarly, entities considering providing capital to such projects will need to grapple with issues that are unique to projects relying on a government contract for their revenues.

Program Structure

Bidders selected in the solicitation will be included in a contract pool that is eligible to bid on “task orders” for specific projects during the “ordering period,” which will be for a minimum of 3 years, with possible extensions for up to 7 additional years. The task orders are expected to be in the form of firm, fixed-price power purchase agreements with terms of up to 30 years each. The Army will evaluate the market every 18 months and may solicit additional participants (an “on-ramp”) or remove participants from the contract pool (an “off-ramp”). For example, the Army may implement an on-ramp in response to the availability of new technologies and may implement an off-ramp to winnow out underperforming participants.

Selection Criteria

One criterion for selection into the contract pool will be price; bidders are required to submit a maximum price per kWh for each technology on which they are bidding (i.e., solar, wind, biomass, or geothermal). The solicitation indicates that prices will be reviewed for “reasonableness and realism.” Prices should be based on costs for development, construction, operation and maintenance, but should exclude project-specific costs for items such as land use rights, interconnection costs and National Environmental Policy Act (“NEPA”) compliance. Potential bidders likely will seek additional clarification from the Army on what should be included, and excluded, in the price bids. For example, the Army reserves the right to determine on a case-by-case basis for each task order whether to retain all or a part of the renewable energy credits for which a specific renewable energy project qualifies. It is not clear, however, whether bidders should exclude the value of renewable energy credits when calculating the maximum price to bid in this solicitation.

The solicitation is designed to identify bidders that can provide “Best Value” to the government. Evaluation factors will include financial capability/durability, corporate technical experience, organizational/management approach, past performance, small business participation, potential impact on other orders already placed, and price.[3] Bidders with acceptable or better ratings typically would be accepted into the pool and would be eligible to bid on specific task orders.

Bidders are required to provide information with respect to all of the evaluation factors. For example, bidders must describe three 4-megawatt (“MW”) (2-MW for solar) or larger projects that are relevant to the type of technology included in the bid for which the bidder has had primary corporate responsibility for implementation and must demonstrate how these projects were financed (including the extent to which the projects were self-financed or third-party financed). In responses to frequently asked questions, the Army indicates that team arrangements involving either joint ventures acting as a prime contractor or prime contractors supported by subcontractors may be used, which may assist potential bidders who cannot meet the experience requirements directly.[4] Any key subcontractors included in the bid must be identified and must provide a letter of commitment. According to the Army’s responses to frequently asked questions, in reviewing the experience of a bidder, the corporate experience of team members will be evaluated, but an individual’s experience from prior employment will not be considered. Prime contractor bidders must provide up to 10 references with respect to past performance (a specific questionnaire is provided for this purpose). All bidders, regardless of size, also must provide a “small business participation plan.”

Power Purchase Agreements (Task Orders)

The Army plans to enter into power purchase agreements for specific renewable energy projects to be constructed on or near Army installations. The bidders selected into the pool in the current solicitation (plus any on-ramp additions and minus any off-ramp reductions) would be eligible to compete for these projects. Projects under 4 MW would be reserved for small business, and the contracting officers for projects of 4 MW to 12 MW would be required to first consider reserving the offer to small businesses. To be considered a small business, among other factors, a bidder (together with its affiliates) must be primarily engaged in electric generation, transmission and/or distribution of electric energy, and its total electric output in the preceding year must have been no more than 4 million MW hours. The evaluation criteria for specific task orders, as for the current general solicitation, would be based on “Best Value” to the government, as discussed above.

For potential participants that are familiar with power purchase agreements with utility off-takers, the government task orders may appear strange. The task orders will be in the form of standard government contracts, rather than commercial power purchase agreements, and will incorporate many provisions from the Federal Acquisition Regulations (FAR). These include, for example, certain labor (Davis-Bacon Act) and “buy-American” restrictions that merit careful consideration in developing bids both for the general solicitation and specific task orders. Many participants may encounter challenges adapting to the task order model and, in particular, convincing their capital providers that the task order approach is viable. For example, participants and their capital providers will need to assess the risks of possible reductions in Congressionally appropriated funds for payments under the agreements. The Defense Department is authorized under 10 U.S.C. 2922a to enter into power purchase agreements for a term of up to 30 years with the approval of the Secretary of Defense, with costs to be paid out of annual appropriations. Bidders will need to evaluate what will happen in the event that appropriated funds are not available. In addition, some bidders may be surprised to see that there are no provisions for buyer events of default; instead government actions that would be considered to be a breach under a standard commercial contract typically would be handled as a “change order,” resulting in a possible price adjustment. Another likely feature of the task orders is a government right to terminate for convenience.

