PART IV: WHAT CAN BE DONE TO ENCOURAGE GOVERNMENT PURCHASES OF RENEWABLES?

There are a number of measures that can open government procurement to renewables, and do so in a way that will help to build an industry for the private market.

CHANGE PROCUREMENT LAWS AND REGULATIONS

At least three changes in procurement regulations are essen-tial.

• First, many large government facilities, in both regulated and deregulated state electricity markets, should be free to choose their electricity service providers, including green power providers. Most large wholesale customers, such as industrial and large commercial facilities, can choose their supplier in both regulated and deregulated markets. Unfortunately, in regulated markets unless a government facility is directly connected to a federally owned transmission system, it is a captive customer of the local franchise utility.³⁵ Fortunately, deregulation of the domestic electric utility sector is creating lower electricity prices and the entrance of integrated energy supply and service companies, some of which offer electricity generated from renewable energy resources. The savings possible as the result of competition could be used to cover the higher cost of renewable energy purchases.³⁶ The ability to choose between suppliers means that the federal government can reward those that offer green power options and provide incentives to those that do not.

• Second, environmental costs and benefits should be incorporated into government energy purchasing decisions. Beyond using life-cycle costing procedures, government officials could credit renewable energy systems for their contribution to the environment through green accounting procedures. One possible option is a standard method or technology/power pool profile to assess emissions of Clean Air Act criteria pollutants and greenhouse gases associated with energy use (including grid power and distributed energy, such as diesel generators) at individual government facilities, and to accord sufficient weight to the assessment within an overall decision to purchase energy. This could ultimately take advantage of environmental disclosure requirements for power generation that are emerging around the nation. (Environmental disclosure requires energy providers to inform customers of the fuel mix in their power supply, and can also provide information on the typical impacts on air quality of different fuels.) A simpler, though less accurate method would be to grant a percentage reduction in renewable energy costs as a proxy for environment benefits. While legislation is ultimately needed to make such accounting mandatory for all facilities, agencies and the executive branch can develop procedures and use them within existing budget and legislative boundaries.

• Third, in cases where equipment purchases are determined by a contracting officer from an agency’s capital department or by purchasing departments that use budgets based on up-front costs, policymakers should also give operations departments and facility managers — the people who must work with the equipment — a strong voice in energy purchases. Awards programs that recognize innovative procurement practices can encourage teamwork between capital and operations departments so that they purchase products with the greatest value, including both cost and performance. When such teams are formed, the life-cycle cost and performance of renewables, and not just the short-term price, will be considered more closely in purchasing decisions. Although current awards programs are making teamwork a central criterion, a greater focus on rewarding teamwork in energy decisions will directly benefit renewables.

SUPPORT NEW FINANCING SOURCES

Relying solely on annual direct appropriations to government agencies can prove volatile for any multiyear procurement effort. Two other financial methods deserve close attention.

Energy Savings Performance Contracts

Authorized by the U.S. Congress in the Energy Policy Act of 1992, Energy Savings Performance Contracts (ESPCs) allow federal facilities to install energy-efficient technologies by spreading payments over 25 years, so as to finance the payment of energy cost savings. Energy service companies (ESCOs) assume the capital costs of retrofits and services, as well as the design, installation, O&M, and finance costs, that lead to greater energy efficiency. The ESCO guarantees the federal facility a fixed amount of energy cost savings for up to 25 years. The federal government pays the ESCO a share of the total energy cost savings during the life of the contract, and keeps the rest. Once the contract ends, the government retains all the savings and equipment.

DOE’s Federal Energy Management Program (FEMP) has built on its experience with ESPCs to create “Super ESPCs” for distributed renewable energy technologies. FEMP selects certain ESCOs to enter into “indefinite delivery, indefinite quantity” (IDIQ) contracts (that is, the ESCO can take purchase orders over several years for an indefinite number of products or services). By participating in these, the ESCO can contract with individual government facilities without going through a lengthy solicitation process each time. Individual agencies can “piggyback” on the contract and select the ESCO to supply and even install renewable energy equipment. Currently, Super ESPCs are meant to last for 25 years. Agencies can place orders within three years of the award.

