Pentagon wants to spur a revolution in clean energy

For American drivers, $4-a-gallon gasoline is painful: It bites deeply into household incomes at a time when millions of people are stretched to a breaking point. But for the U.S. military, the cost of fuel is a magnitude greater--and a matter of life or death. Fuel shipments account for the majority of the supplies trucked through Afghanistan, and militants attack the convoys almost daily. At least one member of the armed forces is killed for every 24 fuel convoys that snake their way along Afghanistan's dangerous roads; hundreds of troops and contractors have died protecting the trucks. All of that ramps up the cost of a gallon of military gasoline to stratospheric levels. Gen. James Conway, the former Marine Corps commandant, estimated in 2009 that gas sometimes cost his forces $400 a gallon once all of the expenses were taken into account.

Because of the military's vast energy needs, senior Defense officials say that reducing those costs is a national-security imperative. On its own, the U.S. military is the single largest industrial consumer of oil in the world. It requires approximately 125 million barrels annually--more oil than 85 percent of the world's nations consume. Every $10 increase in the price of a barrel of crude costs the Defense Department $1.3 billion. In 2008, the year that oil and gasoline prices last reached record highs, the Pentagon spent about $20 billion on fuel alone--a burden ultimately borne, of course, by U.S. taxpayers. Energy experts predict that prices will only rise in the coming years. Meanwhile, the nation's broader dependence on oil all but ensures that the military will remain handcuffed to the Middle East, North Africa, and other volatile-but-oil-rich parts of the world.

So the Pentagon has launched an aggressive program to change all that, with a slew of ambitious plans to convert the oil-hungry U.S. military to alternative-energy sources--and, at the same time, spur creation of a commercial industry capable of producing enough renewable energy at affordable prices for civilians. The hope is that demand from a massive consumer like the armed forces could affect supply--scaling up energy production, driving down cost, and leading to technological breakthroughs for biofuels, solar panels, hybrid vehicles, and similar products. That would reduce the need for oil throughout the U.S. economy and spare the armed forces from future missions in war-torn, oil-exporting states. It's not the military's job to fight climate change, but many senior Defense officials contend that there is a clear national-security reason to do so, because government studies show that the fossil-fuel emissions behind global warming will induce food shortages, drought, and rising sea levels--inviting a world of political volatility.

The Pentagon has spawned a range of modern technologies, from the Internet (created by the Defense Advanced Research Projects Agency in 1969 as an internal communications network), to the GPS capability now commonly found in cars and smartphones (developed decades ago to help troops maneuver through unfamiliar terrain), to the microwave oven (which grew out of World War II microwave radar detectors). The list goes on: microchips, semiconductors, jet engines, and many other inventions were conceived and born within the military-industrial complex before the commercial economy adopted them.

So can the military-industrial complex do for clean energy what it did for the Internet, jet engines, and the microwave?

Experts in the worlds of defense, energy, finance, and policy say yes--but the hurdles are high. The Republican-controlled House, skeptical of climate change and renewable energy, isn't a fan of the Pentagon's green push. Renewable fuels are far more expensive than conventional ones, and it's not clear when (or if) prices will fall enough to compete with petroleum. The success of the entire effort depends on the Pentagon's ability to spur creation of an industry capable of producing enormous quantities of renewable energy despite largely unproven technologies and business models. The Defense Department "is in the process of playing a catalytic role with renewable energy," said Arati Prabhakar, a former director of microelectronics for DARPA who now chairs the Energy Department's Efficiency and Renewables Advisory Committee. "They won't be the biggest, most important market over time. But for the newest technologies, those first few percentage points of market share are tremendously important."

The rewards of sparking an industry that would transform the entire U.S. energy economy could be tremendous. But the challenges along the way will be, too. Transforming how people drive their cars and power their homes and businesses is much harder than inventing a single technology, such as digital communications, that changes the game once it is introduced. And clean energy is different from the GPS or the Internet: The private sector, not the Pentagon, is developing the underlying science. That means the military is heavily dependent on the business acumen of alternative-energy entrepreneurs and the vagaries of Wall Street, which has to decide whether to finance a company's growth plans. Although a handful of firms are already producing high-octane biofuels that can replace conventional petroleum for tankers, fighter planes, and aircraft carriers, they have yet to do it on the large scale--and at the low price--necessary to power the entire military, let alone fill up the tanks of millions of U.S. drivers.

The Plan

Although investment in renewables could substantially reduce what the military pays for fuel in the long run, the up-front cost for new, often untested technologies is high--and the Pentagon will have to accept the bet that at least some of them won't work. These efforts come, of course, just as Congress wants to slash spending--a belt-tightening to which even the Defense Department won't be immune.