The Army appears to be keenly aware of the need for participants to obtain financing for their projects. Accordingly, the solicitation indicates that the task orders may include a schedule of termination payments that would be made by the government in the event of a termination for convenience. In addition, the solicitation states that the task orders will provide that awardees may novate their contracts to special purpose entities in order to obtain project financing, and, in responses to frequently asked questions, the Army stated that the special purpose entities’ financiers may obtain step-in and foreclosure rights. The approaches outlined in the solicitation appear to incorporate many of the elements of task orders issued by the Navy in connection with renewable energy projects from which the Navy is purchasing power.

The task orders will provide for projects to be located on, or close to, the Army installations served by the projects. The Army may purchase energy up to the amount of a particular installation’s load profile, and bidders would be allowed to sell excess energy to third parties.[5] Bidders would be expected to advise the Army of any adverse effects the project’s provision of energy might have on the energy rates charged to the installation by the local utility. The task orders will include performance standards for availability and total production, which would vary according to the type of technology used. For baseload power technologies (biomass and geothermal), contractors may be required to provide replacement power during times when they are out of service. A key goal of the Army is to reduce its vulnerability to power outages, so contractors would be expected to provide for isolation from the grid in the event of outages, so that they could continue to serve the installation’s needs during periods when power otherwise is unavailable to the installation from its traditional utility provider. The contractor would be responsible for interconnection study costs, and it appears, though it is not entirely clear, that the contractor would be responsible for all interconnection costs, including any network upgrades. This is a subject for more specific negotiations with respect to particular task orders. The government, however, would be responsible for NEPA compliance documentation. In any event, as discussed above, interconnection and NEPA compliance costs would be excluded from the maximum prices to be submitted with the bid for the current solicitation.

Next Steps

The Army plans to hold a pre-proposal conference for potential bidders, with details on location and timing to be announced. There is a formal process for submitting questions on an internet website; other modes of submitting questions will not be allowed. Bids are due at 12:00 AM on September 28, 2012.

Conclusion

The Army’s entry in a big way as a purchaser of renewable energy opens up a tremendous new market for developers. However, the Army’s requirements are different from the needs of typical utility offtakers in many respects, including, for example, security of supply and form of contracting. Developers considering entering this new market will need to evaluate these requirements carefully to ensure that they can develop competitive bids and, if they are fortunate enough to receive an award, can finance, construct and operate the resulting project in an effective and profitable manner.

O’Melveny & Myers Lawyers’ Experience in DOD Projects

Attorneys at O’Melveny & Myers have worked on several of the relatively few renewable energy projects that have been developed so far to serve, or that are located on, DOD installations. We have a thorough knowledge of the relevant task orders and related FARs as well as appropriation risk and have worked through issues of concern to developers and capital providers with the relevant DOD Departments. Please contact any of the individuals listed above or your O’Melveny & Myers contact if you have any questions regarding any of the matters discussed in this client alert.

[1] The solicitation (request for proposal) is available at https://acquisition.army.mil/asfi/solicitation_view.cfm?psolicitationnbr=W912DY11R0036  
[2] The DOD and the Department of the Interior (“DOI”) executed a memorandum of understanding on July 20, 2012 that contains a “renewable energy partnership plan” to develop renewable energy facilities on lands under the jurisdiction of the DOI but withdrawn for use by the military. The memorandum of understanding is available at: http://www.doi.gov/news/pressreleases/loader.cfm?csModule=security/getfile&pageid=312415  
[3] According to the solicitation, non-price factors, when combined, will be given significantly more weight than price terms.
[4] The frequently asked questions and responses are available at: https://acquisition.army.mil/asfi/solicitation_view.cfm?psolicitationnbr=W912DY11R0036  
[5] In order for electricity sold to the third party to qualify for the production tax credit under Section 45 of the Internal Revenue Code of 1986, as amended (the “Code”), the third party generally may not be “related” to the power seller within the meaning of Section 45(d)(4) of the Code. See Notice 2008-60, 2008-30 I.R.B. 178. There is no similar related person restriction with respect to the investment tax credit under Section 48 of the Code.