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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:

Traditional Financing


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.

Project Example: The city of Dublin, Ohio established a lease agreement with IGS Energy to install a 248 kW CHP system at the local recreation center in 2014. The lease agreement is for 15 years, and IGS assumes the performance risk for the CHP project. Dublin forecasted energy cost savings from the CHP system at $19,000/year due to the agreement’s fixed electricity costs for the first five years compared with expected increases in electricity rates.
city of Dublin

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.

Project Example: The University of Alaska Fairbanks (UAF) replaced its existing boilers, in 2018, with a CHP plant producing 240,000 lbs/hr of steam and a steam turbine delivering 17 MW of electricity. The total project cost was ~$245 million and was financed through a mix of general funds and bonds. The Alaska Legislature reviewed and approved state financing options for the project in 2014 and provided UAF with $157.5 million of revenue bond issuance authority for the project. UAF makes payments on the debt out of savings realized through roughly $4.5 million in reduced annual fuel costs. University of Alaska Fairbanks

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:
Project Example: Meriden YMCA in Meriden, CT installed a 60 kW CHP system alongside energy efficient lighting upgrades in 2015 using C-PACE financing. The total project cost was ~$330,000 and provided roughly ~$34,450 energy cost savings per year from both the CHP and lighting upgrade. The C-PACE financing term is for 19 years, and the annual C-PACE assessment for the combined project is $27,321. asdf

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.

Project Example: The $36.6 million Aberdeen Proving Ground project was financed through guaranteed energy savings using an Energy Savings Performance Contract (ESPC) between the U.S. Army Corps of Engineers and Johnson Controls. The CHP plant generates 7.9 MW of electricity and produces 34,600 lbs/hr of 350 psig steam unfired and 93,900 lbs/hr with natural gas duct burner supplemental firing. The customer also is directly benefited from $2.5 million in incentives from BGE SmartEnergy Savers Program. Aberdeen Proving Ground

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.

Project Example: Unison Energy provided financing for the Gaylord National Harbor Resort and Convention Center’s (National Harbor, MD) 6 MW CHP microgrid through an ESA approach. Unison designed, built, and currently owns the three 2 MW generators, and sells the electricity and thermal energy to the resort. The CHP system offers significant resilience benefits to the resort and convention center, with the ability to operate in both load following and island mode and provides ~85% of the building’s energy needs. Unison Energy

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.

Project Example: The University of New Hampshire (UNH) Durham Campus self-financed their 12.5 MW CHP system for ~$28 million, which was installed in 2006. UNH also launched the EcoLine project in 2009 to provide landfill gas for the CHP system. The entire project had an estimated payback of ~10 years and allows UNH to sell renewable energy credits (RECs) from EcoLine’s generation to help finance the capital cost of the project. University of New Hampshire

More Information

For more information on CHP financing frameworks and applications, please use the following resources.

CHP Financing Primer: While the technical and economic benefits of combined heat and power (CHP) projects are well documented, the financing process often misunderstood and frequently not given sufficient attention. CHP developers must navigate a complex landscape of project financing alternatives and provide detailed project information in order to attract investors. Inadequate information can cause project delays, leading investors to offer less favorable financial terms, or even decline a CHP investment opportunity all together. CHP developers can increase the likelihood of getting a CHP project financed if they carefully plan and prepare, pay attention to detail, and build and maintain relationships with lenders and investors. Details financing options available for CHP including financial metrics and considerations used to assess projects, a CHP project due diligence checklist, and project profiles highlighting the business case for CHP.
Better Buildings Financing Navigator: Through the Navigator, users can also connect to the larger Better Buildings Challenge Financial Ally community, which includes banks and lenders that are committed to making bold financial investments in efficiency and renewables and are actively pursuing new opportunities to finance projects. The Navigator is designed for anyone who wants to access financing for energy efficiency and renewable energy projects or learn more about the marketplace in general, including building owners, facility and energy managers, sustainability directors, executives, contractors, consultants, brokers, researchers, and other decision-makers.
CHP Financing Webinar: Provides an overview of CHP Financing Strategies, Solutions, and Case Studies. The webinar will include:
  • 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
Connect with Financial Allies: Find a list of the Better Buildings Financial Allies—market-leading financing companies that have committed to funding energy efficiency and renewable energy projects. You can filter the Allies based on the financial products they offer, sectors they serve, technologies they finance, and locations they serve. Selecting multiple boxes within a single category will expand the list, whereas selecting boxes across categories (e.g. across Products and Sectors) will narrow the list.