Federal energy projects require funding to generate results. Agencies trying to stretch their capital budget for a construction project should investigate renewable energy project funding options outside the traditional appropriated budget process. Carefully matching available funding tools with specific project needs can make the difference between a stalled, unfunded renewable energy project and a successful project that generates energy and cost savings.
Federal agencies may be able to use tools to finance renewable energy facilities outside the capital budget appropriations process or to improve project economics, including:
- Energy Savings Performance Contracts
- On-Site Renewable Power Purchase Agreements
- Utility Energy Services Contracts and Incentive Programs
- Renewable Energy Certificates
Beyond funding mechanisms, many contractual arrangements for renewable power projects are new to Federal agencies. Contracting issues with renewable power provides an overview of various agreements that may be involved with a power generation facility integrated into a construction project.
Energy Savings Performance Contracts
A Federal energy savings performance contract (ESPC) is an agreement between a Federal agency and an energy service company (ESCO) where the service company designs, purchases, and installs energy conservation measures at Federal facilities. The ESCO guarantees savings to the agency, and the agency makes payments to the ESCO based on savings from the energy measures. Payments cannot exceed the savings that the agency realizes from the implemented energy measures.
ESPCs can be designed solely for renewable energy projects or can combine renewable energy with energy efficiency measures to increase the savings-to-investment ratio.
One great advantage of a Federal ESPC contract is that it can have a term of up to 25 years. This is a valuable feature given the often high capital cost of renewable energy, allowing ample time for payments from savings to cover the expenses of financing and maintaining the renewable energy system. This is an advantage of ESPCs over on-site renewable power purchase agreements for civilian agencies.
ESPCs are typically only used for improvements to existing buildings, so these are best used for major renovations. ESPCs can sometimes be used for new construction projects, but the Federal authority required for eligibility is complicated.
Specific information on using an ESPC to integrate renewable energy in Federal construction projects is available on the energy savings performance contract page.
On-Site Renewable Power Purchase Agreements
An on-site renewable power purchase agreement (PPA) is an agreement where a renewable energy system is sited and installed at an agency facility but is owned by a private company, such as a renewable energy developer. The agency agrees to purchase the power generated by the renewable energy system, and the developer is responsible for project equipment purchase, design, installation, output, and maintenance.
PPA projects are often more cost-effective than agency-owned projects when the developer may be able to take advantage of tax credits and other incentives not available to the Federal agency. PPAs are an ideal approach to obtaining renewable energy because the agency pays only for energy generated from the renewable energy system; if the system fails because of problems caused by design flaws, equipment failure, inadequate maintenance, or other problems the agency pays nothing. This removes almost all of the technology risk involved with installing a renewable energy project. The various contracting authorities used for PPAs do not require guaranteed cost savings, as the ESPC authority does, and PPAs are not limited to existing buildings and can be used for new construction.
If an agency uses a PPA to integrate renewable energy into larger building construction projects, specific language needs to be added to the agreement that specifies coordination with the larger project. It is imperative that the renewable energy system design and installation are coordinated and compatible with the overall project.
PPAs for renewable energy are not suitable for all Federal renewable energy projects. A number of concerns need to be addressed that affect Federal agencies, including designation of the ownership of the renewable energy certificates, limitations on length of Federal PPAs, restrictions on private ownership of key equipment on certain military properties, uncertain state and utility policies regarding sale of on-site energy by a third-party, and limited existing experience with PPAs in the Federal sector. Some issues are specific to using a PPA to integrate renewable energy into Federal construction projects. The primary issue with integration is ensuring the close coordination of the design and installation of the renewable energy system with the overall project. Other issues relate to having contractors responsible for management of the Federal facility operations and to the coordination of multiple on-site renewable energy systems in one construction project.
Although PPAs are typically used for electricity generating projects, thermal renewable energy from on-site projects can be purchased through very similar contracts that don't involve the utility issues involved in electricity projects.
More information is available on the PPA page.
Utility Energy Service Contracts and Incentive Programs
Agencies can use utility incentive programs for financing renewable energy projects. These programs can range from rebate programs to full project implementation programs that include financing, project management, and performance assurance—called utility energy service contracts (UESCs). UESCs are one mechanism that an agency and its utility can use for renewable energy projects.
A UESC does not have the same contracting requirements as an ESPC, so UESC authority can be used to finance renewables in new Federal construction as well as in major renovations to existing facilities. It also offers some flexibility in performance assurance. In a UESC, as in an ESPC, the agency pays for the project through avoided cost-savings from energy efficiency improvements or renewable energy generation.
This type of contract depends on the local utility, is not available from all utilities, and is not available to all projects or Federal facilities.
Specific information on using a UESC to integrate renewable energy in Federal construction projects is available on the utility energy service contracts page.
Renewable Energy Certificates
Two separate products exist from electricity produced by renewable energy projects that can be sold together or treated separately. The first product is the electricity, or the actual electrons transferred through the power grid sold on a per kilowatt hour basis. The second product, referred to as the renewable energy certificates (RECs), bundles the environmental benefits of renewable energy, such as reduced emissions, and can be sold or used to meet renewable requirements. These are typically sold on a per megawatt hour basis.
Agencies can purchase RECs to meet renewable energy requirements or they can keep RECs associated with on-site renewable energy project. Since RECs vary in value depending on their location and renewable energy type, agencies can sometimes trade or swap RECs to gain additional revenue for an on-site project. More information on using RECs to meet Federal requirements and trading or swapping RECs is available on the renewable energy certificates.