The federal government is the largest energy consumer in the
United States and has initiated a number of programs to improve its
energy efficiency, decrease its energy costs and, lately, reduce
its carbon footprint. Carbon-emissions reductions are a priority
for President Biden’s administration, and late last year
President Biden issued the Executive Order on
Catalyzing Clean Energy Industries and Jobs Through Federal
Sustainability (the Clean Energy EO) to set aggressive
decarbonization goals for federal agencies.1
There are three primary contracting mechanisms that federal
agencies have historically used to purchase competitively priced
renewable energy and that are available to achieve the targets set
forth in the Clean Energy EO: energy savings performance contracts
(ESPCs), utility energy service contracts (UESCs) and power
purchase agreements (PPAs).2 This Legal Update
summarizes the Clean Energy EO and each of the historically
prevalent contracting mechanisms, along with the regulatory nuances
they entail.
Background and Implications of the Clean Energy
EO
In the Clean Energy EO, President Biden aims to align the
federal government’s energy procurement strategy with his
administration’s climate policy. The Clean Energy EO calls on
the federal government to “lead by example” in moving
toward a carbon-free electric grid by 2035 and a net-zero emissions
economy by 2050. The Clean Energy EO specifies targets that the
federal government will:
- Purchase 100% carbon-free electricity on a net annual basis by
2030, with carbon-free electricity defined as electricity produced
from “resources that generate no carbon emissions, including
marine energy, solar, wind, hydrokinetic (including tidal wave,
current, and thermal), geothermal, hydroelectric, nuclear,
renewably sourced hydrogen” and generated from fossil fuels
that are accompanied by carbon capture and storage; - Purchase 50% carbon-free electricity on a 24/7 basis by 2030,
with “24/7” meaning carbon-free electricity production
that matches use “on an hourly basis and [is] produced within
the same regional grid where energy is consumed;” - Buy 100% zero-emissions vehicles by 2035 (and, for light
vehicles, by 2027); - Achieve a net-zero emissions building portfolio by 2045 and
reduce building emissions by 50% from 2008 levels by 2032; - Achieve net-zero emissions from federal procurement and
establish a “Buy Clean” policy to purchase materials with
lower embodied emissions from “all stages of production
including upstream processing and extraction of fuels and
feedstocks”; and - Achieve a 65% reduction in scope 1 and 2 greenhouse gas
emissions from federal operations from 2008 levels by 2030. Scope 1
emissions are “greenhouse gas emissions from sources that are
owned or controlled by a federal agency,” such as vehicles,
equipment, stationary power sources, and on-site landfills and
wastewater treatment. Scope 2 emissions are greenhouse gas
emissions produced as a byproduct of generating energy purchased by
a federal agency.3
More generally, the Clean Energy EO also targets
“climate-resilient infrastructure and operations” and
“a climate- and sustainability-focused federal
workforce.” The Clean Energy EO anticipates that federal
agencies’ efforts to achieve its aggressive goals will
“drive innovation,” “spur private sector
investment” and “create new economic
opportunity.”
The Clean Energy EO also sets forth various procedural
mechanisms by which federal agencies will work toward the ambitious
goals it has established. Federal agencies are instructed to:
- Propose targets, including annual targets, for meeting the
Clean Energy EO’s goals; - Facilitate the development of new carbon-free electricity
resources, including generation and energy storage, through leases,
permits or “other mechanisms” that allow such resources
to be located on agency property (including rooftops, parking
facilities and vacant land); - For federal agencies with fleets of at least 20 vehicles,
develop a strategy to optimize fleet size and composition, deploy
the necessary associated refueling infrastructure and acquire
zero-emissions vehicles; - Reduce emissions from federal buildings through
“deep-energy retrofits, whole-building commissioning, energy
and water conservation measures, and space reduction and
consolidation” and “design new buildings and
modernization projects greater than 25,000 gross square feet to be
net-zero emissions by 2030”; - Track major federal contractors’ disclosures of greenhouse
gas emissions and reduction targets4; and - Identify materials and pollutants that will be covered by the
“Buy Clean” policy and additional supplier reporting and
auditing practices that may help better quantify the embodied
emissions in materials.
