CADS - Defense Industry Enery Reform Report

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					                               Future Energy Program




Defense Industry Energy Reform:

     Incentives and Capabilities




           Benjamin E. Power

            Steven Rotchtin

           23 September 2009




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                                            Future Energy Program



Table of Contents

Executive Summary                                                    3

Introduction                                                         4

Background                                                           4

Justifiability                                                       6

Questions of Justifiability at the DoD                               7

Incentives for Private Industry                                     10

Projecting Investment                                               13

DoD: An Uneven Path Ahead                                           13

Progress in Private Industry                                        15

Final Conclusions and Key Recommendations                           16

Works Cited                                                         19




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Executive Summary

        Resource expenditures in pursuit of the development of energy efficient military technology are
justifiable today for both the Department of Defense and private defense contractors. Accordingly,
private industry investment will increase dramatically in the near term. In contrast, due to internal
constraints on its ability to fully engage in reform, changes at the DoD will happen less immediately and
the reform process will proceed unevenly and at an irregular pace. This difference suggests that energy
reform in the defense industry in the coming years should be driven by private contractors.

Key Recommendations

    •   Private industry needs to work with Department decision-makers to implement contracting
        reforms allowing for centralized energy efficiency contracts for military bases and other projects
        in order to increase the return on investment for private industry.

    •   Private industry and Department officials should continue to coordinate on novel financing
        arrangements to incentivize onboarding of energy efficient technologies that have a longer return
        of investment timeline.

    •   The DoD should institutionalize mechanisms for accountability at the highest levels while
        allowing innovation and adaptation to come from commanders at the ground.

    •   The DoD should develop a metric to assess energy efficiency’s impact on mission effectiveness
        and incorporate it into the Planning Programming Budgeting and Executions System and the Joint
        Capability Integration and Develop System.

    •   An internal governing structure for energy issues with a clear and defined role in the DoD
        decision-making process must be created. Implementing new acquisitions processes that measure
        fuel efficiency is essential.

    •   DoD leadership should encourage shifts in behavior at the local level by allowing commanders to
        reinvest funds saved through energy conservation into further efficiency measure.

    •   DoD leadership needs to communicate to private industry how it intends to change its
        acquisitions process and what features it will value differently in the future so that industry can
        respond accordingly.




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Introduction
         The purpose of this paper is to project how energy reform in the defense industry will proceed in
the near future. Analysis will center on the U.S. Department of Defense, the consumer in the defense
market, and private industry, the group of private contractors who supply the equipment used by the
military1. While these two actors are intimately connected through the market they will not move forward
on energy reform at the same pace. Divergent interests and capabilities will allow for differences in
action. The first section of the paper will examine the justifiability of resource expenditures on energy
reform from the perspectives of the DoD and private industry. Understanding the case for and against
expending resources on energy reform for each sector of the industry is essential to understanding the
extent to which each actor will engage in reform. This analysis of the justifiability of investment will
serve as the basis for the next part of the paper, which projects the path of engagement in energy reform
for the two main actors according to incentives for action and capability to respond to these incentives.
The analysis reveals that, though both the DoD and private industry have strong incentive to invest in
energy reform immediately, private industry will lead industry reform in the near future because it
possesses the flexibility to shift focus to this field right away, whereas the DoD’s actions are constrained
by internal factors.


Background
         The strategic threat posed to the US military by its reliance on expensive, limited, and
substantially foreign-supplied oil is well understood. Since 2001, when a Defense Science Board report
on fuel efficiency in the military was released, a plethora of investigations by internal DoD experts and
private consultants have confirmed that reliance on oil for energy is a serious, long-term vulnerability of
the military2. Massive price fluctuations, susceptibility to disruption in conflict, and the peak oil
hypothesis, which posits that after a certain date the rate of oil production will enter permanent decline,
all suggest that continued dependence on vast amounts of oil strategically threatens the US military’s
ability to operate effectively in the long run.
         Top-level recognition of the importance of DoD energy reform in the past few years has led to
great strides to reduce reliance on fossil fuels. A few key moves recently made by Department officials


