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Technical
Professionals - Project Financing
 A
wide range of options is available for financing CHP projects. These
options include the following:
Bank
Loan
Commercial
banks will be glad to provide loan to pay for some or all of the
cost of installing a CHP system. Availability of this option depends
on the credit history and financial statements of the borrower and
the cash flow expected to be available to pay the loan amount and
the interest on the loan. The borrower also has to be able to provide
collateral that the bank will receive if the loan is not paid back.
Typically, the loan is paid back by fixed payments (principal plus
interest) every month over the period of the loan term, regardless
of the actual project performance. For small businesses, the Small
Business Administration (SBA) can guarantee bank loans up to $750,000
for energy efficiency projects. The SBA guarantee could favorably
impact the borrower's ability to secure loan.
Leasing
Building
owner may lease a CHP system. The lease payments may be bundled
to include maintenance services, property taxes and insurance. There
are many types of leases: capital equipment, operating, municipal,
and leveraged.
The general
characteristics of a capital lease are as follows:
- Appears
on the balance sheet as debt for purchase
- Requires
transfer of owner at the end of the lease
- Specifies
the terms of future exchange of ownership
- Lease
term is at least 75% of the equipment life
- Net
present value of lease payments is about 90% of the equipment
value
An operating
lease appears as an operating expense in the financial statement.
A municipal lease is tax-exempt and offers below-market rates. In
a leveraged lease, the lessor puts up a minimum amount of its own
equity, borrows the rest of the project capital from a third party,
and is entitled to the tax benefits of asset depreciation.
Partnership
In a partnership
financing, the members of the partnership pool their money to invest
in one or multiple projects. This approach lends itself to strategic
alliances among major suppliers of fuel, equipment, and services
for a project. The rate of return on the investment depends on the
economic performance of the project and therefore, there is no guaranteed
rate of return.
There
are two options in forming a partnership for installing and operating
CHP systems: general and limited. In a general partnership, all
partners have unlimited liability. In a limited liability partnership,
liabilities of the partners are limited to their investment in the
partnership.
Joint
Venture
A joint
venture is like a partnership that dissolves when the project is
completed.
Vendor
Financing
In vendor
financing, the vendor of an integrated CHP system or a major component
of the system provides the financing for a project. Vendors could
provide financing at attractive low costs to stimulate markets.
Vendor financing is very common for energy technologies. Vendor
financing is generally suitable for small projects up to up to $400,000.
Some large vendors do provide financing for larger projects.
Bonds
Bonds
are interest-bearing certificates sold by corporations and government
(city, municipality, county, state, school districts, and statutory
authorities) to raise money for projects. There are two types of
bonds: general obligation and revenue.
General
obligation bonds are issued by state or local governments and paid
out of a general fund. These bonds are paid by secured assets or
by the taxing power of the government. Since general obligation
bonds could result in increased taxes, taxpayers generally resist
issuance of this type of bonds.
Revenue
bonds are paid back by the revenues generated, or savings achieved
from the project implementation. These bonds do not require increased
tax burden, are generally issued by public utilities and much are
easier to issue than general revenue bonds.
Energy
Savings Performance Contract
Energy
Savings Performance Contract (ESPC) is a contract in which an energy
service company (ESCO) finances the whole project and gets in return
a share of the energy cost savings. This type of contract provides
building owner the assurance of the CHP system performance. It mitigates
the risks associated with new technologies for the building owners
and allows operation and maintenance of the new system by the ESCO
specialists. For more information on the services provided by ESCOs,
visit the Website for Rebuild
America.
The Federal
Energy Management Program (FEMP) of the U.S. Department of Energy
has signed indefinite quantity contracts with ESCOs on a regional
basis. For more information on financing federal projects using
ESCOs, visit the FEMP
website.
Utility
Program
Most utility
companies now have unregulated energy services business. Through
this business, utility companies can arrange project financing.
To provide such a financing, utilities secure long-term contracts
and ordering agreements from customers to sell electric power and
other services.
Utilities
might offer incentives for CHP systems as part of demand side management
(DSM). They might offer technical assistance, low-cost financing
or rebates to encourage integrated CHP systems in their service
territories. They might also offer CHP services through tariffs
approved by state utility commissions.
The Federal
Energy Management Program (FEMP) of the US Department of Energy
offers policy guidance, training, sample agreements, and technical
assistance to federal agencies in negotiating utility energy services
contracts (UESCs). For more information on financing federal projects
using UESCs, visit the FEMP
website.
End-Use
Purchase (Chauffage)
In this
program, a building owner purchases the benefits of a CHP system
(electricity, cooling, or heating) rather than financing and purchasing
the equipment to achieve the benefits. In this approach, the risk
of project nonperformance falls totally on the owner/operator of
the equipment.
Grants
Sometimes,
government provides grants to promote new technologies that produce
overall benefit for the general public. These grants are generally
awarded through competitive procurement. Some grants might also
be available from environmental or philanthropic organizations.
Some equipment suppliers might donate their equipment. Grants and
donations are generally sought by not-for-profit organizations or
other organizations that offer a rare opportunity to showcase a
project to large number of visitors.
Enhanced
Leasing
Enhanced
leasing is a project financing approach used primarily by the Veterans
Administration (VA). This approach provides VA with a proven method
of leveraging the VA's real estate portfolio and market position.
For more information on enhanced leasing visit the VA
Website.
Appropriations
Some organizations
appropriate their own funds to purchase a system outright. A decision
to appropriate funds is made on the basis of the organization's
"minimum attractive rate of return" (MARR). Federal governments
can appropriate funds and this approach represents the lowest cost
of money because the government's MARR is that for a treasury bill
of a comparable term.
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