Monday, March 12, 2012

Avoided Cost, Avoided Progress: Changing the Paradigm to Gain Energy Security

Every time I attend a military energy conference dealing with infrastructure energy, I always look around to see who is attending from the utilities.  Rarely do I find anyone.   This is a bad thing.  DOD’s energy efforts are akin to coalition warfare and the utilities must be part of the solution…..or they will be part of the problem. 

There are three countries in the world who have not officially adopted the metric system:  the United States, Liberia and Myanmar.  Change is hard and embracing a new paradigm is often frightening.    Similarly, there are four states in the union that do not allow 3rd party power producers to sell directly to a customer: Georgia, North Carolina, Kentucky and Florida.  This means that a non-utility producer of electricity can only sell to the utility.  The rate that the utility purchases the energy is called the “avoided cost” rate. 

In 1978, the Public Utility Regulatory Policy Act (PURPA) required electric utilities to buy power from nonutility electric power producers at the avoided cost rate, that is, the cost the utility would incur if it were to generate or purchase power from another source.   Each state translated this rate differently, with some applying the short-run marginal cost—or fuel cost to produce power—and others interpreting avoided cost to mean the long-run marginal cost of power—the all-in levelized cost of the next plant to be built.  

The reason this is important is because DOD’s plan to meet the goal of 25% renewable energy by 2025 without expending billions of tax payer dollars is to entice businesses to build the facilities on federal installations.  The business will pay the government a lease for the land and produce renewable energy for which the federal facility can claim credit.  In order for this to work, the commercial entity must sell the power through a power purchase agreement at a competitive rate that creates sufficient return on investment.  In those locations where the avoided cost is significantly less than the standard electricity rate the business case cannot be made.  But there is hope!

In the state of Georgia, a piece of legislation is making its way through the State House that would allow 3rd party power producers to sell their power directly to the customer.  The legislation (SB 401) introduced in the Georgia Assembly this year would allow for such power purchase agreements (PPAs). These agreements simply allow property owners (homes, businesses, and bases too) greater flexibility in financing alternative energy generation projects. 

The utilities and coops are resisting these changes.   They are concerned about the mayhem they predict will occur if there are hundreds of distributed power generation sites across the state.  This might have been true if someone had to physically throw a switch to divert or cutoff power, but I am pretty sure we have figure out how to automate that process.    I suppose one might also look at this as a way to gain energy security and, perhaps, another form of security. 

Since the Base Realignment and Closure (BRAC) process began back in 1988, over 350 bases have been close or realigned.   Now there are calls for another couple of rounds of BRAC.  Dr. Robyn, the Deputy Undersecretary of Defense For Installations and Environment told a Congressional committee this month that it was time to reduce the real estate holding again.    This was also a recommendation of the 2008 BRAC commission for another round in 2015.   Dr. Robyn is looking at European bases as well, but with 100 already closed there and another 23 scheduled by FY15, it might be time to look closer to home. 

Dr. Robyn told the committee that the department “can do more to consolidate our infrastructure with the goal of reducing long-term costs while still supporting our operational requirements and strategic commitments.”

Given that most of the low hanging fruit has been picked, when bases are considered this time, might not energy security be part of the criteria?  If local utility regulations prevent competitive business cases for building renewables with third party investments, then the Services will have to put their own money into the efforts or write off energy security as a criterion. 

Given that the Army’s Energy Initiatives Task Force is waiting around for the Corps of Engineers to get the comments back on their draft RFP for renewables, maybe they could get involved in helping set the conditions for success for bases like, Fort(s) Benning, Gordon, Stewart, Bragg, Campbell, and Knox.   The Georgia legislation would be a good place to start.  I am sure Moody and Robins AFB would appreciate the cross Service help.

Simply having the authority to pursue innovative financing in pursuit of energy security is not enough.  It is critical that the Services understand the business cases for the projects.  If business has a choice between regulatory environments, they are going where the business case is best.  I am sure the Services are loathed to get involved with local legislation, but when the utilities begin to throw their weight around, there needs to be a counter balance.  The prestige of the Services and the esteem in which they are held could help local legislators understand the criticality of energy security.  It might even outweigh the campaign contributions and lobbying efforts of those that prefer the status quo to a change in paradigm that creates jobs, business opportunity and energy security.   Dan Nolan

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