1
  Private industry is not monolithic, but for the purposes of this paper it will be treated to a certain extent as one
actor. This is because of shared incentives and market conditions that all of these firms face.
2
  (Board 2001)

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include the commissioning of a strategic energy security plan (to be concluded in the coming months),
greater consideration of how fuel demand is factored into purchasing and acquisition, and evaluations of
quantifiable methods to measure the military’s carbon footprint3. Military decision-makers and
practitioners have collectively demonstrated recognition of the severity of reliance on fossil fuels as well
as a commitment to work towards innovative solutions.
        There is consensus among researchers and acknowledgment by many DoD leaders of the steps
that need to be taken in order to implement institutional changes in the way the military thinks about and
uses energy. Reports on the subject have identified three keys to reform:


            •   Creation of a focused and empowered leadership on energy issues.
            •   Structural change in acquisitions and planning processes.
            •   Cultural change in the way DoD personnel view energy issues.


        In turn, DoD leadership has acted on these recommendations and begun policy restructuring at a
senior level. In 2007 Deputy Under Secretary of Defense for Acquisition, Technology and Logistics
Kenneth Krieg composed a memorandum in which he declared his intent to institute the Fully Burdened
Cost of Fuel (FBCF) as a new measurement mechanism in DoD acquisitions4. This measurement is a
concept developed out of the 2001 Defense Science Board report that is important to changing DoD
planning procedures with regard to energy. A second memo in 2009 from the Office of the Assistant
Secretary of the Army again declared the Army’s intent to institute the FBCF measurement in the
acquisitions process5. Regarding the creation of empowered leadership on energy issues within the DoD,
the 2009 National Defense Authorization Act mandated the creation of a Director of Operational Energy
Plans and Programs post in order to champion and organize energy reform from within the DoD
bureaucracy6.
        Despite recognition of the changes that need to take place and indications of interest in policy
modification, substantial changes in energy practices have not yet occurred in the military. The state of
development of the FBCF measurement and Director of Operational Energy position are two clear


3
  (Leber 2009)
4
  (Krieg 2007)
5
  (Popps 2009)
6
  (Duncan Hunter National Defense Authorization Act 2008)

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illustrations of this. Of the three pilot projects initially commissioned by Under Secretary Krieg in 2007 to
test FBCF, only one, the Joint Light Tactical Vehicle Project, is still running7. Needless to say, FBCF has
not been implemented in any significant way. One of the reasons for this is that the Director of
Operational Energy has still not been named, which means that the DoD continues to suffer from a lack of
leadership on these issues. While energy issues do receive attention and specific projects receive funding,
investment in energy efficient technology is sporadic and unstructured. The DoD recently awarded GE $2
million in federal stimulus funding for a smart microgrid demonstration at a Californian Marine corps
base8; small investments like this demonstration are happening, but could be greatly expanded with larger,
more centralized contracts for broader deployments. DoD has yet to comprehensively institute the type of
structural changes that are necessary to address the military’s strategic energy vulnerability.
         Following the DoD’s lead, defense contractors have not yet made a clearly defined shift in the
type of equipment that they produce. There are indications of new focus and interest in energy efficient
military technology from industry leaders like General Electric and Lockheed Martin, but these
companies have, as of yet, been reluctant to invest heavily in this technology without an accompanying
shift in preference at the Defense Department. With legal constraints on who they can sell this type of
technology to, private industry’s development and investment in this field has to this point largely
mirrored that of the DoD.


Justifiability
         The question of justifiability of resource expenditure on energy reform is considerably more
complicated for the DoD than it is for private industry. For private industry, the investment is justifiable if
it will pay dividends in terms of profits. For the DoD, the case is less straight forward. In order to show
why investment is justifiable for the DoD, this paper will analyze competing claims on the subject9. First,
the paper will present the theoretical framework for claims questioning the justifiability of reform.
Second, competing claims regarding the effect of efficiency on military effectiveness will be raised. Last,
a synthesis of these positions will be presented with a conclusion on the justifiability of reform
expenditures according to the preceding analysis.

