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Internal Debt Financed CHP Project Example

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Internal Debt Financed CHP Project Example

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.

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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.