FINANCING FOR CHP
CHP Financing Basics
While packaged CHP systems offer significant technical and economic benefits to end-users, the financing process for CHP projects can be complex and often misunderstood. End-users and developers must navigate a complex landscape of project financing options and provide detailed project information in order to acquire project funding. While there are many financing mechanisms available to CHP end-users, the best option is unique to each customer and depends heavily upon a number of factors such as available capital, the regulatory landscape, and the host/owner’s experience with project development. The graphic below highlights the CHP financing landscape and offers specific definitions and project examples for each option.
Source: Adapted from Better Buildings Financing Navigator, available at: https://betterbuildingssolutioncenter.energy.gov/financing-navigator/explore
Traditional Financing
Leases
A lease is a simple financing structure that allows a customer to use energy efficiency, renewable energy, or other generation equipment such as CHP without purchasing it outright. At the end of the lease, the customer may have the option to purchase the equipment, return the equipment, or extend the contract, depending on the type of lease used. Lease financing is offered by many equipment manufacturers and vendors as well as third-party lessors and is often used to finance smaller CHP projects where the energy cost savings from the CHP system offset the monthly lease payments. This results in a positive cash flow for the organization leasing the CHP system, and the owner of the system is also able to capture indirect tax benefits from the project. The three main types of leasing options available are capital leases, operating leases, and tax-exempt leases*. A capital lease is an extended equipment rental from a vendor or third party that appears as an asset (rather than debt) on the company’s balance sheet. Alternatively, an operating lease is an extended equipment rental from a vendor or third party that appears as an operating expense. Operating leases were commonly used as an off-balance-sheet treatment of a capital asset. Beginning in 2018, off-balance-sheet treatment for operating leases is longer allowed.
Debt Financing
Users can borrow money directly from banks or other lenders to pay for CHP projects. The user must then arrange the purchase, installation, and management of equipment by a third-party contractor or in-house staff. Loan terms and availability may be affected by the credit worthiness of the customer, limitations on debt that can be taken on the balance sheet, or current debts held by the customer. Commercial loan financing is offered by many equipment manufacturers, vendors, and contractors as well as third-party banks and lenders, typically provide financing for up to 80 percent or more of a system’s installed cost. Some state programs offer below-market loans for special purposes that may also be available to CHP projects. In addition to loans, public entities can raise money for CHP projects through tax-exempt government or private activity bonds. Bonds are used to fund some public sector CHP projects because the benefit of governmental bonds is that the debt carries an interest rate that is lower than commercial debt due to longer terms and government backing. Bonds issuers generally require additional qualification thresholds, strict debt coverage and cash reserve requirements.
Specialized Financing
Property Assessed Clean Energy (PACE)
Commercial PACE (C-PACE) is a financing structure that allows building owners to borrow money for energy efficiency, renewable energy, or CHP projects and make repayments via an assessment on their property tax bill. This financing arrangement then remains with the property even if it is sold, facilitating long-term investments in onsite energy systems and building performance. C-PACE may be funded by private investors or government programs, but it is only available in states or jurisdictions with enabling legislation and active programs. C-PACE financing for CHP and other energy projects can be beneficial because it allows for 100% funding of development costs and enables a secure funding mechanism implemented on a positive cash-flow basis.
Project Example: More Information:
Energy Services
Financing CHP projects through different types of energy services can offer off-balance sheet options that allows end-users to finance with little or no upfront costs and pay based on the actual performance of the system. These mechanisms all allow end-users to assume less performance risk and typically guarantee delivered energy over a certain period of time, although they differ slightly in their applications based on project size and cost.
Efficiency-as-a-Service is a pay for performance, off-balance sheet financing solution that allows end-users to implement energy efficiency projects such as CHP with no upfront capital costs. The energy services agreement (ESA) is the most common type of this arrangement where the developer pays for project development costs, and the end-user makes service payments that are based on actual energy savings or other equipment performance metrics (CHP efficiency, output, etc.) resulting in immediate reduced operating expenses.
Energy Savings Performance Contract’s (ESPC) are an additional energy service mechanism that can be used to finance CHP projects. Under an ESPC, an energy service company (ESCO) coordinates installation and maintenance of efficiency equipment in a customer’s facilities. The ESCO typically provides a savings guarantee. The improvements are usually owned by the customer and may be installed with little or no upfront cost if the ESPC is financed. ESPC’s are typcally used for larger, more complex projects with high upfront costs. Financing mechanisms within ESPC’s can also include operating leases and PPA’s.
A Power Purchase Agreement (PPA) is a financing mechanism in which a third-party developer installs, owns, and operates an energy system on a customer’s property and the customer purchases the electric or thermal output for a predetermined period of time. Under this arrangement, generally customer receives reduced energy cost and defined escalation terms with no upfront costs, and the system owner is able to take advantage of tax credits and receive income from energy sales.
Internal Funding
End-users can also choose to use existing internal financial resources to pay for CHP projects rather than seeking external financing. This is often the most simple and direct method for funding projects and allows the organization to capture the full financial benefits of energy projects rather than paying a portion to a financing provider. Methods for internal funding include operating or capital budget expenditures, self-funded energy savings performance contracts (ESPCs), capital investment funds or internal revolving loan funds, For many institutional organizations such as colleges & universities and city or state governments, internal funds often represent the lowest “cost of money” for funding CHP projects.
More Information
For more information on CHP financing frameworks and applications, please use the following resources.
- DOE Better Buildings Financing Navigator and Financial Ally Network – Joe Indvik, US DOE Better Buildings Initiative
- C-PACE Overview and Financing for CHP – Mackey Dykes, Vice President, Financing Programs, Connecticut Green Bank
- Third Party Ownership for CHP Projects – Jack Sins, Vice President, Business Development, Unison Energy