The move also hinges on how well the military can navigate new relationships with the small constellation of clean-tech entrepreneurs that make up the nation's nascent renewable-energy industry. Those companies, many of which are still seeking venture capital, aren't always well positioned to deal with the Pentagon's onerous, often stovepiped, and frequently lengthy procurement process.

Leading the charge through all of this is Navy Secretary Ray Mabus, who has made alternative energy a cornerstone of his tenure. "We can establish a market for alternative energy because of the size and the amount of energy we use," he told National Journal.

Overall, the Pentagon is aggressively working to meet a mandate, contained in a 2007 law, to generate 25 percent of its electricity using wind, solar, and other renewable sources by 2025. What's more, the Air Force says it will buy roughly 400 million gallons of alternative fuel by 2016, enough to power half of its domestic flights, and the Navy plans to shift half of its energy usage from fossil fuels to renewable sources by 2020. Pentagon officials say that these are extraordinarily ambitious goals; they've only just begun to think about how to realize them.

At Mabus's direction, the USS Makin Island an amphibious assault ship that launches jets, helicopters, and Marine watercraft, has been outfitted with a hybrid engine--a supersized version of what's under the hood of a Prius--and the Navy is considering hybrid engines for a small fleet of its next-generation DDG-1000 destroyers. The service has also successfully powered F-18 warplanes, helicopters, and so-called swift boats using biofuels made from algae and from camelina, a flowering member of the mustard family. A pair of Marine forward operating bases in southern Afghanistan's violent Helmand province are run entirely on solar power, while a company of about 100 Marines there recently spent a month recharging their radios and GPS devices using roll-up solar panels rather than bulky batteries. (They are "logistical centers at the edge of the battlefield," according to 1st Lt. Gregory Wolf, a Marine Corps spokesman.) Overall, the Pentagon has nearly 500 renewable-energy projects and installations--and top Defense officials say they're just getting started.

Yet despite the attention that renewables are attracting, fossil fuels (chiefly oil and coal) remain the lifeblood of the nation's economy. Wind, solar, geothermal, and other renewable-power sources make up less than 5 percent of the nation's electricity mix--and cost about 11 to 20 cents per kilowatt-hour, compared with 3 to 9 cents for such conventional power sources as coal, nuclear, and natural gas. Hybrid and electric vehicles, which dramatically cut the amount of petroleum needed for transportation, account for less than 5 percent of all passenger vehicles sold and cost 20 to 50 percent more than their conventional counterparts. A few small companies make biofuels from renewable nonfood sources, including algae and switchgrass; that fuel, however, costs $140 to $150 per barrel, compared with about $100 for a barrel of oil (although biofuel prices, like oil prices, fluctuate depending on the cost of the commodities used to produce them).

President Obama has tried to spur a transition of the U.S. economy from fossil fuels to clean energy, but his efforts have largely stalled, chiefly because of pushback from Republicans in Congress and a powerful lobbying campaign by the coal and oil industries. Sweeping climate-change legislation that would have priced fossil-fuel emissions and mandated purchases of renewable electricity--creating both demand and a market for clean energy--died in Congress and is unlikely to be revived as long as the GOP controls the House.

Clean-tech companies and venture capitalists say that the military's latest efforts come just as those firms are in desperate need of a boost from the federal government, whether through a mandate, a price signal on fossil fuels, or just a giant new customer. Companies say they need a kick-start to get the technologies close to the point of "price parity"--almost equal to the cost of fossil fuels. When that happens, these firms say, they're confident more demand will emerge. But federal help for renewables is under attack today as never before. House Republican leaders, skeptical of climate-change science and eager to slash federal spending, shoot down anything that resembles new government regulation--and they have placed the paltry clean-energy subsidies that do exist at the center of their assault on government spending.

Mabus has led meetings at the Pentagon with clean-tech companies, senior Defense officials, and Wall Street investors--intended, he said, to deliver a simple message: "We've been working with venture capitalists, we've been working with investors, saying, 'Here's the market we can bring.' We're getting a big response." This month, for example, the Pentagon's Defense Venture Catalyst Initiative invited a handpicked group of clean-tech companies to give presentations on products they believe could help the armed forces. "DOD is being hugely helpful to the industry right now," said Rob Day, a partner in Black Coral Capital, a clean-technology venture-capital firm based in Boston. "DOD is a big enough consumer that they can end up catalyzing a lot of early volume for start-ups that help them bring costs down significantly. Not least of the benefits is that DOD is obviously very credit-worthy and probably willing to engage in long-term contracts, so that kind of customer can also help unlock a lot of financing for these companies."