FEMP has created Super ESPCs that are “region-specific” (focusing on one DOE region) and “technology-specific” (open to the entire nation but focusing on one technology). Under “technology-specific” Super ESPCs, DOE has awarded IDIQ contracts to firms for photovoltaics, geothermal heat pumps, and parabolic trough collectors.³⁷

DOE includes distributed renewable energy technologies in the ESPC program under the premise that renewables save energy by avoiding grid power, especially during periods of peak electricity demand and high prices. Thus the renewable energy purchase must save a facility some money. In reality, federal agencies purchase renewable energy technologies and “bundle” them within a conventional energy efficiency ESPC. By doing so, the agency pays for the technology through energy savings — though primarily from conventional energy efficiency measures.

As a trade-off, the agency receives less of the annual energy cost savings from the conventional efficiency measures, the payback period for the total project is extended, and the savings- to-investment ratio drops. The size of the renewable energy purchase is thus limited by the size of the conventional energy efficiency investment and the willingness of the agency to lengthen the payback period.³⁸ While ESPCs are amenable to well-developed technologies such as solar water heaters and PVs, it is less likely that more experimental and expensive technologies such as PV concentrators will be chosen by participants.

Many states, including Maryland and Ohio, have begun their own ESPC programs. Through DOE incentives programs and general word-of-mouth, more states are likely to adopt ESPC programs and should make sure that renewable energy benefits from improved energy efficiency.

Tax-Exempt Authorities

Governments have a unique opportunity to use tax-exempt financing from non-profit authorities, such as bond issuances, to finance renewable energy projects and subsequent energy generation. Such financing usually offers more favorable interest rates than taxable financing. As a result, it can greatly reduce the cost of renewable energy projects, which tend to be capital-intensive and therefore sensitive to interest rates. Before 1996, qualifying non-profit organizations could issue up to $150 million in tax-exempt financing for electricity and gas services. A 1996 change in federal law has complicated the use of tax-exempt bond financing for local electricity and gas services.³⁹ Nevertheless, tax-exempt bonds in support of industrial development, economic development, research, and other public purposes that can benefit renewables are still available. Such bonds could support new renewable energy purchases, or the installation of renewable energy capacity to make subsequent government power purchases attractive.⁴⁰

OPEN THE GOVERNMENT TO AGGREGATION

Clearly one of the strengths of government procurement of renewables is the potential for high-volume purchases. Volume purchases also benefit the government, since it can buy equipment and power at relatively cheap wholesale rates. Unfortunately, different governments, and even different agencies within government, have difficulty aggregating their purchases to achieve savings based on volume.

The Benefits of Aggregation

Aggregation among governments is beneficial for reasons other than its capacity to drive volume discounts. First, aggregating government energy purchases in a single region could create a substantial market, and would present economic development opportunities by encouraging manufacturing and service firms to locate near their customers. Second, it also allows governments to help tackle regional air quality problems that affect human and ecological health and that could impede the economic growth of a region through regulatory penalties, particularly to private businesses and consumers.

Third, aggregation supports the transfer of knowledge of governments experienced in a particular renewable energy product to less experienced governments. For example, federal supply schedules (discussed later) that screen products based on quality will help government officials who are uncertain about particular products. Aggregation also reduces government transaction costs, since every government agency does not have to create separate contracts for similar services.

Finally, it can help smaller governments who are interested in very small purchases, and consequently may not receive the attention from vendors that larger government purchases would. The city of Ashland, Oregon, is facing this problem in its participation in the Million Solar Roofs program — an initiative announced in 1997 by President Clinton to install solar energy equipment on 1 million roofs nationwide with the participation of utilities, governments, and private consumers.⁴¹ Ashland expects to order a small number of solar products compared with other customers, and anticipates both high prices and low delivery priority. The city is now looking at aggregating its order with those of larger customers, including other utilities and a solar purchasing cooperative.⁴² Unfortunately, aggregation with other governments has not been explicitly considered by Ashland, though options should be made available by other municipal governments, as well as the state government.

