DOD Renewable Energy Projects:

Improved Guidance Needed for Analyzing and Documenting Costs and Benefits

GAO-16-487: Published: Sep 8, 2016. Publicly Released: Sep 8, 2016.

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What GAO Found

The Department of Defense (DOD) has emphasized working with private developers using a variety of alternative financing mechanisms—that is, agreements with private developers to pay back the costs of the projects over time—to develop renewable energy projects greater than 1 megawatt. According to DOD officials, DOD works with private developers because doing so gives DOD several advantages. For example, private developers have access to tax incentives that can significantly lower the overall costs of developing projects compared to what those costs would be if DOD developed the projects on its own.

DOD used various approaches to analyze the financial costs and benefits of the 17 renewable energy projects GAO examined, but project documentation was not always clear or complete. In particular, project documentation did not always clearly identify the value of land used and compare that to any compensation DOD received. Specifically, for 8 projects, DOD received little or no financial compensation for the use of its land, but the documentation did not clearly compare the value for granting use of DOD land to the value of what DOD received for it. As a result, DOD contributed potentially valuable land—in some cases, over 100 acres—for the development of a project without including this as a cost in project documentation. GAO's 2009 cost-estimating guide states that one basic characteristic of a credible cost estimate is the recognition of excluded costs, so any excluded costs should be disclosed and a rationale provided. However, DOD guidance does not specify that project documentation should include a comparison of the value of land and any compensation received. By clarifying its guidance to call for project documentation to include a comparison of land values and any compensation it would receive, DOD would have greater assurance that its officials have credible information about projects' financial costs and benefits before approving them.

Some of the 17 projects GAO reviewed advanced DOD's renewable energy goals and energy security objective (e.g., for access to reliable supplies of energy during an outage of the commercial grid), but project documentation was not always clear about how projects did so. For example, officials told GAO they believe that all the projects contributed to DOD's energy security objective, but this view was not reflected in the documentation for the 17 projects. GAO found that only 2 projects would immediately be able to provide electricity to an installation in the event of a grid outage. Five other projects would require additional investment, such as the installation of batteries or other energy storage, before they would be able to deliver electricity during an outage, and project documentation did not always reflect this information. Under federal standards for internal control, agencies are to record and communicate information to management and others who need it and in a form and within a time frame that enables them to carry out their internal control and other responsibilities. Without clarifying its guidance to call for project documentation to include information about projects' contributions to DOD's energy security objective and any additional investment needed to do so, DOD officials may not have a full understanding of all relevant information when approving renewable energy projects.

Why GAO Did This Study

By law and executive order, DOD is to pursue goals for the production and consumption of renewable energy. Also, DOD policy calls for investing in cost-effective renewable energy and improving energy security—addressing risks such as disruption of electricity grids serving military installations.

The Joint Explanatory Statement for the National Defense Authorization Act for Fiscal Year 2015 included a provision for GAO to examine how DOD determines the costs and benefits of a sample of renewable energy projects. This report examines (1) DOD's approach for developing renewable energy projects with a generating capacity greater than 1 megawatt, (2) DOD's approach for analyzing the financial costs and benefits of selected projects, and (3) the extent to which these projects addressed DOD's renewable energy goals and energy security objective. GAO examined a nongeneralizable sample of 17 projects that reflect a mix of military departments and services, funding mechanisms, and technologies. GAO also examined legal authorities, project documentation, and DOD guidance, and interviewed DOD officials.

What GAO Recommends

GAO is making eight recommendations, including that DOD should clarify guidance to call for project documentation to include (1) a comparison of the value of the land used and the compensation DOD is to receive for it and (2) information on projects' contributions toward DOD's energy security objective. DOD fully concurred with GAO's recommendations.

For more information, contact Frank Rusco at (202) 512-3841 or ruscof@gao.gov or Brian J. Lepore at (202) 512-4523 or leporeb@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: DOD initially concurred with this recommendation. As of May 2018, DOD reported that the Office of the Assistant Secretary of Defense for Energy, Installations and Environment was in the process of revising its guidance on the development of energy projects to include a requirement that any energy project that includes a land use agreement must identify the value of the land in question in the project documentation. DOD estimated that the updated guidance would be issued in October 2018. DOD also reported that it would update the DOD Instruction on Installation Energy Management to include a similar requirement. DOD estimated that the updated instruction would be issued in April 2020.

    Recommendation: To improve DOD's analyses of the financial costs and benefits of renewable energy projects, the Secretary of Defense should direct the Assistant Secretary of Defense for Energy, Installations and Environment and the Secretaries of the Army, Navy, and Air Force to modify guidance for presenting land values in project documentation to apply to the range of alternative financing mechanisms DOD has used.

    Agency Affected: Department of Defense

  2. Status: Open

    Comments: DOD initially concurred with this recommendation. As of May 2018, DOD reported that the Office of the Assistant Secretary of Defense for Energy, Installations and Environment was in the process of revising its guidance on the development of energy projects to include a requirement that any energy project that includes a land use agreement must identify in the project documentation the value of the land in question, the compensation DOD will receive in return for leasing the land, and any difference between that and the land value. DOD estimated that the revised guidance would be issued in October 2018. DOD also reported that a similar requirement would be included in an update to the DOD Instruction on Installation Energy Management, which the department expected to be issued in April 2020.

    Recommendation: To improve DOD's analyses of the financial costs and benefits of renewable energy projects, the Secretary of Defense should direct the Assistant Secretary of Defense for Energy, Installations and Environment and the Secretaries of the Army, Navy, and Air Force to clarify the guidance to direct all project documentation for alternatively financed projects involving land use agreements to include the value of the land, the compensation DOD would receive for it, and how the value of the land compared with the value of the compensation.

