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 of a treasury bill of a comparable term.

Commercial banks will be glad to provide loans 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 a loan.

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.

In this arrangement, 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 equipment owner/operator rather than the building owner/operator.

An Energy Savings Performance Contract (ESPC) is a contract in which an energy service company (ESCO) finances the whole project and in return gets 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 and how to locate one, visit the Website for the National Association of Energy Service Companies.

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.

Enhanced leasing is a project financing approach used primarily by the U.S. Department of Veterans Affairs (VA). This approach provides VA with a proven method of leveraging the VA's real estate portfolio and market position.

Sometimes federal, state, and local governments 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 for new or innovative projects. Grants and donations are generally sought by organizations that offer a rare opportunity to showcase a project to large number of visitors. You may wish to contact us to see if we know of any grants that may apply to your situation.

A joint venture is like a partnership that dissolves when the project is completed.

Building owners 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 including 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.

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.

Tax policies can significantly affect the economics of investing in new onsite power generation equipment such as CHP. CHP systems do not fall into a specific tax depreciation category, and their depreciation periods can range from 5 to 39 years. These disparate depreciation policies may discourage CHP project ownership arrangements, increasing the difficulty of raising capital and discouraging development.

Depreciation takes into account that the decreased worth of the CHP equipment caused due to wear and tear, and allows businesses to register a fair current value when assessing the overall net worth of the company. That amount of depreciation is often allowed as a tax deduction for that particular calendar year. The straight-line depreciation method spreads the cost evenly over the life of an asset. Accelerated depreciation method of depreciation allows greater deductions in the earlier years of the life of the CHP equipment

Related resources:

• Tax Incentives Assistance Project

Many utility companies now have an unregulated energy services business. Through this business, utility companies can arrange project financing. To provide such financing, utilities secure long-term contracts and ordering agreements from customers to sell electric power and other services.

Regulated utilities might offer incentives or preference for CHP systems as part of demand side management (DSM) or standard offer programs. They might offer technical assistance, low-cost financing or rebates to encourage integrated CHP systems in their service territories. They might also give preference to CHP adoptors throughfeed-in tariffs or portfolio standards 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.

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.