7
  (Roper 2009)
8
  (Environmental Leader 2009)
9
  It is taken as a given that, for the reasons stated in the paper’s introductory section, energy reform is strategically
necessary for the military’s continued long-term strength. What is in question is the justifiability of investment
today.

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Questions of Justifiability at the DoD
Theoretical Framework of Questions
           Central to explaining the limited progress that the military has made on energy reform are
arguments that question the justifiability of large scale investment in the field at this time. While official,
recorded expressions of opposition to reform from within the military are immaterial, it is possible to
infer from the lack of energy put forwarded in implementing study recommendations and policy
directives that questions remain in the minds of many as to the current justifiability of change.
Competing interests and military paradigms cast doubt on the value of the DoD investing time and
resources in a long-term project with, what are argued to be, detrimental effects on the military’s current
operations.
           While the military’s long-term strategic interests in energy efficiency are well established, it is
possible to question the merit of energy reform according to a characterization of reform as a competing
interest. According to this model, there is a tension between the US military’s short-term and long-term
interests: the military must weigh its strategic interests in energy reform against its interests in
maximizing operational effectiveness in combat operations today.
           The justifiability of energy reform can also be questioned in principle according to military
doctrine. The Weinberger and Powell Doctrines advocate a military that, when used, is used with
decisive force in order to overwhelm the enemy10. These doctrines easily lend themselves to the
conclusion that it is necessary to be inefficient in energy use when conducting military operations in order
to maximize the effectiveness of the action. Here too a strong argument can be made in favor of
sustainability in that greater efficiency of energy use can augment tactical power, as untethering of forces
from energy supply lines can act as a force multiplier.
           In general terms, what the competing interests paradigm and Weinberger and Powell Doctrines
share is the assertion that focusing efforts on increasing efficiency sacrifices military effectiveness.
According to the competing interests model, there is a tradeoff between effectiveness today and efficiency
in the future. Similarly, the Weinberger and Powell Doctrines assert that in military operations
effectiveness comes at the cost of efficiency.


Efficiency verses Effectiveness


10
     (Johnson 2009)

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           For either of these arguments to serve as justification for not engaging fully in energy reform, it
must be proven that pursuing energy reform necessarily sacrifices military effectiveness in today’s
operations. If this is the case, then there may be legitimate cause for ceasing, or, at least, postponing this
transformation.
           The simplest and most accessible exhibition of how this assertion could hold true is with regards
to the “P for Plenty” attitude of logisticians in planning military operations. The “P for Plenty” attitude
describes logisticians approach to providing supplies to military personnel carrying out operations.
Military planners make sure to err on the side of oversupply to ensure that operational units receive all the
resources they need in combat situations, as there is little cost to oversupply but significant costs to
undersupply11. In turn, while carrying out operations, commanders are expected to act to fulfill objectives
and ensure troop safety, not conserve resources. If the “P for Plenty” attitude in planning military
operations was sacrificed in pursuit of increasing fuel efficiency, then military effectiveness could
become a cost of energy efficiency.
           Less directly, conserving fuel may adversely affect military effectiveness by decreasing the
efficacy of training. In 2006 the Air Force reexamined its training programs and began to shift training
hours away from live flights and into flight simulators12. This was done in order to reduce fuel costs amid
rising oil prices and increasing energy demand by US forces in Iraq. The cost of this shift is that pilots
now receive fewer hours of live flight training before entering real combat situations. Though simulators
have improved in quality with this shift, there is still a fear that the quality of training has been reduced.
           More broadly than the supply of resources for specific operations or training of pilots, one can
argue that engaging in energy reform at the Department of Defense draws resources and attention away
from more pressing issues: the current military operations in Iraq and Afghanistan. The DoD possesses
limited financial, physical and human resources. While energy reform doesn’t require physical resources,
it does require financial and human ones. Pursuing energy reforms requires diverting attention away from
theatres of operations and also investing financially in technology that may not serve a use in current
operations.