    Agency Affected: Department of Defense

  3. Status: Open

    Comments: DOD initially concurred with this recommendation. As of May 2018, DOD reported that the Office of the Assistant Secretary of Defense for Energy, Installations and Environment was in the process of revising its guidance on the development of energy projects to include a requirement to document the source of escalation rates and a justification of why a documented rate calculator was used. DOD estimated that the revised guidance would be issued in October 2018. DOD also reported that this revised guidance would be included in an update to the DOD Instruction on Installation Energy Management, which the department estimated would be issued in April 2020.

    Recommendation: To improve DOD's analyses of the financial costs and benefits of renewable energy projects involving long-term PPAs on its land, the Secretary of Defense should direct the Assistant Secretary of Defense for Energy, Installations and Environment and the Secretaries of the Army, Navy, and Air Force to revise guidance to develop consistent sources for assumptions for escalation.

    Agency Affected: Department of Defense

  4. Status: Open

    Comments: DOD initially concurred with this recommendation. As of May 2018, DOD reported that the Office of the Assistant Secretary of Defense for Energy, Installations and Environment was in the process of revising its guidance on the development of energy projects to include clear guidance on how to include economic sensitivity analyses in project documentation. DOD estimated that the revised guidance would be issued in October 2018. DOD also reported that this revised guidance would be included in an update to the DOD Instruction on Installation Energy Management, which the department estimated would be issued in April 2020.

    Recommendation: To improve DOD's analyses of the financial costs and benefits of renewable energy projects involving long-term PPAs on its land, the Secretary of Defense should direct the Assistant Secretary of Defense for Energy, Installations and Environment and the Secretaries of the Army, Navy, and Air Force to revise guidance to clarify how to describe sensitivity analyses in project documentation.

    Agency Affected: Department of Defense

  5. Status: Closed - Implemented

    Comments: DOD initially concurred with this recommendation. On November 3, 2016, DOD updated its policy covering the information required in approval packages for renewable energy projects involving long-term power purchase agreements. The revised guidance calls for the submitted information to include the fair market value of the leased land and how the compensation received for it will be applied to the renewable energy project, such as being used for a reduction of utility rates.

    Recommendation: To improve DOD's analyses of the financial costs and benefits of renewable energy projects involving long-term PPAs on its land, the Secretary of Defense should direct the Assistant Secretary of Defense for Energy, Installations and Environment and the Secretaries of the Army, Navy, and Air Force to revise guidance to clarify how project documentation should present information on all costs of a project, including the value of the land and compensation received for it and in turn how that value and compensation would affect the estimated costs and benefits of purchasing electricity from the project (e.g., whether compensation could be used to reduce electricity costs for the project when estimating cost-effectiveness).

    Agency Affected: Department of Defense

  6. Status: Open

    Comments: DOD initially concurred with this recommendation. As of May 2018, DOD reported that it had updated its guidance on the development of energy projects to include language requiring that the project documentation include a description of the project's contribution to DOD's energy production, consumption, and security goals. We are currently in the process of reviewing the guidance.

    Recommendation: To improve the information available to approving officials on projects' contributions to DOD's renewable energy goals and energy security objective and to help ensure the consistency and completeness of project documentation, the Secretary of Defense should direct the Assistant Secretary of Defense for Energy, Installations and Environment and the Secretaries of the Army, Navy, and Air Force to develop guidance to clarify that projects should specify their contribution to DOD's energy production and consumption goals.

    Agency Affected: Department of Defense

  7. Status: Open

    Comments: DOD initially concurred with this recommendation. As of May 2018, DOD reported that it was expanding to additional priority installations a requirement that those installations prepare installation energy plans that detail their energy security requirements and the projects planned to meet those requirements. DOD estimated the additional installations would submit their installation energy plans by September 2019.

    Recommendation: To improve the information available to approving officials on projects' contributions to DOD's renewable energy goals and energy security objective and to help ensure the consistency and completeness of project documentation, the Secretary of Defense should direct the Assistant Secretary of Defense for Energy, Installations and Environment and the Secretaries of the Army, Navy, and Air Force to develop guidance to clarify the type of energy security benefit that projects will provide and state whether any such benefit is immediately available or would require additional investments and, for projects that would require additional investment, provide a detailed estimate of those investments.

    Agency Affected: Department of Defense

  8. Status: Open

    Comments: DOD initially concurred with this recommendation in its comments on our draft report. However, in May 2018, DOD reported that it no longer concurred with the recommendation. The department stated that it was studying potential metrics and assessment tools to help the Services scale their efforts to enhance energy security, but that it would not develop guidance to the Services directing them to use a consistent method of valuing energy security as a basis for project development. DOD stated that there were diverse potential solutions to providing assured power for installations, and that it was premature and possibly counterproductive to issue guidance directing an approach to energy security planning that was founded on an estimate of an allowed premium to be paid for the energy security benefits of assured access to power because the key metric was effectiveness, not value. As GAO reported in September 2016, without a consistent approach to estimating the value of energy security benefits, approving officials cannot have reasonable assurance about the value of projects' energy security benefits.

    Recommendation: To improve the information available to approving officials on projects' contributions to DOD's renewable energy goals and energy security objective and to help ensure the consistency and completeness of project documentation, the Secretary of Defense should direct the Assistant Secretary of Defense for Energy, Installations and Environment and the Secretaries of the Army, Navy, and Air Force to develop guidance to clarify that a consistent approach is to be taken to estimate the value of the energy security benefit of providing assured access to power during a grid outage and that a description of this approach is provided in project documentation.

    Agency Affected: Department of Defense

 

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