The military's demand for renewable energy wouldn't have nearly the effect on the clean-energy market as those economywide policies. But energy experts say that sustained demand from such a massive, unique customer could provide the crucial push needed for some clean technologies to reach the price-parity tipping point. Overall, the military consumes 1 to 2 percent of all of the energy used in the United States. That may not sound like much, but a big shift in how that percentage of power is produced could be enough to change the dynamic. "It can help spur the entire industry," said Brad Carson, director of the National Energy Policy Institute at the University of Tulsa in Oklahoma. "One percent is actually a massive market. It's enough to make an impact. That's enough for small start-ups to build sufficient volume to make their business viable and get into the commercial market."

Among the reasons a consumer like the military can have such a big impact: its willingness to push cutting-edge technology and a refusal to compromise on security and reliability. That can give renewable-energy companies that sell to the Pentagon a priceless advantage in convincing commercial consumers that renewables and hybrids are just as sturdy and dependable as old-fashioned fossil-fueled cars. "Because of its interest in security, DOD can spur some truly experimental technologies," Carson said. "Many of these Navy bases are looking at generating electricity from ocean waves--something that's technically doable but has never been scaled up at any level."

The Hurdles

Still, the Pentagon is stepping into a complicated game of chicken-or-egg. For the moment, clean-tech companies selling to the military can't get the financing they need to enable them to produce tens of millions of gallons of product annually unless they can show investors that there are customers chomping at the bit for that product. But the Pentagon can't afford to buy such large quantities of biofuel until the price drops substantially. A close look at the military's recent purchases shows how much more prices will have to fall for renewable energy to compete with conventional fuel. The Navy bought 150,000 gallons of biofuels from a San Francisco-based company called Solazyme, which grows an algae that can produce synthetic petroleum, a product chemically indistinguishable from old-fashioned Texas sweet crude. Solazyme declined to say how much the algae-based fuel, which will power giant tanker ships, costs. However, people familiar with the deal said that the price is at least an order of magnitude greater than what the military pays for conventional fuel to power its jets, ships, and combat vehicles--about $3 to $4 per gallon. Another firm, Sustainable Oils, sold the Air force 200,000 gallons of camelina-based aviation fuel at an average price of $50.15 per gallon; it was used to power combat helicopters and the Green Hornet, an F/A-18F Super Hornet strike fighter. "It went 1.7 Mach," Mabus said of the Green Hornet. "The engine didn't notice the difference."

But all of that won't help Solazyme, Sustainable Oils, and similar companies create an economy of scale that could power a fleet of tankers and jets on algae or camelina for anything like an affordable price. "One of our main criteria is that it has to be cost-competitive with traditional fuel," said Kevin Geiss, the Air Force's deputy assistant secretary for energy. "I fully appreciate the industry's perspective in wanting a firm purchase commitment so they can reduce their own risk in what is a high-risk business. But the realities are that price matters.... The Air Force has given the strongest market signal of anyone about our commitment to these types of fuels. We know this is the future," he said, stressing that prices have to fall before the military can increase its green-fuel buys.

The clean-tech industry's advocates are striving to bring those prices down. Retired Gen. Charles F. Wald is working with the Aviation Fuel Alliance, a group of the nation's biggest military and commercial consumers of jet fuel (including the Air Force, Navy, FedEx, and American, Delta, Southwest, and United airlines) to push for legislation to change the military's fuel-procurement requirements; specifically, they want to extend the five-year limit on contracts to 15 years. The idea is that the military and commercial users would commit to 15-year pacts if they could get the fuel at a lower price, and those contracts would create the economy of scale that could unleash private investment in algae technology.

The Pentagon, too, has been trying to get Congress to allow it to ink longer contracts, but the push has been stalled since the George W. Bush administration. "The current commodity buy is too low to get production to scale," Wald said. "If you could send a signal to industry that this group will buy guaranteed fuel at a certain rate, comparable to the cost of oil, for 15 years, you could send the signal the market needs." Not to mention paving the way for a future in which commercial flights are powered by algae-generated biofuels.

