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.”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.
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 See Federal 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).
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 See FACT 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 See FACT 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.”
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).
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).
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.
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.