/ Methodology for Conducting Cost Benefit Analysis to
Support Energy Security Investments

Chapter 1

Purpose, Introduction, and Literature Review

1.1 Purpose

The purpose of this research is to develop and articulate acost benefit analysis (CBA) methodologyspecifically for investments for energy security projects for the Department of the Army. Thisguide will assist Army analysts and agencies in preparing a CBA to support Army decision-makers in funding energy security focused capital projects. This guide will also assist analysts in identifying, quantifying, and evaluating the future costs and benefits of alternative solutions for energy security projects.

Energy security is one component of general physical security of installation that has recently gained great importance because of the fragility of the national power infrastructure. The United States (U.S.) Army’s energy security vision is “an effective and innovative Army energy posture, which enhances and ensures mission success and quality of life for our soldiers, civilians and their families through leadership, partnership, and ownership, and also serves as a model for the nation.”[1] In the context of this report we are focused solely on energy security for Army installations. Our working definition for energy security is that the “equipment and processes are in place to ensure power is available to an installation to accomplish its critical mission.”

This document/guide is intended for mainly in theoperational energy security functional areas. Note that this guide was written mainly by modifying the U.S. Army, Cost Benefit Analysis Guide, 3rd Edition dated 22 February 2012. That document was prepared by the Office of the Deputy Assistant Secretary of the Army (Cost and Economics) (U.S. Army, 2012). We simply edited that document to make it energy security specific.

All military operations require energy, and how the armed forces use this “operational energy” can enhance or undermine military effectiveness. Nonetheless, it is new for Department of Defense (DoD) components to consider operational energy as a distinct program or capability, rather than a commodity that can be included in military planning as an assumption. As described in the 2010 Quadrennial Defense Review (QDR), DoD energy security means having assured access to reliable supplies of energy and the ability to protect and deliver sufficient energy to meet operational needs. It is implicit in this definition that military energy security enhances and does not sacrifice other operational capabilities.[2] We are limiting our research and this publication to the operational needs of military installations.

1.2 Introduction

If the U.S. were attacked from an external, sophisticated enemy or even an internal, disgruntled employee, the energy grid would be an easy target to damage/destroy that would lead to catastrophic results. This could cut off power to military bases and greatly degrade our ability to project forces in addition to crippling the U.S. economy. Figure 1.1 graphically shows how power is currently distributed to most military installations. Creative economics, to include 3rd party financing, and engineering solutions are needed to finance these for strategic instruments to ensure the security of our installations, but to also comply with the myriad of regulations, orders, and laws that govern how they are operated. Also, as the largest single user of power and fuel, DoDmust take a leadership role in shaping the national energy debate and policy.

Figure 1.1 An installation that is dependent on external sources of power

Physical and cyber attacks to the energy grid and supporting elements is a long-known risk. Open sources report has disclosed to public they have information of cyber attacks against power system controls from outside the U.S. Multi-city outages and rolling blackouts have become more common. Natural and man-made disasters along with disgruntled employers are the primary threat to the grid along with sophisticated enemies such as China. Our current nation power infrastructure is fragile and not resilient – in a time of war it would be an easy and crippling first target. We, the DoD, must be prepared to execute our national security mission. Without power this is not possible. Table 1.1 contains a threat matrix as a function of physical, cyber, and natural attacks. The table shows the consequence and the target. From that table you can see that 1) critical infrastructure is probably the most vulnerable to a wide range of threats, 2) disruption can be caused by a host of people, 3) little differences between natural and man-made, and 4) cyber attacks are the most persuasive.

Table 1.1 Threat matrix as a function of modes (modified from Ramirez-Marquez, 2007)

Threat Matrix - Human
Mode / Consequence / Target
Threaten / Disrupt / Destroy/
Damage / Economy / People / Symbolic / Critical
Infra-
structure / Environ-
ment
Physical - Intended
Spies / X / X / X / X
Terrorists / X / X / X / X / X / X
Criminals / X / X / X
Vandals / X / X / X / X / X / X
Enemies / X / X / X / X / X / X
Disgruntled / X / X / X / X / X / X
Physical - Unintended
Software / X / X
Human / X / X
Organ / X / X
Info Tech / X / X
Hardware / X / X
Cyber - Intended
Hackers / X / X / X
Spies / X / X / X / X / X
Terrorists / X / X / X / X / X / X / X
Criminals / X / X / X
Vandals / X / X / X / X / X
Disgruntled / X / X / X / X
Enemies / X / X / X / X / X / X / X
Cyber - Unintended
Software / X / X / X / X
Human / X / X / X / X
Organ / X / X / X / X
Info Tech / X / X / X / X
Hardware / X / X / X / X
Natural
Hurricanes / X / X / X / X / X / X
Earthquake / X / X / X / X / X
Floods / X / X / X / X / X / X
Tornados / X / X / X / X / X
Drought / X / X / X / X / X
Fire / X / X / X / X / X
Volcanoes / X / X / X / X

In today’s resource-constrained environment, the Army must exercise wise stewardship of every dollar it manages. A key element in our stewardship is to develop and use sound CBA practices throughout all requirement/resourcing processes. For every proposed program, initiative or decision point that will be presented to decision-makers, it is important to provide an accurate and complete picture of both the costs estimates and the benefits to be derived.