Meanwhile, the Defense Department is also confronting a new world of energy-security threats--and clean-energy opportunities--in the form of domestic military bases that rely on the fragile, aging U.S. electric grid for power. Over the past two years, a slew of studies have raised alarms about the vulnerability of the nation's commercial electric grid, which is more than a century old in some parts of the country. A 2008 study by a Defense Science Board task force on the Pentagon's energy strategy concluded that U.S. military bases rely almost exclusively on "outside the fence" commercial power, which is "remarkably fragile" and a highly attractive target for terrorist attacks. Yet increasingly, the military is conducting remote warfare abroad from bases at home, such as Nevada's Creech Air Force Base, which operates the Predator drones over Iraq and Afghanistan. Creech is "deeply vulnerable to blackouts and cyberattacks," according to Dorothy Robyn, the deputy undersecretary of Defense for installations and the environment. According to the Defense Science Board, the Pentagon's reliance on the commercial grid puts missions at risk. "A power failure at a military base here at home could threaten our operations abroad," Robyn said.

So energy officers at military bases are working to turn their facilities into "island microgrids"--entities that can generate and store their own electricity, independent of the surrounding commercial grid. The base grid is plugged into the bigger grid, but in the event of a blackout, it could continue to function on electricity generated on-site--largely from renewable sources. These include utility-scale solar arrays, backed up with advance-battery solar-power storage units and diesel generators--along the lines of the two small, all-solar bases operating in Afghanistan's Helmand province. Energy experts say that the military's approach could also offer a new model for towns and cities, protecting them from regional-grid blackouts--and boosting local renewable-energy production.

The military's push for energy independence is opening up new opportunities for companies like NanoSolar, a San Jose, Calif.-based manufacturer that is building solar generators this fall at the National Guard's Camp Roberts in California and Camp Perry in Ohio. One of the largest solar arrays in the world is currently operating outside Las Vegas, where a 140-acre field of solar panels generates electricity for both Nellis Air Force Base and the surrounding towns. "There's tremendous opportunity for solar power at DOD installations throughout the Southwest," said Brian Stone, NanoSolar's vice president of sales.

For now, the cost of solar-generated electricity is still 10 to 50 percent more than power from fossil fuels, but Stone hopes that the new military demand will lower the price--if the Pentagon changes how it buys electricity. For now, military bases make two- to 10-year purchase agreements with electricity providers. But, as with biofuel producers, solar and other renewable-source companies say that those contracts won't be enough to help them get the investment they need to grow. Only longer, 20- to 25-year contracts could be enough to bend the cost curve.

Risk, Reward

Even some of the biggest defense contractors see both challenge and opportunity in helping the military reduce its oil use. Defense giant BAE has developed prototypes of 27-ton hybrid combat vehicles--rolling tanks that carry a two-person crew and alternate between electric-battery and conventional-fuel propulsion. The firm is also working on a line of full-sized, 75-ton hybrid tanks that Mark Signorelli, BAE's vice president of ground combat vehicles, said could save the military as much as 20 percent of the fuel it now uses in giant combat vehicles, which are one of the top three fuel guzzlers in the arsenal. But the sticker price of the vehicles' propulsion systems, which BAE estimates will be in the range of $1 million to $2 million, is about 5 percent to 10 percent higher than that of standard propulsion systems, which has caused military procurers to hesitate; to date, the Pentagon has not purchased any hybrid tanks.

Signorelli says that the process is comparable to the quandary that a consumer faces in buying a new car: balancing the higher up-front cost of, say, a $28,000 hybrid Ford Fusion against the prospect of recouping the money in fuel savings two or three years down the road--and enjoying additional economy thereafter. It's a case that the car dealer has to make to the customer, and that Signorelli has to make to the military. In both situations, he says, the seller also has to demonstrate that the hybrid will be as safe and sturdy as a standard vehicle. "They want you to show them first," said Signorelli, who added that given the Pentagon's latest drive to save petroleum, his company intends to make a new pitch to the military this fall.

In some ways, however, the timing of the military's clean-energy push couldn't be worse. Because the effort will cost more at the outset, an era of budget-cutting isn't the best time to sell the proposal to Congress. And for GOP deficit hawks, any outlays that smack of clean-energy subsidies are the first target. Republicans have already sought to slash all of the Energy Department's funding for clean-energy research this year, and some want to eliminate the department altogether. Meanwhile, Republican leaders of the House Appropriations Committee want to cut $8.9 billion from the Defense Department's $538 billon request for fiscal 2012. Although that's a pittance compared with the cuts awaiting other agencies, it means that something will come under the knife, and it may well be purchases of algae-generated jet fuel, solar-power contracts, or hybrid combat vehicles.

But expect this to be one priority for which the administration pushes back hard--aided by many powerful friends at the Pentagon and on Wall Street. With Obama unable to enact any of the climate-change legislation he once envisioned, the military is the next best platform to spur the growth of a clean-energy economy--and it may be his last.