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Mission-focused capital for the development of US federal microgrids

US federal installations, with their unique requirements for high-quality and uninterruptible power, have quickly become a test bed for new technologies and business models, and they currently drive an outsized portion of global microgrid deployments to meet their energy needs.

In response to federal budgets contracting or staying constant in recent years, the public sector has seen a push from agencies to leverage allocated dollars to foster private co-investment in innovative public infrastructure projects. The federal teams who developed these innovative projects were able to use a series of energy-focused contract types such as: Utility Energy Services Contracts (UESCs), Energy Savings Performance Contracts (ESPCs), Power Purchase Agreements (PPAs), Energy Savings Agreements (ESAs), Enhanced Use Leases (EULs), Utility Privatization (UP).

The financial benefits of collaboration between public and private sector participants have become increasingly clear following the successful implementation of projects using the aforementioned contract vehicles. At the same time, it is now well understood that the financial and mission improvements brought about by public-private partnerships hold positive implications for national security, government functionality, the fiscal responsibility of public agencies, and market opportunities for the private sector. Therefore, maximizing the budget available to fund mission-supportive energy programs has become a priority at the highest levels of defense and civilian agencies—indeed, recent congressional markups to existing bills have attempted to encourage and/or enforce the very innovations that Department of Defense (DoD), Government Services Agency, and other agencies began over the past few years.

Public and private sector leaders considering how to best implement affordable energy technologies at government sites have rallied around the concept of energy resiliency, which is defined as the enhanced assurance of energy supply in the face of kinetic or cyber-attacks, or natural disasters. The DoD has an acute interest in resiliency, both to maintain availability at task- and mission-critical assets, as well as to maintain productivity of their enormous base of human and physical capital, which is active every hour of the day.  To bridge the financial gap, the establishment of a dedicated energy resiliency bank deploying mission-focused capital may be the most logical path forward.

Defining the mission for focused capital

Public and private financing gaps exist for a few reasons, with the first being a relatively short track record for energy resiliency projects, as there is an insufficient amount of data for congressional budget offices and private lenders to reference. The lack of data leads to uncertainty about a project’s performance—both operationally and financially—and thus, the project stalls in appropriations and capital investment, and at best, leaves the DoD and other operators with underfunded programs or ones with unfavorable lending terms.

The second cause of financing gaps is that many energy resiliency projects tend to rely on high valuations of the intangible benefits they provide to justify the up-front costs of equipment procurement and operations. By way of example, if a military flight line were to lose power, the operational impacts would manifest themselves in the form of restricted flights, activation of contingency plans, and additional stress on pilots and ground crews. It would then fall on the base commander to develop a relevant budget request to address the problem, but no system exists to fully account for the total costs.

The third cause of underinvestment in energy resiliency relates to human and organizational behavior. In order to set up a new program office or begin lending into a new market, the government or a financial institution has to hire new staff, learn about the risks and processes of a new technology, and determine a risk profile of projects they are willing to fund. This process takes time, commitment, and capital, all of which only come with a greater understanding of technology potential and risks.

Fortunately, that greater understanding has now been developed through initiatives from private sector and non-profit organizations, as well as visionary teams within government agencies. The overarching challenge of valuing resiliency with the necessary precision can be accomplished by combining knowledge of next generation energy technologies, private sector financial processes, public sector accounting principles, and government agency operations. Establishing a team with expertise across these domains is the most efficient way to deploy capital for energy resiliency infrastructure development.

Defining the framework for a mission-focused bank

The goal of a resiliency bank would be to counter the reasons for underinvestment in resiliency projects and accelerate the deployment of energy hardening technologies and processes. A successful resiliency bank would accomplish this by de-risking resiliency projects, removing the upfront cost of adoption, leveraging greater private investment, and increasing the efficiency of public dollars, which can be preserved through loan repayment. The full suite of financial tools made available to federal agencies through the establishment of resiliency banks could include direct debt, wholesale debt, subordinated debt, loan loss reserve or other credit enhancements, warehousing, securitization, standardization, and data collection. These tools are currently made available to the handful of state and local governments that have implemented mission-focused public banks, and their success stories are piling up in the form of stronger project pipelines, self-sustaining mission-focused bank organizations, and reinvestment of returns into previously unfunded public projects.

In addition, the resiliency bank could centralize expertise with federal procurement contract vehicles, establishing a specialty organization dealing in public-private business. Project approval timelines would decrease as standard and transparent evaluation methodologies proliferate, and specialists familiar with alternative finance develop business cases. A mission-focused resiliency bank would help the broader agency operate more efficiently by helping to coordinate efforts to engage with and stimulate private investment. By offering technical assistance to potential resiliency projects, providing easy and clear information, and guiding customers to the appropriate program, a resiliency bank could ensure that government support is most effectively reaching market participants.

Multiple resiliency banks could exist within the federal government, with each established under a dedicated agency. There may also prove to be opportunities for efficiencies in large organizations. For instance, the DoD could stand up a resiliency bank to manage intra- and inter-departmental projects for the Army, Air Force, and Navy, with dollars appropriated under the Office of the Secretary of Defense. The organization could subsequently work in concert with private capital to offer loans, leases, credit enhancements and other financing services to close gaps in the private capital markets for all defense energy resiliency projects.

Conclusion

Government facilities across the country and around the world stand to gain from a resiliency bank, not to mention the taxpayers who will be seeing more “bang for their buck” from their public dollars. Evidence of this structure’s potential to succeed already exists, such as the handful of military bases that have individually explored options to privatize infrastructure, partnered with utilities to underground power lines, monetized public assets in exchange for private energy development and services, centralized backup generation under a microgrid, or become nuclei of secure energy in anticipation of the next superstorm. 

Imagine a single office whose mission is to gather lessons in energy resiliency technologies, project finance, and quantifiable benefits from around the world to develop more secure and energy independent US federal facilities. Also imagine the improvements that could be made possible through low-cost financing previously unavailable to the public sector. This would be the duty of a federal resiliency bank—imagine the energy future it would enable.

This article was written by Jared Smith at PA Consulting, Alex Kragie at the Coalition for Green Capital, and William Pott at POWER Engineers.

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