United States: Defense Energy Projects: Latest Trends

In this Industry Current, originally published in Power Finance & Risk, three attorneys at Orrick discuss the evolution of the U.S. Department of Defense's power procurement process and the implications for sponsors seeking DoD power purchase agreements. The authors are Harry L. Clark, a partner in the firm's international trade and compliance group, Christopher Gladbach, a partner in the energy and infrastructure group, and Evgeniya Shakina, an associate in the international trade and compliance group.

The U.S. Department of Defense and each of the three major military service branches are committed to expanding renewables purchases to meet their energy needs over the next decade. The National Defense Authorization Act of 2007 requires that DoD procure 25% of its energy from renewable sources by fiscal year 2025. In 2012, President Barack Obama buttressed this goal by announcing a 2025 renewables deployment goal of 3 GW for DoD.

The service branches have each made significant progress in purchasing renewables from utility-scale projects, including from off-base and on-base (behind-the-meter) projects.

To accelerate this progress, to varying degrees, they are now exploring larger-scale procurements by relying on government procurement offices such as the Defense Logistics Agency. In expanding the scope of renewables purchases, they are moving to a more comprehensive "systems installation" approach as well as aggregation of several projects (for service to multiple locations) in one solicitation.

These approaches could involve a combination of on-site and off-site generation, micro-grids and, potentially, energy storage facilities. While creating an interesting opportunity for developers, the move to "systems installation" and project-aggregation approaches creates certain challenges beyond the usual set of risks related to government contracting that developers and financing parties need to consider. This article highlights some of those key issues as well as other unique issues and risks associated with these types of projects.

Project Timing and Coordination

The government does not act like a private party in procuring goods and services. In general, (1) the government is often slow, and delays are frequent; (2) government approvals take time and necessitate coordination among a number of parties; and (3) apart from a few persons inside specialty agencies, the government has little experience or expertise relating to renewables projects or third-party project finance.

As an example of the approval and coordination challenges, for a typical behind-the-meter solar project, the developer may have to negotiate a PPA with one government agency and a site-land lease with another; the developer will also need the support of the relevant installation leadership. This same developer will then have to get approval of the PPA package from the Office of the secretary of Defense, which, if not coordinated appropriately, can result in significant additional delay.

That said, DoD has gained broad experience recently on renewable projects and has learned some lessons. Each new project takes less time and involves fewer government-specific challenges than the last. DoD agencies are proceeding in a more coordinated way. Agencies such as DLA that have already been in charge of multiple contracts have significantly improved their relevant processes over the last several years and reduced project delays (but, of course, there is room for further improvement).

In pursuing amalgamated projects for multiple installations, the service branches will need to take special care in ensuring that the multiple projects are coordinated centrally and the approval process is streamlined. Otherwise, the risk of a development delay may be too high for a developer to absorb.

Guaranteed Energy Purchases and Minimum Annual Production

Most DoD PPAs include commitments that the government as the power purchaser will pay for a minimum annual production level per year. Beyond this level, the DoD typically commits only to pay for energy consumed rather than the total volume of energy produced by the asset (common in the utility PPA market).

For behind-the-meter projects in states without net metering schemes, this effectively means that developers will only build projects that meet the minimum annual guaranty level since there are no assurances that additional generation will be paid for.

For off-site facilities, the developer should have a plan and obtain requisite permits and approvals to sell the energy in excess of the government's consumption in the relevant market.

In parallel, developers generally have to pay liquidated damages to the government if generation does not meet a certain minimum annual production threshold. When negotiating these thresholds, developers should ensure that they allow enough breathing room for project underperformance.

As the government moves to thinking about multiple projects serving multiple loads, these thresholds will continue to assume paramount importance and invite scrutiny by financing parties.

Portfolio Risk

Aggregating multiple energy projects to serve multiple loads creates unique portfolio-associated risk, which needs to be mitigated. Financing parties will seek comfort that multiple projects are sufficiently isolated such that a problem or delay involving one energy project does not jeopardize the revenue from the contract as a whole. Thus, developers and the government will both have to think about how to structure these procurements, including considering events of default and provisions related to single-project terminations (as opposed to overall contract termination).

One method that has been considered is the right to "off-ramp" or "shelve" a project if there is a significant development delay or hurdle to allow the rest of the projects to proceed while parties continue to seek to resolve challenges associated with the shelved project.

State Utilities Laws

State utility laws are critically important for the viability of any given DoD project. For example, a solution involving both on-site and off-site generation delivered to one or more retail loads would only be possible in states that have sufficiently deregulated the energy market and have retail choice (absent some type of a back-to-back or other arrangement with a utility). At the same time, behind-the-meter projects may have limited potential in states that do not allow net metering unless (1) they are sufficiently small such that their output is almost always less than the load of the installation or (2) an appropriate storage facility is created for excess energy.

