By Michael Papadales and David Baran
An expected increase in federal renewable energy investment will provide industry with a rare opportunity for growth despite the current reality of reduced government spending.
For infrastructure and construction firms, overall federal market prospects appear bleak, as the government slashes spending amid budget concerns. For example, funding for military construction (MILCON) accounts has fallen dramatically, with the FY2014 budget request more than 25% less than FY2012. Meanwhile, sequestration has induced further delays and cancellations of federal construction projects.
Within this context, the notion of increased investment in federal renewable energy projects may come as a surprise to many. Yet the outlook for federal renewable energy is remarkably robust as agencies are embracing creative means of leveraging private financing to meet their renewable energy objectives.
Even within the context of a tough budgetary environment, leaders at federal agencies are driven to continue investing in renewable energy. This pressure arises from concerns regarding energy security, a growing emphasis on affordable and predictable utility costs, and the need to comply with mandated renewable energy standards.
To resolve these conflicting forces, federal customers have turned to privately financed project structures such as power purchasing agreements (PPAs), enhanced use leases (EULs), and Energy Savings Performance Contracts (ESPCs) as a means to design, build, and install renewable energy systems at federal facilities without incurring the upfront capital costs themselves. Consequently, these federal renewable projects are relatively insulated from most current fiscal pressures. Additionally they are strongly supported by the executive branch as a means of achieving its broader policy goals in a time of fiscal constraint. As a result, this market is expected to see double digit growth over the near term.
Demonstrated Interest & Action
Undoubtedly, even with these forces in alignment, many in the private sector may question the government’s sincerity in supporting renewable energy. Reassuringly, federal agencies have increasingly demonstrated their commitment over the past eight years under both Democratic and Republican Administrations. The Energy Policy Act of 2005, the National Defense Authorization Act of 2007, and President Obama’s recently released Climate Action Plan all mandate sizeable government investment in renewable energy.
These goals have prompted agencies to take action. For example, the Army is establishing a $7B multiple award contract vehicle to support power purchasing agreements (PPAs). Its recent announcement of geothermal seats under this IDIQ contract has only heighted anticipation for the forthcoming release of the solar, biomass, and wind awards, where the majority of spending is expected. Other organizations are not to be overlooked, however, as customers such as the Air Force, the Navy, and the Department of Energy, have already closed on projects worth hundreds of millions of dollars.
As long as the incentives remain in place for private industry to drive progress, a growing number of alternatively-financed renewable energy projects are anticipated to launch over the next three to five years, especially once task orders are awarded under the Army’s large MATOC. Similarly, other agencies are expected to incorporate lessons learned from initial projects, and expand their ongoing renewable efforts to a greater number of larger deals.
While this suggests a significant market opportunity, companies are likely to find the competition fierce. With renewable energy offering one of the few bright spots on the federal horizon, firms across the value chain are entering the market. Those that succeed will be the ones with comprehensive strategies to pursue these large projects far in advance of their formal RFP release.
A Rigorous Approach
As the leading strategy and management consulting firm serving clients in government-driven markets, Avascent has helped a range of firms capitalize on emerging trends in federal renewable investment. In our experience, to succeed, executives must build a solid business case and strategy by addressing a range of key questions:
- Market Landscape: Which technologies are poised to receive the most spending? Who are top customers and what are their priorities?
- Project Prioritization: Which proposed projects are real and will be executed? Which projects deserve prioritized business development resources?
- Project Structure: What types of financing structures are, and will be used most frequently? How have other firms navigated government terms & conditions to minimize risk?
- Sales Channels & Partner Identification: How do firms ensure the right sales channels are in place to access government spending? Which firms are the most attractive partners? How are partnerships secured
- Competitive Differentiators: How do firms differentiate and compete in an increasingly crowded market?
About the Authors
Michael Papadales is a Senior Associate at Avascent where he co-leads the firm’s Infrastructure and Industrial practices. He supports senior executives, business development, and corporate development teams in leading construction, engineering, and industrial manufacturing firms that serve U.S. and foreign governments. Since 2004, Michael has managed engagements supporting clients on a range of business issues, from strategic planning and acquisition due diligence, to tactical capture support and sales channel management.
Dave Baran is a Senior Analyst at Avascent, where he is one of the lead analysts in the firm’s Infrastructure and Industrial practices. Dave has assisted multiple clients, including Fortune 500 firms, in understanding the latest trends in alternative financing for government procurement. Much of his work has focused on renewable energy, including analyses of DOD customers and how to best leverage alternative financing tools such as PPAs, EULs, ESPCs and broader public private partnerships.
Contributors: Jennifer Desrosier & Veronica Clarkson
Want to chat? Contact Michael Papadales, Senior Associate, at email@example.com