Leased CHP Project Exampleback to Financing Main Page
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.
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.