Alternative Perspective



11
     (Johnson 2009)
12
     (Louis Hansen 2006)

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        There is a strong dissenting position to the argument that energy efficiency sacrifices military
effectiveness. One can argue that efficiency does not sacrifice effectiveness and in many situations
actually increases it.
        The clearest demonstration of how energy efficiency can contribute to military effectiveness is
with regard to supply lines. Moving fuel to forward operating bases requires heavily protected convoys
moving along dangerous supply lines. Because supply lines stretch long distances they often move
through unsecure regions and are especially vulnerable to attack13. In order to protect these convoys, vast
amounts of resources are expended; convoy protection is troop intensive and has been among the most
dangerous tasks for US soldiers in Iraq14. In Afghanistan, operations are less fuel intensive, but convoys
are particularly vulnerable as they move through mountainous choke points like the Khyber Pass.
Protection of convoys requires the use of armored vehicles, helicopters, and fixed wing fighter aircraft, an
enormous commitment of troops and resources that must be diverted from other military operations15.
Moreover, the troops used for convoy protection are particularly susceptible to attack from enemies that
exploit the vulnerable position troops are placed in while guarding convoys.
        While increasing energy efficiency would by no means lead to the eradication of supply convoys,
improved efficiency would mean that fewer convoys will be required to meet operational needs. This
would help to alleviate the burden of convoy protection, making soldiers who would be on this duty
available for combat operations, and removing important assets from vulnerable positions, thereby
improving the military’s strategic position.
        Another important cost of reliance on many convoys to provide fuel is logistical. The complicated
logistics of transporting energy consumes DoD planning personnel and complicates missions. The
Defense Energy Support Center estimates that 20,000 soldiers are employed in fuel transportation at a
cost of $1 million dollar per day16. The costs of transporting fuel are magnified in logistics. Lieutenant
Colonel David Johnson described the relationship between logistical demands and operations as
exponential, indicating that a slight increase in supply requirements leads to a comparatively large
increase in logistical planning requirements17. Conversely, this relationship suggests that improved energy



13
   (Thompson 2008)
14
   (Bochman 2009)
15
   (Powering America's Defense 2009)
16
   (Transforming the Way DoD Looks at Energy 2007)
17
   (Johnson 2009)

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efficiency would yield significant savings in terms of logistical requirements. In Afghanistan, where
supply planning logistics are more complicated than in Iraq, this would be an important development.
           Energy efficiency can also have significant benefits in terms of increasing the mobility of troops
and the range of options available to commanders in planning operations. Operating units with high
energy efficiency become de-tethered from supply positions. This allows them to move more freely in the
completion of mission objectives. Further, with regard to operational planning, improved efficiency
increases planning options by decreasing the extent to which fuel requirements act as a restricting factor.
In operating units with high energy efficiency, fuel demand no longer needs to “drive tactical planning”18.
           At a higher planning level, energy efficiency can improve planning efficacy by decreasing
uncertainty in costs. Fluctuation in oil prices and the massive uncertainty in costs associated with these
fluctuations make military planning more difficult. Without a relatively accurate assessment of energy
costs, comparisons of the utility of different weapons systems in the acquisitions process and of the
financial costs of different actions in supply and combat become unreliable. According to a Center for
Naval Analysis report, a $10 change in the cost of a barrel of oil translates into a $1.3 billion dollar
change in the DoD’s energy costs. These price changes cause the DoD to either divert funds from other
projects or return to Congress to ask for a supplemental19.
           A synthesis of the competing claims on energy efficiency reveals that energy reform plays a role
in improving the effectiveness of military operations today, not just in strengthening the long-term
strategic position of the military. According to this assessment of the utility of reform to the military in
both the short and long-term, energy reform is a worthwhile and justifiable pursuit for the DoD today.


Incentives for Private Industry
           The role of private industry in the promotion of energy efficient military technology is difficult to
define. The structure of the defense market indicates that the strategic direction of investment should be,
almost entirely, defined by the DoD. This is because the defense market resembles monopsony, a market
with a single buyer and numerous suppliers. In such a market, because demand is provided by one actor,
this actor is empowered to dictate the direction of the market and suppliers must react accordingly. The
defense market is not a perfect monopsony, as military technology often has commercial applications that
provide the opportunity to engage other buyers and sales to foreign governments are also possible, so long

18
     (Powering America's Defense 2009)
19
     (Powering America's Defense 2009)

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as they are approved by the DoD and Congress20. However, it still holds true that the DoD is the dominant
actor in the American defense industry and that the market structure generally resembles monopsony.
This market type makes private contractors secondary actors in defining the direction of the industry.
Still, private contractors are not incapable of influencing the direction of the market. Through political
means and through development of capabilities or displays of changing interests, private firms can shape
DoD demand. Exhibitions of interest and ability in new fields, along with political maneuvering to draw
attention to these developments, are certain to draw the DoD’s attention and influence the type of
equipment that it demands.
        This capability of contractors to influence DoD demand makes analyzing the interests of private
industry in energy reform essential to understanding the industry. There are a number of factors that are
likely to enhance private contractors’ level of interest and investment in energy conscious military
technology.
        The coming withdrawal of U.S. troops from Iraq is one. US troops officially withdrew from Iraqi
cities this June and according to the Status of Forces agreement signed between Iraq and the US in
November 2008, US troops will complete a total withdrawal from Iraq by the end of 201121. The war in
Iraq required immense defense expenditures, driving a 40% increase in defense spending under President
Bush to $678 billion in 200822. A May 2009 Congressional Research Service Report stated that Congress
allocated $642 billion dollars to Iraq for incremental war-related costs (costs in addition to normal
peacetime activities) between FY 2001 and FY 200923. Draw downs in Iraq, which will not be fully offset
by troop increases in Afghanistan, will lead to large decreases in defense expenditures on active military
operations.
        The expected result of coming decreases in expenditures on active military operations and on
weapons capability improvements is a significant softening of the defense market in coming years. This
will have a profound effect on defense contractors, who will be forced to search for ways to maintain
revenues amidst a weak market for their product.
        In searching for strategies to cope with a weak market for defense products, the military’s
expressed interest in energy reform is sure to draw the attention of contractors. As discussed earlier, the
DoD has made clear its interest in energy reform, even if it hasn’t yet taken significant steps toward

20
   (Burnett 2009)
21
   (Bruno 2008)
22
   (Bruno, The Fine Print on Defense Spending 2009)
23
   (Belasco 2009)

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implementing change. Internal investigations, consulting reports, Congressional and Presidential
mandates, and a multitude of official memos and statements indicate the DoD’s intent to move in the
direction of energy efficiency.
           More important than intent, there is a growing consensus among experts that this is change that
will happen. The DoD has exhibited throughout its history that it is capable of undertaking reform of this
scale and importance, specifically when it has the opportunity to be at the forefront of wider cultural and
technological movements24. The Defense Department takes pride in the leading role it played in the civil
rights movement through its successful integration of African American soldiers and in the development
of the internet. These exhibitions of its ability to achieve far-sighted and impactful developments lend
credibility to the DoD’s claims regarding energy reform. The DoD has proven that when committed to
this type of action, it is capable of seeing that action through to its successful completion. With regard to
energy reform, the DoD is not yet at a point where it is fully committed to the movement, but an
increasing recognition of the problem by top Department officials as well as individuals independently
championing reform is converging to create momentum.
           The combined effect of a softening in the defense market and recognition of the DoD’s coming
shift in favor energy efficient technology in the future serves to incentivize private contractors to become
immediately involved in developing advanced energy efficient military technology. While sales to foreign
governments may partially offset the decrease in DoD demand, a more promising path for the future for a
private contractor is establishing oneself as an industry leader in energy efficient technology. This will
allow particularly innovative, forward-looking contractors to place themselves at the head of the industry
when the military begins to act on its policy directives regarding energy efficiency. Private contractors
can maximize long-run revenues by developing into leaders in a field primed for rapid growth in the
future.
           There are already indications from some private defense contractors that this is a path they wish
to explore. Private contractors have followed very closely the progress that the DoD has made on energy
reform with an eye towards the day when the Department moves past unstructured investment and
addresses the issue more comprehensively. Lockheed Martin, in partnership with the Department of
Energy, and state and local utilities, has entered aggressively into non-conventional energy by exploring
nuclear, solar, biomass and ocean energy generation25. It has also developed capabilities through a focus

