ESP-Facilitated Financing - One feature of EPC that the ESP can bring to the table is their relationship with financial partners who are interested in financing good projects. The financing will typically take the form of one of the options below. It may not be the lowest cost option, but the convenience of working with a lender who is comfortable with performance contracting and the ESP makes this a frequent choice
Tax Exempt Lease Purchase (TELP) Agreements - Also known as municipal leases, these are perhaps the most popular option for financing performance contracting. Further, the effective interest rate is reduced because interest payments received from the government are exempt from federal income tax. In most states, TELPs are not considered debt and rarely require public approval. If funds are not appropriated to pay the lease in future budgets, the equipment is returned and the lease is terminated. For this reason, these leases are usually limited to equipment that is essential to the operation of the entity. To learn more, see this US DOE web page on Leasing Arrangements.
Capital Leases - Capital leases are common in performance contracting. The lessee (the entity using the equipment) assumes many of the risks and benefits of ownership, including the ability to expense both the depreciation and the interest portion of the lease payments. The equipment and future lease payments are shown as both an asset and a liability on the lessee’s balance sheet, and the lease payments are classified as capital expenses. Capital leases often have a “bargain purchase option” that allows the user to buy the equipment at the end of the lease at a price below market value.
Operating Leases - In these leases, the entity providing the equipment retains full ownership, so it does not appear as an asset or a liability on the user’s balance sheet. This can appeal to users that are near their borrowing capacity. There are specific IRS rules regarding when a lease can be treated as an operating lease versus a capital lease. Payments on an operating lease are usually less than for capital leases and loans, since the lessor owns the asset and the user is not paying to build equity. It is assumed that the residual value of the asset can be recovered at the end of the lease. Because of this, operating leases are typically limited to equipment with substantial residual value.
Montana Alternative Energy Revolving Loan Program - This program, administered by Montana DEQ, is for local governments, schools, and universities. Loan amounts of up to $40,000 are available on up to 10 year terms at a low interest rate (3.25% in 2017). Up to 20% of the loan can be for energy efficiency, with the rest being renewable energy. To learn more, go to the DSIRE Alternative Energy Revolving Loan Program web page.
Revenue Bonds - These are bonds with repayment tied to a specific revenue or cost savings stream. For example, cost savings from an EPC project can be pledged to pay off a bond. Because the bond issuer’s repayment obligation is limited to a specific revenue stream, revenue bonds are often viewed as higher-risk than a general obligation (GO) bond that can be repaid from general tax revenues, resulting in a higher interest rate cost. Revenue bonds may or may not require voter approval. See this US DOE web page on Bonding Tools.
Qualified Energy Conservation Bonds (QWCBs) - QECBs are subsidized by the federal government. State, local, and tribal governments can sell QECBs up to a certain dollar value that is based on their population. QECBs are direct-subsidy bonds, meaning that the issuer receives a direct rebate from the U.S. Treasury, essentially reducing the cost of borrowing. QECBs can be a valuable source of low-cost loan capital. For more information on QECBs, visit US DOE QECB and CREBS Primer.
Clean Renewable Energy Bonds (CREBs) - CREBs may be issued by state, local, and tribal governments to finance renewable energy projects. The bondholders receive federal tax credits, enabling the issuer to pay the bondholders a below-market interest rate. The issuer remains responsible for repaying the principal reduced interest on the bond. To learn more about CREBs, visit the DSIRE CREBS page or this US DOE QECB and CREBS Primer.