A number of federal projects are already underway that will
count toward the Clean Energy EO’s objectives.5 For
instance, a 520-megawatt solar project will be developed at Edwards
Air Force Base in California this year pursuant to a lease of Air
Force property by the project developer;6 most of the
modernization work occurring at an Internal Revenue Service Center
outside of New York City will be completed pursuant to a 17-year,
$30.9 million ESPC; and the US Park Police’s fleet of
motorcycles and dirt bikes in Washington DC, New York City and San
Francisco will begin transitioning to a 100% zero-emissions fleet,
with completion targeted by 2025.7
The Department of Defense (DOD) and General Services
Administration (GSA) have also issued a Request for Information
(RFI)8 seeking responses from retail suppliers in
organized electric markets that are interested in supplying a
portion of the federal government’s carbon-free electricity.
The RFI expressly seeks information only and is not a request for
proposals (RFP) or a binding commitment on the part of the federal
government to purchase electricity. Specifically, the RFI asks for
proposed strategies for reaching the Clean Energy EO’s goals in
the respective organized markets, including the supplier’s
thoughts on the feasibility of the Clean Energy EO’s timeline
and of transitioning existing contracts; methodologies for tracking
carbon-free electricity; anticipated pricing; company information;
and the terms the supplier would need to see included in a
potential future RFP in order to offer a response.
The RFI also indicates how federal agencies may proceed in
procuring carbon-free electricity. For instance, the RFI discusses
extending the duration of retail energy supply contracts, which
typically range from two to five years, to terms not to exceed 10
years. The RFI also calls for renewable energy certificates or
other accounting metrics to be included with carbon-free
electricity. The RFI anticipates that at least 10 gigawatts of
carbon-free electricity will be developed as a result of federal
agencies’ compliance with the Clean Energy EO.
Other Executive Branch Initiatives on Climate
Change
The Clean Energy EO follows previous Biden administration
actions, including the executive order on confronting
“Climate-Related Financial Risk”9 that
President Biden issued on May 20, 2021, that focused on
environmental, social and governance (ESG) criteria with respect to
federal contractors (ESG EO). The ESG EO required the Federal
Acquisition Regulatory Council (FAR Council) to consider: “(i)
requir[ing] major Federal suppliers to publicly disclose greenhouse
gas emissions and climate-related financial risk and to set
science-based reduction targets; and (ii) ensur[ing] that major
Federal agency procurements minimize the risk of climate change,
including requiring the social cost of greenhouse gas emissions to
be considered in procurement decisions and, where appropriate and
feasible, give preference to bids and proposals from suppliers with
a lower social cost of greenhouse gas emissions.”sup>10 To
this end, the FAR Council is engaged in the rulemaking process to
address these two items.11 Additionally, as noted above,
the Clean Energy EO builds on the ESG EO by requiring GSA to track
greenhouse gas emissions disclosures and reduction targets made by
major federal contractors pursuant to the ESG EO.12
Existing Government Energy Supply Arrangements
To date, federal agencies have primarily used ESPCs, UESCs or
PPAs to contract for renewable energy or efficiency
improvements.
Energy Savings Performance Contracts
Under an ESPC, federal agencies may contract with an energy
service company (ESCO) for energy conservation measures intended to
produce guaranteed savings for the federal agency. The ESCO will
review and advise on energy usage at a specified facility and
create a design to satisfy the federal agency’s targeted
efficiency improvement and carbon-reduction goals. The ESCO will
then develop and finance projects, such as efficiency upgrades or
new generation equipment, that will result in improved resilience,
reduced emissions, lower cost or a combination of these attributes.
The ESCO purchases and installs the equipment at the facility
directly or through subcontractors.