24
     (Bochman 2009)
25
     (Lockheed Martin and Alternative Energy Solutions 2009)

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on foreign markets, which are, at this time, more advanced in the field than the American defense market
is26. Furthermore, Lockheed has organized symposia on clean technology in order to encourage research
in the field27. General Electric, another powerful contractor, has also shown interest in entering the field
of clean energy military technology. This summer GE announced a project to develop a smart microgrid
system of energy management at the Twenty Nine Palms Marine Corps base28. While Lockheed’s and
GE’s actions and statements suggest that they are moving toward heavy investment in this field, the
nature of the companies make accurately identifying their strategic direction and long-term business plans
difficult.


Conclusions on Justifiability
         Expending resources on energy reform is justifiable and worthwhile for both suppliers and
consumers in the defense industry. For private contractors the case is straight forward: investment is
justifiable in order to cope with a weak defense market and to develop expertise in a field in which
growth is expected. For the Defense Department the situation is more complicated, as its objectives are
more varied and less clear. Analysis shows that short-term energy reform is in the interest of the DoD in
terms of both decreased budgets and improved operational capabilities, while long-term energy reform
promises to strengthen the military’s long term strategic position.


Projecting Investment
         Two main factors will dictate the pace and depth of reform for the industry. The first is the
strength of the case in favor of reform and the incentives associated with it. The second is the capability
of the actor to respond to this incentive. Differences in the clarity of incentives and in the ability to
respond to them will account for the differences in action between the DoD and private contractors in this
field in the coming years.


DoD: An Uneven Path Ahead
         The realization of the long-term strategic importance of energy efficiency and the strong case for
how efficiency contributes to operational success in combat operations today suggests that the DoD will

26
   (Fitzpatrick 2009)
27
   (Lockheed Martin Seeks Partners in Developing Clean and Nano Technology Solutions at Upcoming TechConnect
World Symposia 2009)
28
   (Guevarra 2009)

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begin to take serious action on these issues in the future. In the near term, technologies that pay
immediate dividends in Iraq and Afghanistan will receive the most attention. Developments in the use of
foamed tents at forward operating bases and mobile fuel cells are among these projects29. Larger changes
to DoD planning, organizational structure and the valuation of energy in the acquisitions process,
however, will move much slower30. There are a number of reasons to expect that these changes, crucial as
they may be to operational success today, will not be implemented quickly and will continue work their
way through the DoD bureaucracy at a slow pace.
        According to Andy Bochman, the editor of the DoD Energy blog, there are three main forces in
the DoD that work against faster action on these larger energy reform issues. The first is institutional
inertia. Changing cultural and procedural norms at an institution the size of the Department of Defense is
a herculean task. The number of people involved in the decision making process and in implementing
reform serves as an important obstacle to achieving any substantial progress on energy reform quickly.
Second, tribalism works against swift energy reform. Interest groups within the DoD work to further their
own ends, and to many, energy reform plays no consequential role in achieving these ends. The result is
aversion to involvement in the reform process from groups inside the Department. Last, an older
generation that often conflates energy reform with environmentalism creates opposition to the reform
movement at senior levels. In conflating energy reform with environmentalism this group fails to account
for the strategic considerations that drive reform and dismisses the movement’s importance. The existence
of these obstacles is made glaringly obvious in the Defense Science Board’s 2008 report, whose first
finding is that “the recommendations of the 2001 Defense Science Board Task Force Report have not
been implemented” and the situations and shortcomings noted in the report seven years earlier “have not
changed”31. Despite this shortcoming in policymaking, the rise of individual efforts to achieve higher
energy efficiency championed by individual base commanders and others, like the implementation of a
microgrid at the Twenty Palms Marine corps, provide clear evidence that change is afoot and, if
coordinated through proper policy, a strategic shift in DoD energy posture attainable. The failure to
respond to the numerous investigations like the 2001 DSB report that were issued over an extended
period indicates that the obstacles to reform are significant, have been at work throughout the past decade,
and continue to figure prominently at the DoD.