Also, state utilities laws could impact the structure of the developer's offer. For example, in Texas's deregulated market, the legal owner of generation assets cannot act as a retail electric provider, which necessitates some additional considerations by the developer with respect to structuring the project if a physical load is to be served by the developer's generating asset.

Termination for Convenience

In federal procurement of goods and services—including for energy—the government must have the right to terminate the procurement contract for the government's "convenience," that is, without justification.

As a result, developers and financing parties are often concerned about the uncertainty of their recovery in the event of termination for convenience. One solution is a tailored termination for convenience contract clause that references a standard schedule for party recovery defining the level of recovery for every year during construction and following commercial operation of the relevant project—often called a termination value schedule.

The negotiated termination for convenience contract clause should also account for distributions to all financing parties, including debt and potential tax equity investors, applicable upon a termination settlement. developer will have to take care to include other allowable costs that result from a termination in the contract clause, including make-whole costs for debt repayment and associated penalties and fees, interest rate hedging breakage costs, personnel-related demobilization costs and costs associated with pursuing a termination settlement with the government.

Anti-Assignment Act and Financing Consents

The Anti-Assignment Act generally prohibits assignment of a federal procurement contract without the consent of the government. This creates tension related to the rights of a lender to "step-in" and assume the contract in a default scenario.

To overcome the general ban on contract assignment, the government requires that its acquiescence to an assignment be memorialized in a novation agreement between the government, the contractor and the party to whom the contractor is assigning the contract.

The novation approval process represents additional risk and uncertainty that financing parties must accept. The government can agree to mitigate this risk by allowing financing parties to cure developer defaults through payment of money, and pledges of upstream equity in the project company owning the renewables project are generally permitted.

Developers and financing parties should generally account for additional time and resources needed to negotiate estoppels and financing consents with the government as such consents often are not initially developed or standardized and take time to negotiate.

Changes and Subcontracting

Under developer "prime" project contracts with the government, developers are necessarily acting as a conduit between DoD and subcontractors, and, thus, their obligations to perform under a prime contract should be fully supported by subcontractors' obligations to perform under their respective subcontracts.

With limited exceptions, DoD may make "changes" within the general scope of its contract at any time, resulting in increased costs to the developer. Developers have contract rights to higher upward contract price adjustments to offset cost increases attributable to changes. But the risk of a government short-pay of an equitable adjustment request needs to be appropriately allocated between the developer and its subcontractors.

One method to alleviate developer risk related to changes is to include "pay-if-paid" arrangements pursuant to which the subcontractor gets made whole only if price adjustments fully account for increased costs. There are a number of alternative risk-allocation methods that developers and subcontractors utilize. The developer should also be sure to properly "flow down" certain rights and obligations related to federal acquisition regulations to its subcontractors.

Leases

As mentioned in Part I, for on-site projects at a military installation, the developer will need to negotiate a lease with the government in its role as the landowner.

Government lease forms, which were inevitably created for unrelated purposes such as housing for service personnel, ordinarily require substantial tailoring to serve as reasonable lease arrangements and facilitate financing. It is critical that the developer evaluate lease forms' treatment (or non-treatment) of issues such as lender protections and step-in rights, allocation of risk related to environmental liability, insurance, government property-related access restrictions and lessee indemnification.

Assuming that the trend related to the utilization of multiple on-site projects continues, the government should pursue (and developers should request) a centralized approach to lease negotiations to mitigate time and resource costs attributable to work with standard DoD lease forms. Happily, DoD has recently negotiated several leases for renewables projects with relatively sophisticated developers, so the government now has access to better precedent. It is to be hoped that these improvements come to be reflected in DoD lease forms. 

Buy-American/Domestic Preference Rules

Domestic preference rules apply to utilization of solar panels for DoD power projects. Solar panels must be sourced from the U.S. or another "designated or qualifying country." Designated and qualifying countries include parties to the World Trade Organization Procurement Agreement and countries that have a free trade agreement or qualifying defense procurement arrangements with the U.S.

Notably, China is not party to any of these arrangements, meaning that solar panels for DoD projects generally cannot be sourced from China. Developers must, therefore, consider opportunities for utilizing panels from other countries and potential implications of the use of such panels for project economics.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
21 Sep 2018, Conference, Florida, United States

Employment partner, Michael Weil will be participating in The Intellectual Property Law Institute’s 2018 Conference.

26 Sep 2018, Conference, New York, United States

Employment Partner, Mandy Perry and Chair of Orrick's Global Employment Law Practice, Mike Delikat will be participating in the Global Business Protections 2018: International Restrictive Covenants and Confidential Information Conference.

26 Sep 2018, Seminar, Tokyo, Japan

Orrick’s Global Japan Practice is hosting a series of “Orrick Library” seminars to explore legal issues in various fields in Japan as well as the United States, Asia and Europe

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions