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Feb 5, 2016

Lockheed Martin Signs Its First Major Renewables Deal for 30 MW of Solar


Earlier this week, aerospace, defense, and advanced technology company Lockheed Martin announced that it had concluded a deal to buy 30 MW of solar power from Duke Energy Renewables, a Business Renewables Center (BRC) sponsor and part of Duke Energy. Lockheed Martin is a BRC member. After Salesforce announced a new deal in January, Lockheed and others are following suit this first week of February (including fellow BRC member Steelcase, which announced 25 MW of wind from BRC sponsor Apex Clean Energy). It’s a promising start for 2016 after a record-setting year 2015. 

“Lockheed Martin is one of the first corporations to announce a major renewable energy deal in early 2016, but more importantly, it joins a growing list of leading corporations signing these deals for the first time,” says Hervé Touati, a managing director at RMI and head of the BRC. 

What is really remarkable about the deal is that a giant government contractor inked it. The nature of Lockheed Martin’s business means it is subject to intense government scrutiny and is internally divided into business areas, like government satellites or tactical aircraft, that each operate under different contracts with Uncle Sam. This complicates large-scale, long-term renewable purchases. “We applaud Lockheed Martin for its clean energy leadership, not only in its sector but across the market broadly,” says Touati.

The power purchase agreement (PPA) for 30 MW of power from Duke Energy Renewables’ Conetoe, North Carolina, solar facility will provide about 72,000 megawatt-hours per year for 17 years—that’s enough to power about 6,500 average American homes annually. What’s unusual is that “we did a lot of work with our corporate functional groups to make sure that we understood all of their concerns and started addressing them well before we started evaluating any projects,” explains Scott Stallard, senior manager of environmental sustainability at Lockheed Martin.

Learning From Peers and the BRC

Starting in early 2015, CustomerFirst Renewables, a BRC founding sponsor, began advising Lockheed Martin on the PPA, and Lockheed Martin joined the BRC as a corporate member around the same time. “The Lockheed team being able to speak with their peers at other corporates and other folks in industry about the large-scale renewables movement really built their confidence in kicking something off in a more material and serious way,” says Alan Zang, vice president of finance and operations at CustomerFirst Renewables.

Stallard adds: “It has been helpful to be a BRC member. Being able to talk to people from different corporations that are working on similar transactions allowed us to understand better and gain insights.” In addition to the events, BRC’s guides and primers were helpful to Lockheed Martin, especially the Accounting Primer. Such resources proved useful “particularly to our corporate stakeholders,” says Stallard. “We absolutely used that in all of our workings with the corporate accounting group.” 

Securing Buy-in from Many Internal Stakeholders

Lockheed Martin’s corporate functional groups, or business areas, have a lot of autonomy because they are subject to separate government contracts, and they are spread over 50 states. “With our corporate structure and its diverse disclosure requirements, it made more sense for us to go out and meet with each site and ask if they wanted to participate in this transaction.” says Stallard. The separate business areas largely own the sites themselves. 

Zang says that most PPAs are driven by a “corporate-level mandate that is autonomous in its decision-making for these types of deals, as opposed to getting buy-in from their businesses. It’s much more of a corporate-level decision.” Stallard says, “A lot of what we did to get the business areas to buy in is something that a top-down company doesn’t have to do; they keep their transaction at the corporate level.” Zang adds: “This is one for the record books, I think, in terms of organizational complexity.”

Making Progress Toward Sustainability Targets 

Lockheed Martin has reason to work through the complexities of its situation: it is committed to sustainability. Like 43 percent of Fortune 500 companies, it has sustainability goals—and it is meeting them. Lockheed Martin set a goal in 2008 of cutting its carbon emissions by 25 percent by 2012, and met it. Now it has new goals, including a 35 percent reduction in carbon from 2010 levels, to be achieved by 2020. 

Lockheed Martin is the first defense contractor to procure large-scale, offsite renewables in line with the White House's executive order announced in March 2015. The order, which directed federal agencies to track and reduce their greenhouse gas emissions, is intended to increase sustainability in the government and its supply chain. As part of that effort, the president asked top contractors to disclose greenhouse-gas emission reduction actions. 

“Lockheed’s PPA paves the road for major defense contractors to follow, ensuring there is a viable, economic way to address clean energy and honor the commitments to their largest customer, the government of the United States,” says Lily Donge, a principal at RMI and a leader of the BRC. Lockheed Martin already had an array of  renewable energy coming from onsite solar, wind, and biofuel—in part due to its commitment through the U.S. EPA’s Green Power Partnership. But like other corporations, it needed to secure offsite, utility-scale renewables to really scale up.

Renewables as an Energy Price Hedge

Lockheed Martin also chose to execute this fixed-price, long-term PPA to hedge against increases in energy costs, a valuable economic driver of large-scale renewable power projects. “Investing in large-scale renewable power, in addition to the environmental benefits of cleaner electricity to power our facilities, helps Lockheed Martin hedge against the volatility of the electricity market and lower our energy costs,” says Bob O’Brien, president of LMCPI, which is concerned with Lockheed Martin’s properties. Large corporations already hedge in their grid energy contracts for periods of a year or two. “This is a nice addition to our current hedging strategy,” says Stallard. “This gives us the ability to hedge out in a different way, for a much longer term.”

About half the power is going to Lockheed Martin sites on the PJM interconnection, to which the Conetoe facility is connected, while Lockheed Martin credits the other half internally to sites outside of PJM. Stallard explains: “Inside of PJM, it’s the direct delivery model.” But far-flung sites are still getting the accounting benefits for the price of power from the PPA. “The sites that we’re assigning to outside of PJM are getting the benefit of this system,” he says. “So as power prices go up across the board, they’re going to get a benefit from the fact that they’re hedged over here.”

Stephen Abbott, a senior associate at RMI, adds: "By taking title to the electricity, Lockheed Martin has been able to employ a creative deal structure which allows them to directly power facilities within PJM with solar energy and also protect their facilities in other regions from rising electricity rates." 

A Learning—and Teaching—Process

CustomerFirst Renewables’ Zang says that the process of making the deal was “pretty novel. To really work it through the grassroots of the organization was pretty unique.” Getting buy-in, and then managing the complexities inherent in any PPA, took drive. “They were very good at keeping it going in their organization,” Zang says of Lockheed Martin. 

All those autonomous business areas didn’t just need to be managed, they needed to be convinced. Stallard points out that, “we’ve got 60,000 scientists and engineers in the company. We really drove CustomerFirst Renewables hard with doing analysis and they came through on that front all the time.” Stallard says that Lockheed Martin’s structure “made it a little bit more challenging—maybe a lot more challenging—to do that but, in the end, we now have buy-in at the sites and all the businesses for the project.”

When they put out an RFP they got bids from about 90 different projects, and Duke Energy Renewables’ Conetoe facility came out on top. The Conetoe solar plant is bigger than Lockheed Martin’s 30 MW. Tammie McGee, communications manager at Duke Energy, says, “When it was completed at the end of 2015, it was the largest operating solar site east of the Mississippi,” though that will change this year. The remaining 50 MW of power were bought by BRC member Corning in December 2015. 

McGee points out that, “It’s not that unusual to see an Apple or a Google announce that they are getting some of their energy from solar sites, for example, but it hasn’t been common among industrial and manufacturing companies.” The few others that have executed PPAs include Procter & Gamble, Owens Corning, and Mars. McGee says, “Lockheed Martin demonstrates an innovative spirit and is really in the forefront of companies that are weaving sustainability into their everyday operations. We’re pleased to have enabled their objectives by delivering a cost-effective solar solution..

Passing It On

“Lockheed Martin is more than willing to share its experience with BRC members, because we’re hoping that by sharing it’s going to drive more uptake in renewables,” says Stallard. “I do hope this is paving the way for other government contractors to revisit whatever they may have thought about renewable energy. I hope we’re not only leading the way for the rest of the global security and aerospace industry but certainly for other government contractors as well.” 

Zang says, “If the biggest government contractor in the world has done it, that means that it can be done. The devil is in the details, of course. The big question is government accounting, and how does something like this impact the contracts.” Now that Lockheed Martin and CustomerFirst Renewables have paved the way, their learnings can help others follow quickly, and with less effort. “We’re extremely excited to have been a part of it,” says Zang. 

Photo copyright Lockheed Martin. Used with permission.

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