Navy Applies Emission Reduction Credits Savings to UESC

August 28, 2007

The Naval Facilities Engineering Command-Southwest (NAVFAC-SW) Energy Team initiated an unprecedented effort in January 2002 to realize the value of nitrogen oxide (NOx) emission reduction credits (ERCs) into the salvage value of equipment removed as part of a utility energy services contract (UESC). The total value of the credit was finally realized in June 2007 when the local utility, San Diego Gas and Electric, presented the Navy with a check for over $1 million. While the proceeds from this effort are substantial, the precedence established by the effort is invaluable to other federal agencies. Utilizing a similar approach and citing the enabling contracting authority referenced in this article, other agencies may be able to realize the significant value of ERCs into their contracts.

The SW Division Energy Team leading the effort on a $16 million UESC cogeneration upgrade project at the Naval Medical Center San Diego (NMCSD) recognized an opportunity for the Navy to benefit from ERCs generated from replacing three 1985 vintage turbines with one cleaner and more efficient unit and two standby diesel emergency generators, resulting in nitrous oxide pollution reduction of 14.7 tons per year. ERCs are bankable and tradable and can be used to offset emissions reduction requirements elsewhere within the same air basin. As such, the ERCs have value and are often bought and sold on the open market. Given that the ERCs hold value, the team developed a strategy to have the project, its customer at the time, Navy Public Works Center San Diego (PWCSD), and ultimately the installation, NMCSD, receive this financial benefit.

By establishing precedent, the overall impact of this effort Department-wide is even larger. The project is likely to affect Navy policy relative to OPNAVINST 5090B and ultimately save installations millions of dollars. Navy installations now have the ability to immediately realize ERCs available from equipment replacements and apply ERC revenue against project costs. The process also allows the Navy to obtain market value of the ERCs, demonstrating that the Navy can leverage its assets to take full advantage of these emerging markets and be a competitive force in business approaches and issues.

The Energy Team, with input from legal counsel, defined their goal as, "Realize the value of the ERCs into the value of the existing construction contract." Authority to do so can be found in 40 U.S.C. 486(c) and its implementing regulations in 41 CFR Part 101-46, which allow for the sale of old turbines where the proceeds are used to buy a new turbine, or to exchange old turbines to get an allowance to save money on a new turbine. The consideration the contractor includes in the contract for the salvage value of the turbines can reflect the value of the ERCs.

Several other options were available, including the Navy ERC pilot program that allowed for sale of the ERCs on the open market (limited to $500,000 per year, DOD-wide) and the option to have the Region apply for and bank the ERCs. However, both these options were limited and did not take immediate advantage of the full value of the credits or a direct reduction in the financed amount of the UESC contract. With business acumen and input from counsel, the Energy Team developed a multi-step process and flowchart for the salvage value approach. The process as outlined determined the appropriate salvage value of the turbines and, more importantly, minimized the risk to both the government and the contractor. The steps included:

  • Defining the approach, including appropriate legal review and briefing the parties involved. Support and approval from the PWCSD and the NMCSD were critical to the success of this endeavor.
  • Determining quantity of potentially available emission credits, a function of the government, the UESC contractor (San Diego Gas and Electric) and the San Diego Air Pollution Control District (SDAPCD). This included an application to SDAPCD and source testing of the equipment in a manner approved by the SDAPCD.
  • Estimating market value of the potential ERCs to be recovered, and negotiation of this value with the contractor to be applied against the construction cost.
  • Applying for ERCs and issuing to the contractor for sale on the open market.

Faced with numerous legal, environmental, and interagency challenges, the team demonstrated diligence, creativity, and dedication over a five year period to see this effort through and to provide its customers with the best possible service and expertise. The benefit of this initial effort certainly will be extended to other government agencies, with potential for enormous contract savings within the Navy and DOD.

For more information, please contact David. B. Deiranieh of the Navy.