Ashland’s options for aggregation point to another promising policy for government procurement — aggregation with private customers, including residential loads. This strategy directly ties the private market with government procurement. Private consumers can benefit from lower prices for renewable energy technologies and green power due to volume purchasing. They also benefit from the negotiation power of the aggregating authority to require quality products and services. Further, this can avoid a scenario where small private customers are subsidizing cheaper electricity rates for aggregated government facilities.⁴³ Finally, it can support municipal aggregation strategies in a deregulated environment. By combining different loads such as office buildings and homes in an aggregated energy purchase, municipal aggregation makes residential customers increasingly attractive to energy providers, including green power marketers.⁴⁴

One Trick - Different Facilities, Different Terms

One problem with aggregation is that different facilities have different capital turnover periods and contract terms, and therefore cannot aggregate purchases within a year. One solution is to allow staggered entry by individual facilities into a broad contract between a government and a supplier. This option may favor purchases of more modular renewable energy technologies, such as wind turbines and photovoltaics, that vendors can supply with some flexibility to gradual increases in demand. Another option, a slight variation of the one just mentioned, exists today — supply schedules.

Existing Opportunities for Aggregated Purchasing

Supply schedules are a convenient way for governments to consolidate purchases, and for firms to benefit from such purchases. In the federal government, supply schedules are administered by the General Services Administration and the Department of Defense’s Defense Logistics Agency. (See Box 3, on GSA’s program.) These agencies consolidate procurement requirements of multiple federal agencies, and can get guaranteed, private market prices through volume purchasing. Many state equivalents to GSA, such as New York’s Office of General Services, administer supply schedules from which state governments, municipal governments, and non-profits can purchase products. Unfortunately, the federal government cannot allow state and local governments to purchase from its supply schedules, nor can it purchase products from state or local supply sources.⁴⁵

For power purchases, the General Services Administration can aggregate area federal agencies to negotiate power from a local utility. GSA’s area-wide agreement relieves federal agencies in the same area of having to negotiate and execute individual contracts. The agency negotiates one generic contract, and any federal agency can then place authorizations detailing a specific project into the contract, using it to make their individual purchases. Eliminating the need for separate agreements offers significant administrative economies of scale and greatly reduces the time needed to execute a federal purchasing decision.

Municipal governments can also drive renewable energy markets simply by aggregating their own facilities, either by renegotiating a utility contract in regulated electricity markets (as in Portland, Oregon; see Box 4), or by signing up facilities with green power marketers in a deregulated electricity market, as in Santa Monica, California. Santa Monica aggregated its energy bills, totaling $2.3 million per year, and issued an RFP to buy 5 MW of green power. At a 5% premium ($140,000 annually), the city will meet all its power needs from existing geothermal plants, with the electricity provider promising new plants in the future.⁴⁶

Aggregation’s Impact on Contractors

One controversial impact of aggregation falls on contractors. Since aggregation’s primary purpose is to reduce prices and the profit a vendor makes per unit of product sold, it could theoretically squeeze small businesses that have low sales volume. However, if government procurement is to help open the private market to renewables, volume purchases and lower profit margins can only help, as long as there is enough profit to allow firms eventually to recoup start-up losses in a young industry, to expand manufacturing and distribution operations, and to provide innovative products and services. As markets for renewables grow, firms will have to be increasingly poised to respond to higher volumes of demand with lower prices.

Aggregation does not automatically squeeze small businesses out of the government contract business. According to the U.S. Small Business Administration, federal contract consolidation grew from 1991 to 1995 — average contract values increased, and the share of “large” contracts ($100,000 or more) increased by 20% during the same period. But small businesses’ share of the number of awarded contracts fell only slightly, from 60.5% in 1992 to 58.9% in 1995. Average contract size grew among small businesses. In 1991, a third of all contracts were large. By 1995, this portion grew to half. These results do not point to a dramatic impact on small businesses, though they do show that aggregation does not automatically favor them.⁴⁷