The ESPC guarantees a fixed amount of annual savings to the
applicable federal agency, and, to the extent the ESCO does not
produce those savings through energy conservation measures, the
federal agency’s payments to the ESCO under the ESPC are
reduced. The guaranteed annual savings are established pursuant to
a baseline agreed on by the ESCO and the federal agency during the
contracting process—the federal agency must be satisfied with
the guaranteed savings before it executes the ESPC. The federal
agency’s payments under the ESPC are fixed pursuant to a
schedule and may be made annually, monthly or at another negotiated
interval. Once the ESPC expires, no further payments are due to the
ESCO, so additional cost savings as a result of the energy
improvements accrue solely to the federal agency.
To be an ESCO, a firm must apply to and be approved for ESCO
status by the Department of Energy (DOE) Qualification Review Board
(QRB). The QRB evaluates firms based on previous project experience
and whether the company or any principal has been insolvent or
declared bankruptcy within the previous five years. The DOE
Qualified List currently includes about 100 firms, and a subset of
21 ESCOs have been awarded an Indefinite-Delivery,
Indefinite-Quantity (IDIQ) ESPC. An IDIQ ESPC is a streamlined
master agreement that allows federal agencies to negotiate and
award task orders to the ESCOs under the master agreement. Task
orders are issued through a competitive bidding process that
includes only the other contractors that have been awarded under
the same IDIQ ESPC. Task orders awarded under an IDIQ ESPC can be
protested only if the awarded value of the task order exceeds a
minimum dollar threshold (which is $25 million for DOD and $10
million for civilian agencies). After entering an ESPC, an ESCO may
subcontract portions of the project to other providers.
Agencies may also enter ESPC energy sales agreements (ESPC
ESAs), which use multiyear contracting authority for distributed
energy projects on federal property. Under an ESPC ESA, the agency
will contract with an ESCO that will then finance (or obtain
financing for), construct and operate the project. Federal agencies
benefit by not having to provide upfront capital for the project,
only paying for the electricity that is generated, and avoiding
operation and maintenance responsibilities. Costs under the ESPC
ESA must be lower than the utility rate. Resulting savings are used
by the federal agency to pay the cost of the ESPC ESA. The ESCO
counterparty may also be eligible for federal tax incentives.
Utility Energy Services Contracts
UESCs are similar to ESPCs in that their purpose is to conserve
energy through efficiency improvements, but UESCs do not guarantee
annual savings for the customer agency; payments are based on
savings estimates.13 Under the UESC model, federal
agencies contract with a local utility, which designs and
implements energy conversation measures ranging from “lighting
retrofits to renewable energy systems and combined heat and power
plants.”14 Because UESCs are not required to
produce annual savings, DOE has issued a Performance Assurance
Planning Guide that contains suggested terms for federal agencies
to include in UESCs to ensure that the expected savings are
achieved.15 Recommended best practices include
performance verification at start-up, at the end of the warranty
period and at contractually agreed intervals. Verification involves
validating control systems and tracking variables such as
temperature and HVAC use. After performance is verified pursuant to
the UESC, the federal agency accepts the project and makes payments
pursuant to the UESC. For purposes of entering a UESC,
“utilities” are providers that have “an exclusive
service territory and an obligation to serve the customers within
that territory” and that are subject to regulatory
oversight.16 Federal agencies may select UESCs only
after providing fair consideration to all serving utilities. The
utility will borrow money to construct the project and may
subcontract the project to an ESCO.
Power Purchase Agreements
Finally, federal agencies may enter PPAs for renewable energy
projects either on- or off-site and either with the utility that is
franchised to serve the federal facility or with an independent
generator that will build, own, maintain and operate a generator.
