When embarking on energy efficiency projects, such as the installation of a combined heat and power (CHP) system, financing tends to be one of the biggest obstacles. It can be an arduous task to distill through all the financing options and accounting treatments, while understanding the differences in cash flow and rate of return that each option can bring to the table.
Since each organization is different, below is a quiz that can help you get started to figure out what financial solution works best for your CHP project and your organization.
Property owners who self-finance will own the asset, will pay for upfront design, engineering, construction and installation, and will operate and maintain the CHP system over its useful life. Property owners can contract out O&M services that can help optimize equipment usage. The benefit of self-financing is that the property owner benefits from all energy savings and returns.
POWER PURCHASE AGREEMENT
A power purchase agreement (“PPA”) allows for a third party to own the CHP asset and sell energy back to the property owner. Pricing on a PPA is set on a per unit basis and matches market electricity and thermal rates. Sometimes PPAs can be priced at a discount of market depending on the PPA provider. This option removes operation and maintenance responsibility from the building owner, but also reduces the overall returns and energy savings.
ENERGY SAVINGS AGREEMENT
An energy savings agreement (“ESA”) creates a pay-for-performance financing vehicle that uses energy savings earned to pay back upfront capital. ESA’s can provide 80-100% of upfront development and construction costs. After the project is operational, the property owner uses a portion of the realized savings from reduced energy consumption to make monthly payments. ESA payments are based on actual energy units saved. The financing structure is an off-balance sheet solution and will be dependent of further modeling of savings generated by the CHP system. The property owner has the option to own the asset. The operations and maintenance of the system can be included in the service price.
Property assessed clean energy (“PACE”) financing allows property owners to fund CHP projects with no up-front costs. With PACE, property owners living within a participating district can finance up to 100% of their project and pay it back over time as a voluntary property tax assessment through their existing property tax bill. The debt does appear as a liability on the balance sheet. The tax assessment is considered an operating expense. GI Energy recommends a discussion with the city or county where the subject property is located in order to understand the municipality’s ability to enter into a special property assessment tax.
Equipment loans are cost effective and time sensitive. Rates can be very competitive given the property owner’s credit quality. Typically, equipment loans require a lien of the equipment and will require the property owner to own the underlying asset. The property owner will be responsible for operations and maintenance and overall long-term costs of the equipment.
Capital Leases are similar to equipment loans. Financing is cost effective and time sensitive. Rates would be very competitive given strong credit quality. Based on a 10-year maturity GI Energy’s leasing partners have typically quoted an interest rate range between 5-7%. A capital lease is an on-balance sheet solution and will require a lien of the CHP equipment.
ENERGY EFFICIENCY 0% LOANS
Certain state energy efficiency programs offer 0% or 1% interest rate loans to nonprofit entities undertaking a CHP project. The loans would be through the city or county’s bond program and will be recourse to the property owner and will have a maximum term of 20 years. The loan must be repaid from energy savings and will not require additional collateral. Energy Efficiency loan programs can take significant time to close and should be factored into the implementation timeframe. The property owner maintained ownership of the asset and is responsible for operations and maintenance.
TAX EXEMPT LEASE PURCHASE
A tax-exempt lease-purchase (“TELP”) offers nonprofits access to an operating lease program that leverages energy savings costs to repay lease payments. Since energy costs are seen as an operating expense and often tied to utility budget, TELP’s can be documented as operating leases, also known as off-balance sheet leases. The property owner maintains ownership and will need to operate and maintain the equipment. Rates are better than commercial leases due to the tax-exempt designation on the property owner.
Choosing the best financing option for your clean energy project can be a complex task. If in doubt, contact GI Energy today so that we can help you better understand the options available, and work with you make the best decision.