EDUCATE GOVERNMENT AND THE PUBLIC

Government

If government is to use renewables to meet a greater share of its energy needs, officials need to know about the performance, reliability, safety, and diverse benefits of these energy sources. Educating the government about renewables is not a new con-cept. A number of organizations already provide educational materials and services to governments, though many of these efforts have tended to focus exclusively on PVs. For example, the Urban Consortium Energy Task Force and the City of Albuquerque, New Mexico, produced a PV purchasing guide-book directed at local and state governments.⁴⁸ Sandia National Laboratory has run the Photovoltaic Design Assistance Center to help governments find cost-effective PV applications.⁴⁹ And the Interstate Renewable Energy Council has held conferences with procurement officials, educating them about PVs and encouraging procurement by providing contact information on PV firms.⁵⁰

The renewable energy industry itself — including equipment suppliers and green power marketers — should play a much greater role in the educational process, especially since electricity restructuring means that many governments may have more liberty to choose their energy sources. Most government officials interviewed for this report had never been visited by a representative of the renewable energy industry or an individual firm.

Yet contact between the industry and the government promotes purchases. For example, a PV contractor recently listed on the Federal Supply Schedule paid an informational visit to the GSA Tampa office. The visit, plus the easy purchasing system, convinced the office to request project funding from the GSA Regional Service Office for PV lighting on a federal courthouse, which was approved.⁵¹

Outreach and marketing efforts should recognize that different government officials play different roles in the procurement process. Policymakers (who set budgets and procurement policies), energy offices, government architects, and facility managers all influence what energy options are chosen. In municipal and small state governments, influencing the political leadership can be especially effective, since their proximity to and influence with government administrators is relatively high compared with the situation in larger governments.

Particularly promising outreach activities include renewable energy project site visits for government officials, training for government service staffs, presentation of data demonstrating declining life-cycle costs, and performance testing results. Presentations to government officials should also address a top interest of state and local governments — the local economic development potential of renewables. Industries must explain to governments that procurement and greater tax revenues can go hand in hand.

The Public

The failure of government officials to buy renewable energy is based largely on their belief that American voters would not approve the additional costs associated with renewable energy technology. An effective public education program targeting energy service professionals and the public can create positive peer pressure on governments and even specific government facilities.

Public education efforts should have two goals. First, they should aim to create general support for renewable energy in order to cultivate “passive pressure” on the government. For government procurement, the most important precedent is recycled paper. Extensive educational efforts by environmental groups, which targeted children and adults alike, made government use of virgin paper a questionable practice that starkly contrasted with public sentiment supporting recycling.

The second goal should be to use public campaigns and lobbying to develop direct pressure on government to purchase renewables. Advocates of renewable energy should have information on the government procurement process, the location of local government facilities, and the government officials to lobby. They should also understand what tools are available to purchase renewables, including financial tools and political action tools, such as referenda to dedicate funding for renewable energy purchases.⁵² They should know that public institutions are responsible for heeding public demands for environmental quality, and that barriers to government procurement can be overcome.

TAP INTO INCENTIVES AVAILABLE TO THE PRIVATE MARKET

When government facilities have access to incentives to encourage renewable energy use among private consumers, the economics of government procurement can be more attractive. For example, the Department of the Navy plans to install up to 849 solar water heaters (SWHs) on houses within the Moanalua Terrace Navy Family Housing project using rebates for new construction and energy-efficient water heating offered by Hawaii Electric Company, the local utility. Rebates total $1,500 per system, allowing the Navy to install 136 SWHs in the project’s second phase for $235,000, saving more than $500,000 in energy costs over the next 15 years.⁵³

Electricity restructuring may present many states with new sources of incentives, such as net metering and system benefits charge funds. Net metering, available in approximately half the states, allows users of distributed energy technologies to pay for power purchased off the grid while selling excess power generated by the distributed energy technology back to the grid, thereby improving the technology’s economics.⁵⁴ System benefits charges can involve a government, either state or federal, adding a charge for each unit of power consumed. The charges can be pooled to fund a variety of energy programs, including renewable energy. In California, system benefits charges are funding a Renewable Resources Trust Fund that includes subsidies to purchasers and lessees of qualifying renewable energy systems.⁵⁵ Federal, state, and local government facilities should be able to take advantage of the program to spur procurement of renewables.

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