29
   (DoD Energy Security Task Force 2008)
30
   (Funk 2009)
31
   (D. S. Board 2008)

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          As reform continues unevenly, with substantially more progress on individual programs than core
issues, there is little doubt that the DoD will, in the coming years, reach a point at which it is considerably
more efficient and effective in its energy use. The timeline for these changes will be influenced by
internal factors, such as the successes and failures of individual programs, and external ones, like the
price of oil and commercial technological advances32. However, for the reasons explained above, there is
scant reason to expect that the DoD will drastically alter its course in the near future and begin to account
for the core deficiencies in its energy practices. Energy reform at the DoD will remain a long process that
proceeds at an irregular pace.


Progress in Private Industry
          The outlook on the development of energy efficient technology is significantly different at private
contracting firms than it is at the DoD. It is reasonable and logical to expect private defense contractors to
begin development and to make progress in this field in a much shorter time frame than the DoD will. The
recognition of the potential for long-term profits in this area amidst a lull in demand in the defense
industry creates a situation where private companies have incentive to move quickly into this field to try
and gain first-mover advantages.
          In addition to the existence of clear incentives for reform, private contractors differ from the
Department of Defense in terms of their flexibility. As profit-motivated firms, private contractors are
more flexible to adjust to changes in demand than the DoD is. While limited to a certain extent by
corporate structures and physical, human and financial capital constraints, private firms are innately more
flexible than government institutions and therefore more capable of responding quickly to a new set of
incentives. The greater simplicity in objectives, with long-term profit maximization at the core of these,
allows private firms to act swiftly and decisively as conditions that affect these core objectives change. As
discussed earlier, the situation at the DoD is not nearly this simple. An example of the ability of private
firms to shift direction quickly is Lockheed Martin’s acquisition of Savi, an energy supply management
firm33. Through acquiring smaller companies with expertise in a field, contractors like Lockheed can
quickly increase their capabilities in an area. In the case of Savi, Lockheed quickly built expertise and
acquired experience in energy supply management. This ability to shift direction through acquisitions will



32
     (Bochman 2009)
33
     (Daily 2006)

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allow contractors to become leaders in components of the defense industry related to energy technology
that they project will be useful to the DoD in the future.
        The existence of clear incentive along with the capability of reacting swiftly to this incentive
suggests that private defense contractors will begin proceeding with intensive development in the field of
energy efficient military technology in the near term. In this period, private companies will lead
development in the field and will be the primary actors driving progress.


Conclusions on Projections
        In the short-run, the less influential and normally reactionary actors of the industry, the private
contractors, will have atypical ability to shape the strategic direction of the defense market. Private
contractors will lead the defense industry in the development of energy efficient technology in the time
that it takes the DoD to adjust its culture and internal processes to reflect a different magnitude of interest
in energy efficiency


Final Conclusions and Key Recommendations
        Heavy investment and strong focus on development of energy efficient military technology is
justifiable for the defense industry as a whole today. For the military, the long-run strategic benefits as
well as the operational benefits that result from increasing energy efficiency make this true. For private
industry this is true because of the expectation of heightened DoD interest in this technology and because
of the current wane in demand in the market for defense products.
        Private industry focus and development in this field will happen before the DoD successfully
reforms its energy culture and planning processes. Private industry investment will happen according to
this timeline because there is incentive to act in this manner and because private firms are flexible enough
to shift to this focus in a short time frame. DoD energy reform will continue, but the process will be
uneven and will proceed at an irregular pace. Technologies with clear benefits for operations in active
theaters of conflict today will receive the most attention, while the more important structural changes to
military practices and culture will receive inadequate levels of consideration due to barriers to reform that
exist inside the department. Though energy reform is in the short and long-run interests of the DoD,
inflexibility will prevent the department from adequately addressing the issue in the near term.
        In a market like the defense industry, where the structure resembles monopsony, one would
expect the consumer, the DoD, to dictate changes and trends in the market. Yet, because of the existence