A CBA provides decision-makers with facts, data, and analysis required to make an informed decision. Specifically, a CBA:

  • Is a decision support tool that documents the predicted effect of actions under consideration to solve a problem or take advantage of an opportunity.
  • Is a structured proposal that functions as a decision package for organizational decision-makers.
  • Defines a solution aimed at achieving specific Army and organizational objectives by quantifying the potential financial impacts and other business benefits such as:
  • Savings and/or cost avoidance,
  • Revenue enhancements and/or cash-flow improvements,
  • Performance improvements, and
  • Reduction or elimination of a capability gap
  • Considers all benefits to include non-financial or difficult to quantify benefits of a specific course of action (COA) or alternative.
  • An analysis of needs and problems, their proposed alternative solutions, and a risk analysis to lead the analyst to a recommended choice before a significant amount of funds are invested by the stakeholders.
  • Must be tailored to fit the problem, because finding the optimal solution is the focus of the CBA.
  • Supports the decision making process, but will not make a final decision. That will be the responsibility of the decision maker/leadership.
  • Is not a substitute for sound judgment, management, or control.

The Office of the Secretary of Defense (OSD) as well as the senior leaders of the Department of the Army (DA) have mandated the use of CBAs to support resource decision making. Thisguide is applicable to a wide range of energy security requirements, issues, tasks, and problems that require a deliberate analysis to arrive at the optimum course of action.

This guide describes a CBA process that comprises eight major steps.

  1. Define the problem / opportunity, to include background and circumstances,
  2. Define the scope and formulate facts and assumptions,
  3. Define and document alternatives (including the status quo if relevant),
  4. Develop cost estimates for each alternative (including status quo if relevant),
  5. Identify quantifiable and difficult to quantify benefits,
  6. Define alternative selection criteria,
  7. Compare alternatives, and
  8. Report results and recommendations.

These eight steps are shown graphically in Figure 1.2.

Figure 1.2 The eight step CBA process (U.S. Army, 2012)

When this guide refers to the Army enterprise, it means that initiatives should be evaluated based on the benefits they provide to the Army as a whole, not to any individual organization. A CBA makes the case for a project or proposal, weighing the total expected costs against the total expected benefits, over the near, far, and lifecycle timeframes, from an Army enterprise perspective.

Energy security is particularly challenging. Like aesthetics it can often be hard to quantify. Many of the benefits must be expressed in non-economic terms and are difficult to quantify. However, it is a component of ability to project forces and conduct the mission of the armed forces.

1.3 Documenting a CBA

The preferred method of documenting a CBA is through the use of narrative document such as a report. In general, a narrative description better details the situation and analysis that are necessary for a CBA. In Appendix A, this guide includes an example CBA focused on energy security.

The final CBA presented to the decision maker must provide a recommendation that meets the objective of the CBA, as well as a value proposition that supports the recommendation. A value proposition is a clear statement that the benefits more than justify the costs, risks, and tradeoffs/billpayers. In other words, a value proposition is a short statement that describes the tangible results/value a decision maker can expect from implementing the recommended course of action and its benefit to the Army. A value proposition should tell the decision maker exactly what can be achieved by implementing the recommended course of action.

An example of a strong value proposition is: “By burying power lines from Fort YYY installation’s main transformer to the power distribution substation at XXX Airbase, the amount of time the airbase and supporting facilities will be without electric on average will be reduced from .6% (52 hours) to .3% (27 hours) annually.” It is specific, and reports tangible, attractive results.An example of a weak value proposition is: “By burying power lines from Fort YYY installation’s main transformer to the power distribution substation at XXX Airbase energy security will be increased.”

1.4 Literature Review

Identify quantifiable and difficult to quantify benefits (Step 5) is by far the biggest challenge for conducting CBA analysis of energy security projects. Basic engineering economics and decision analysis tools exist for conducting the other steps in the CBA process and are well understood. However, research is needed to describe the quantifiable (both economic and non economic) as well as difficult to quantify aspects of energy security projects.

The literature contains many references on how to quantify energy security especially from a national strategic perspective. For example the Nautilus Institute for Security and Sustainable Development (1998) presents a comprehensive review of the state of the art and makes the conclusion that there are no real analytical techniques for quantifying the value of energy security. Also, Hughes (2009) presents an Analytical Hierarchy Process very similar to the technique we are proposing. However, that work was mainly focused on national energy security.

The US Army Corps of Engineers came up with an analysis of the energy security on Army installations. They discussed the information mentioned earlier in our report including the possibilities of “islanding”. This report then lists the different alternatives that they will use before applying their criteria to them. However, when they get to this point, each alternative has three options for each criterion. Either it is “good” with that criteria, “no go”, or is somewhere in the middle. This does not take into account the range that these alternatives can fall on. However, that they used a large number of alternatives is the best idea to come out of this report.

