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Agencies need more flexibility to finance energy projects, experts say

Jan. 28, 2010 - 06:00AM   |  
By TIM KAUFFMAN   |   Comments
Richard Kidd, program manager of the Energy Department's Federal Energy Management Program, urged lawmakers to allow all agencies to enter into long-term power purchase agreements.
Richard Kidd, program manager of the Energy Department's Federal Energy Management Program, urged lawmakers to allow all agencies to enter into long-term power purchase agreements. (Tom Brown / Staff)

Agencies spent more than $1.7 billion last year on energy-efficiency projects, a dramatic increase from past years, officials say.

Richard Kidd, program manager of the Energy Department's Federal Energy Management Program, said that amounted to more than an 80 percent increase from 2008, when $935 million was spent.

"It looks like it was the best year ever in terms of federal investment," Kidd said Wednesday before the Senate Homeland Security and Governmental Affairs subcommittee on federal financial management, government information, federal services and international security.

About two-thirds of the investments were paid for with appropriated dollars, much of which came from the American Recovery and Reinvestment Act. The rest was financed by private-sector financing arrangements, such as Energy Savings Performance Contracts (ESPCs) and Utility Energy Services Contracts (UESCs), in which contractors pay for renovations upfront and are paid back over time with agencies' cost savings that result from reduced energy consumption.

Such private-sector financing tools are a "wonderful mechanism," since they allow agencies to make improvements they otherwise could not afford, said Dorothy Robyn, deputy undersecretary of Defense for installations and environment.

However, they do have their drawbacks, Robyn and Kidd said.

For starters, projects funded through ESPCs end up costing nearly 2 times what they would cost if funded through direct appropriations because energy service companies pass on their upfront financing costs to agencies, Kidd said.

Additionally, projects funded with ESPCs and UESCs tend to rely on proven technologies such as energy-efficient lighting and electrical systems that guarantee a return on investment to the contractors, Robyn said. This means that it's harder for agencies to test cutting-edge technologies that could have greater potential to reduce energy over the long term.

For more ambitious projects, such as generating on-site renewable energy from solar arrays and other sources, the Defense Department uses other tools, Robyn said. Through enhanced-use leases and power purchase agreements, Defense allows underused buildings or property to be developed at no upfront cost to the government in exchange for cash or other in-kind services.

In October, for instance, the Army Corps of Engineers signed an agreement with two companies to develop a 500-megawatt solar power plant at Fort Irwin in California's Mojave Desert. The $1.5 billion project will be funded through an enhanced-use lease in which Fort Irwin will purchase power generated by the solar plant at a reduced rate, while the companies will recoup their investment by selling the remaining power to other buyers.

Such deals will become more critical as agencies work to cut their energy consumption and greenhouse gas emissions, as required by an executive order President Obama issued in October. Budget scoring rules prevent agencies from paying for renewable energy projects and other long-term investments over multiple years, meaning they must increasingly rely on private-sector financing or partnering arrangements.

"The federal government's budget is structured in such a way that we don't have a capital investment fund. So when an investment makes sense over time, we have to figure out a way to pay for that [project] upfront that doesn't get scored," Robyn said.

The Pentagon has an advantage over most agencies because it has more financing tools at its disposal, Kidd said. The Defense Department and Energy's power management authorities are the only agencies allowed by law to enter into power purchase agreements for longer than 10 years. Most power purchase agreements are for 20-year terms.

Kidd urged lawmakers to allow all agencies to enter into long-term power purchase agreements, which he said would enable the development of more renewable energy projects.

"We need to recognize that the payback period for some of these investments is longer than the one-year budget cycle or midterm election cycle," he said.

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