The National Aeronautics and Space Administration plans to retire the International Space Station by the end of this decade, so the U.S. space agency is turning to private companies to build new space stations in orbit – and expects to save more than $1 billion annually as a result.

NASA unveiled earlier this year the Commercial LEO Destinations Project, which will award as much as $400 million to four companies for development of private space stations.

CNBC spoke with Phil McAlister, the director of commercial aerospaceflight. He said NASA had received about 12 proposals for the contract.

McAlister stated that the industry responded strongly to NASA’s announcement about commercial, non-commercial fliers which go to orbit. “I can’t remember the last time we got that many proposals [in response] to a [human spaceflight] contract announcement.”

NASA spends approximately $4 billion annually to run the ISS, which is over 20 years old. With a possible extension of its lifespan to 2028, the space station will be able to remain in operation through 2024. McAlister stated that NASA would prefer to “be just one user” rather than the primary sponsor for infrastructure and supporter of stations in low earth orbit.

McAlister stated that the strong response from the industry shows that the plan to withdraw the International Space Station by the end of the decade and to transition to commercial space destinations was a feasible, solid plan.

McAlister said that “we are making tangible advances on developing commercial spaces destinations where people can live, work, and play.”

McAlister indicated that NASA was currently evaluating these proposals. He said NASA hopes to announce contract winners before the end of this year, although they are “pushing for sooner.” McAlister pointed out that there were dozens of proposals, from small start-ups all the way up to big aerospace companies. When NASA hosted an industry briefing for company officials in March, interested parties included recognizable names like Elon Musk’s SpaceX, Jeff Bezos‘ Blue Origin, Airbus, Boeing, and Lockheed Martin.

McAlister stressed that NASA will not require anything as large and capable as the ISS in order to save money. McAlister stated that private space stations could be quite large but NASA would only pay for what NASA needs.

“We need to right size our [low Earth orbit] infrastructure,” McAlister said.

NASA last year estimated that the Commercial Crew program alone saved the agency between $20 billion and $30 billion, while funding development for two spacecraft, rather than just one. While Boeing has yet to complete development testing – suffering an extended setback after its first uncrewed Starliner capsule launch in December 2019 failed due to multiple anomalies – SpaceX’s Crew Dragon spacecraft has flown 10 astronauts to the ISS for NASA, as well as four private astronauts to orbit last week.

McAlister said that SpaceX will pay part of the cost to help companies construct new stations. The agency is not expected to cover the whole bill.

McAlister explained that the agency must find the “sweet spot” in terms of sharing resources as well as sharing risk and responsibilities so both can profit.

McAlister said that the cost sharing was an explicit part of the announcement. We do not expect to pay for all commercial destinations. As the companies will own all intellectual property, and the ability to market that capability to other customers than NASA, we don’t believe that is appropriate.

As a guide, the Commercial Crew program is used to help with the Commercial LEO destinations project. At first NASA gave contracts to five companies for Commercial Crew. Then it gradually reduced that number to just two.

McAlister explained that having competitors makes sense when you’re so young.

NASA perceives companies’ strong interest as an indicator that the U.S. is technically and financially capable building commercial space destinations, McAlister stated. It would also decrease NASA’s financial commitments to research and science in orbit.

“Then we can use that savings – that we project to be on the order of a billion to a billion-and-a-half dollars [annually] – for our deep space missions and aspirations,” he said.

NASA has already begun funding the ambitions of one company under a separate but related contract, having awarded Axiom Space with a $140 million to build modules that will connect to the ISS. Axiom will detach the ISS modules from its space station and make it a flying free-flying space station when it is retired.

Axiom is currently manufacturing the modules. This includes large windows for an observation deck. The company plans to launch and connect the first habitable module to the ISS by 2024, under the assumption that Congress provides the necessary funding to extend the space station’s life to 2028.

“We need the ISS extension, because we are not going to be ready with these [independent] destinations by 2024,” McAlister said.

The House of Representatives’ Science, Space, and Technology committee is hosting a hearing on ISS extension on Tuesday, with expected testimony from NASA’s ISS director Robyn Gatens, NASA astronaut Kate Rubins, and Nanoracks CEO Jeff Manber.