The Department of Energy (2006) has developed an energy security assessment guide. This guide is designed for federal installations to support:

  • Initiation of the energy security assessment process,
  • Vulnerability assessment,
  • Energy preparedness and operations planning,
  • Remedial action plans, and
  • Management and implementation.

This report gives a detailed process for conducting vulnerability assessment planning, illustrated in Figure 1.3. However, it does not contain any type of methodology for assessing technologies that mitigate these vulnerabilities. The report does address another interesting concept; the synergism between security and environmental issues.

Figure 1.3 Energy security program flow diagram modified to show the transition from the

vulnerability assessment to remedial action[3]

James Lambert, in his report titled “Energy Security of Military and Industrial Systems: Multicriteria Analysis of Vulnerability to Emergent Conditions including Cyber Threats”, chooses to distinguish emergent conditions (conditions that may develop and affect investment decisions in the future) as either evidence-based or based upon the “subjective advocacy positions of the various stakeholders” (Part II: Background). The general approach of the report focused more on deciding which portfolio of investments best matches a given future scenario best summarized as: “a set of scenarios comprised of emergent and future conditions that influence energy security” (Part III: Technical Approach).

Lambert states that the results from this report present the stakeholders with a set of high performing alternatives, as well as a small set of scenarios that need to be more carefully studied. The difference that makes itself apparent between our report and theirs is that we are trying to maximize desirable achievement with one energy portfolio as dictated by the stakeholders. For instance, if we consider cyber threats to become more significant in the future, then we can increase our share in a portfolio that is more secure against them by increasing the weight of resistance to them. We have explored different future scenarios by generating alternative weights to use if the stakeholder is more concerned with achieving Netzero or energy security.

Alsfelder, et al (2012) used a multi objective decision analysis (MODA) and data envelopment analysis (DEA) to evaluate value as a function of life cycle costs of different energy security measures and renewable energy for military installations. This portfolio approach in an effort to capture both the true costs and to develop technology feasible alternatives. This study will propose methods, processes, and tools for the decision makers to compare the portfolios’ value and cost effectiveness. This paper will culminated in a demonstration of the methodology to illustrate its’ utility using Fort Carson. Unfortunately, this methodology was developed for integrated portfolios of projects and did not work well for single projects.

Chapter 2

Step 1 in the CBA

Define the Problem/Opportunity and

Describe the Background

2.1 Problem or Opportunity Statement

The first and one of the most important steps of the CBA process (see Figure 1.2) is to define the initiative or proposal using a problem or opportunity statement. A problem statement clearly defines the problem, mission need, and required capability. An opportunity statement is similar to a problem statement, but is focused on taking advantage of a favorable situation. When developing a problem or opportunity statement, the key is to state the problem or opportunity in terms of the organization’s mission that requires a solution to describe what the effort intends to accomplish.

  • What required performance or outcome is not being achieved?
  • What is the perceived vulnerability gap?
  • Who and what are impacted by this problem?
  • Specifically, who are the customers or stakeholders?
  • Briefly describe the process for providing the procedure, product or service where the problem or improvement opportunity occurs and how and why it occurs.

Example of a weak problem statement: “By installing solar cells we can improve energy security.” This statement is vague, does not identify the problem, and does not propose a solution to the problem.

An example of a good problem statement with respect to energy security might read as “For the last five years, on average Fort XXX has lost power for 60.3 hours (32% was during normal working hours) for greater than 50% of the base due to downed power lines on post. This has affected quality of life and the ability of the XX Division to conduct training missions and in a time of war could preclude power projection.” Note that the problem statement does not propose a solution.

The problem/opportunity statement should also be defined using clear, results-oriented language and be unbiased as to a recommend solution. The more precisely the problem/opportunity can be defined, the greater the likelihood that the analysis will meet the needs of the decision maker.

2.2 Objective

The objective statement describes the purpose of the CBA: what is the decision to be made, and how does the CBA inform and support it? What is the purpose of the analysis?

Examples of objectives that may be appropriate:

  • To inform Congressional decision on funding for energy security projects at Fort Benning.
  • To inform senior leader decision on the use of renewable energy and how that relates to energy security at Army installations.

The CBA preparer should identify key stakeholders early in the CBA development process. The decision-maker is one of the most important, if not the most important, stakeholder. They are the ones who best define the problem/opportunity and determine if the CBA is solving the right problem (or capitalizing on the right opportunity). The stakeholder’s opinion in terms of what is important to them is of critical importance to the outcome of the CBA. The decision-maker must have an understanding of how to use the CBA once it is complete and how it will be implemented. The decision-maker does not need to understand the detailed analysis techniques used in the CBA, but should feel comfortable with the conclusions offered. The term “Voice of the Stakeholder” (VOS) is a phrase that is often used to describe their needs and desires. The VOS is an important input for developing the selection criteria (also known as evaluation / decision criteria) and identifying the benefits that will result from solving the problem (or opportunity). Besides providing guidance to the CBA preparer, the stakeholders also help determine/validate the criteria which will be used to evaluate and compare CBA COAs. Decision criteria are an outcome of the “Voice of the Stakeholder”. Needs and requirements of the Stakeholders should be translated into the means of evaluating COAs.