Because the generation assets remain privately owned, PPAs
potentially offer developers eligibility for federal tax
incentives, along with the ability to sell the associated renewable
energy credits, if the federal agency that purchases the power does
not require the delivery of the credits as a by-product. These PPA
attributes may result in lower electricity costs being passed on to
the federal agency. However, PPA availability is far from
universal. Federal statutes require federal agencies to procure
electricity for government facilities only within the confines of
the applicable state’s utility exclusive franchise
laws17 unless the agency head or the secretary of the
applicable military department18 makes a determination
that the alternative supply produces certain specified energy
savings results or is required for reliability or supply-adequacy
reasons.
PPAs provide some of the same advantages provided by ESPCs and
UESCs, such as allowing the federal agency to avoid any upfront
capital investments and to delegate operations and maintenance
responsibilities. However, there are also some relative
disadvantages, including the fact that PPAs may not be available to
federal agencies for off-site distribution projects in some states,
and engaging in a PPA arrangement requires determinations at the
agency head or secretary level that might not have been made and
could be difficult to obtain.19 Franchised utilities are
not required under the Federal Power Act to provide transmission
service for the government’s own purchase and use at
retail,20 such as for direct consumption at a federal
facility—meaning that an off-premises generator with a PPA
might face difficulty in delivering power to the federal facility
customer unless the federal facility is within a
competitive–retail-choice state (many states that house large
DOD facilities, including Georgia, Alabama, South Carolina, and
Nevada, are utility-exclusive-franchise states). Additionally,
under the Federal Acquisition Regulation (FAR), most federal
civilian agencies are generally limited to contracting for 10-year
terms.
DOD is notably excluded from the 10-year limitation and has
authority to enter into some eligible PPAs (in particular, those
involving energy security and resilience) for up to 30
years.21 Parts of the military already take advantage of
this authority to enter long-term renewable PPAs. The US Army
Engineering and Support Center, Huntsville has established a $7
billion Multiple Award Task Order Contract (MATOC) vehicle for Army
installations to enter long-term PPAs toward the Army’s
congressionally-mandated renewable energy goal of 25% renewable
energy by 2025. The MATOC establishes a pool of 25 solar and 10
wind companies that are now able to compete for Army PPA task
orders. These companies will receive competitive task order RFPs
when renewable energy opportunities relating to their specified
technologies are identified at Army installations.
Federal Energy Procurement in the Years Ahead
While much attention has been focused on the climate-related
provisions of the recently passed Infrastructure Investment and
Jobs Act and the pending Build Back Better Act,22 the
federal government’s procurement strategies are also certain to
change in response to climate concerns. The Clean Energy EO
emphasizes the federal government’s own exposure to climate
change risks while also pointing to the economic opportunity the
energy transition presents. In issuing the Clean Energy EO,
President Biden is taking advantage of his relatively expansive
authority over executive branch agencies in order to advance his
energy and climate agenda. Unlike ongoing legislative efforts,
these measures do not require congressional approval. It is clear,
though, that the Clean Energy EO intends to do far more than change
the federal government’s energy mix—it intends to create
a large market for and generate additional investment in clean
energy industries that can serve the entire economy.
As discussed above, taking advantage of these contracting
opportunities will require potential market players to be aware of
the nuanced federal contracting landscape. Providers identifying
opportunities to enter ESPCs, UESCs or PPAs with federal agencies
should consider the unique features of each contracting vehicle,
along with the relevant FAR requirements.
Footnotes
1. See Exec. Order 14057, Executive Order on
Catalyzing Clean Energy Industries and Jobs Through Federal
Sustainability, 86 Fed. Reg. 70,935 (Dec. 13,
2021).
2. SeeFederal On-Site Renewable Energy Purchases and
Renewable Energy Certificates, DEP’T OF ENERGY (last
visited on March 19, 2022); Federal Off-Site
Distributed Energy Project Financing Options, DEP’T OF
ENERGY (last visited on March 19, 2022).
3. Scope 1 and 2 emissions are defined by the Federal
Greenhouse Gas Accounting and Reporting Guidance.