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of new opportunities to generate profit and the responsiveness of private industry to these shifting
incentives, counterintuitively, it is likely that the coming shift toward energy efficient technology in the
defense industry will be led by private firms. In contrast to flexible actors in private industry, the DoD is
hampered by internal politics that prevent it from adjusting quickly to its interest in energy efficiency.
Private contractors are going to lead reform in the industry because of the DoD’s inability to act in its
own best interest at this time.
        Private contractor leadership in energy reform will likely exhibit itself in two general forms. The
first is that energy efficiency will become a central attribute and primary selling point of all new weapons
systems. Energy efficiency will no longer be a secondary issue and a concern of only specific projects; it
will be a core requirement of everything that contractors produce. Second, contractors will begin to
devote resources to increasing the military’s energy efficiency in the coming decade the way that they
devoted resources to increasing battle space information in the last. Over the last number of years a
central theme of contractors’ production has been increasing battle space information and situational
awareness of soldiers. In the same way, increasing the military’s energy efficiency will be a central theme
of contractors’ work in the coming decade. Contractors will focus efforts on developing technologies that
have the explicit purpose of making the military a more energy efficient organization.
        Structural energy reform in the Defense Department that will follow private contractors’ lead will
respond to the three main challenges listed in the paper’s introduction. The first is leadership. An energy
efficient DoD will have a centralized and empowered energy leadership that has a clearly defined role in
acquisitions and planning processes. Second, acquisitions and planning processes will fully account for
the true cost of energy according to the Fully Burdened Cost of Fuel. Last, increased energy information
and incentivization of usage habits at multiple levels of the Department will lead to a culture in which the
strategic value of energy is fully recognized.
        It is interesting to note that the future projected in this paper for the defense industry’s movement
toward energy conscious technology explicitly exhibits the exercise of private contractors’ influence over
the Defense Department. Private industry will be leading the DoD into development of a new field in the
defense industry precisely because private contractors see the opportunity to make profit in this field. In
the short-term, private industry, not the DoD, will dictate a shift in the development of the industry
according to its interests in profit maximization, not the DoD’s interest in defense. However, in this case,
the ability of private contractors to influence DoD acquisitions will actually benefit the military in
achieving its stated objectives with regard to energy reform.

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        The influence of defense contractors in DoD acquisitions decisions is, in this specific situation,
working in the military’s interest. This is because the longer term agenda has been set by the DoD. The
reason that private contractors have interest in leading this reform is that they know, from published
reports and statements from DoD leadership, that the DoD wants to initiate this reform and increase its
energy efficiency. The issue is that, in the short-run, there are constraints on DoD action that prevent it
from realizing these ambitions. The absence of these constraints in private industry allows it to initiate
change that is in the military’s interest.

Key Recommendations

    •   Private industry needs to work with Department decision-makers to implement contracting
        reforms to centralize energy efficiency contracts for military bases and other projects in order to
        increase the return on investment for private industry.

    •   Private industry and Department officials should continue to coordinate on novel financing
        arrangements to incentivize onboarding of energy efficient technologies that have a longer return
        of investment timeline.

    •   The DoD should institutionalize mechanisms for accountability at the highest levels while
        allowing innovation and adaptation to come from commanders at the ground.

    •   The DoD should develop a metric to assess energy efficiency’s impact on mission effectiveness
        and incorporate it into the Planning Programming Budgeting and Executions System and the Joint
        Capability Integration and Develop System.

    •   An internal governing structure for energy issues with a clear and defined role in the DoD
        decision-making process must be created. Implementing new acquisitions processes that measure
        fuel efficiency is essential.

    •   DoD leadership should encourage shifts in behavior at the local level by allowing commanders to
        reinvest funds saved through energy conservation into further efficiency measure.

    •   DoD leadership needs to communicate to private industry how it intends to change its
        acquisitions process and what features it will value differently in the future so that industry can
        respond accordingly.




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