4. According to the Clean Energy EO, these disclosures
will be based on information and data collected through supplier
disclosures made pursuant to the ESG EO (discussed below). To date,
the FAR Council has not implemented any proposed regulations
regarding the tracking of major federal contractors’
disclosures of greenhouse gas emissions and reduction
targets.
5. SeeFACT SHEET: President Biden Signs Executive
Order Catalyzing America’s Clean Energy Economy Through Federal
Sustainability, THE WHITE HOUSE (Dec. 8,
2021).
6. Press Release, Air Force Installation and Mission
Support Center, AF environmental study greenlights Edwards solar
project (Dec. 10, 2020).
7. SeeFACT SHEET: President Biden Signs Executive
Order Catalyzing America’s Clean Energy Economy Through Federal
Sustainability, THE WHITE HOUSE (Dec. 8,
2021).
8. See DEP’T OF DEFENSE, REQUEST FOR INFORMATION – CARBON
POLLUTION-FREE ELECTRICITY (February 3,
2022).
9. See Exec. Order 14030, Executive Order on Climate-Related Financial
Risk, 86 Fed. Reg. 27,967 (May 25, 2021), which was
discussed in a June 11, 2021, Harvard Law School Forum on Corporate
Governance article by Mayer Brown partners, “President Biden Signs
Executive Order on Addressing Climate Change Risk through Financial
Regulation.”
10. Id. at § 5(b)(i)-(ii).
11. See FAR Case 2021-015, Disclosure of
Greenhouse Gas Emissions and Climate – Related Financial
Risk, DEP’T OF DEFENSE, Open FAR
Cases (last visited March 22, 2022); see also FAR
Case 2021-016, Minimizing the Risk of Climate Change in Federal
Acquisitions, DEP’T OF DEFENSE, Open FAR
Cases (last visited March 22, 2022).
12. In another ESG-related executive action, the SEC
recently proposed rules that would require all publicly traded
companies to report extensive information about climate-related
risks, oversight and emissions, as was discussed in Mayer
Brown’s March 22, 2022 Legal Update “SEC Proposes Climate Change Disclosure Rules
Applicable to Public Companies.”
13. See About Utility Energy Service Contracts,
DEP’T OF ENERGY (last visited on March 19, 2022).
14. See id.
15. See US DEP’T OF ENERGY, PERFORMANCE ASSURANCE PLANNING: CONTINUOUS
DESIGN-LEVEL PERFORMANCE OF EACH ENERGY CONSERVATION MEASURE IN A
UTILITY ENERGY SERVICE CONTRACT IS FUNDAMENTAL TO ACHIEVING
PROJECTED RESULTS (2019).
16. See Frequently Asked Questions About Federal Utility
Energy Service Contracts, US DEP’T OF ENERGY (last
visited on March 19, 2022).
17. See 40 U.S.C. § 591.
18. See, 10 U.S.C. §
2922a.
19. Section 507 of the Clean Energy EO requires agency
heads to take actions to generally implement the Clean Energy EO,
but the text is heavily qualified and is entirely silent on the
determinations that are required under 40 U.S.C. §
591.
20. See, 16 U.S.C. §§ 824i –
824k.
21. See 10 U.S.C. § 2922a; see
also Defense Federal Acquisition Regulation Supplement (DFARS)
241.102(b)(7)(A). (Note that the DFARS references 10 U.S.C. §
2394, which has been renumbered to 10 U.S.C. § 2922a).
Eligibility determinations under this section must proceed from the
Secretary of Defense, and the section’s text does not reference
environmental, emissions or other matters that are the focus of the
Clean Energy EO.
22. The Infrastructure Investment and Jobs Act was
discussed in a January 21, 2022 Mayer Brown Legal Update, “Jolting the Grid: US DOE Implementing Bipartisan
Infrastructure Bill.” The official text of the version of
the Build Back Better Act passed by the House of Representatives is
available on the government’s website for federal
legislative information. President Biden’s framework for
the bill is available on the White House
website.
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