Combined Heat & Power (CHP) Generator Financing

Grid power is purchased at somewhere between 30 and 40 percent efficiency after accounting for transmission and generation losses. A combined heat and power (CHP) system, burning natural gas in an engine-generator and capturing the heat from the exhaust and jacket water to displace boiler fuel, achieves total system efficiencies of 70 to 85 percent from the same fuel input. For a large hospital, university campus, or industrial facility with simultaneous high electrical and thermal loads, the math on CHP can be compelling enough to justify a capital investment of several hundred thousand to several million dollars.

We fund CHP generator systems from the $50,000 minimum through multi-megawatt cogeneration projects, including the engine-generator set, heat recovery equipment, and the electrical interconnect hardware. For projects above our application-only threshold, we move to a fuller financial package but still underwrite faster than a conventional bank. Buyers ranging from independent energy developers to hospital systems to manufacturing plants have used our financing to get CHP systems running. Tell us the kW rating, the fuel, and the heat recovery application, and we structure the deal from there.

How CHP Systems Are Built and What They Cost

A CHP system centers on a prime-mover, almost always a natural gas reciprocating engine for systems in the 30 kW to 5,000 kW range (larger systems may use gas turbines). The engine drives a synchronous generator to produce electricity. Exhaust gases leave the engine at 700 to 1,000 degrees Fahrenheit and pass through a heat recovery silencer or exhaust heat exchanger that transfers thermal energy into the facility's hot water, steam, or absorption chilling system. Jacket water and oil cooler heat is also recovered through a separate heat exchanger, further boosting the thermal recovery fraction. Together, exhaust and jacket water recovery typically captures 40 to 50 percent of the fuel's energy as usable heat.

Engine platforms from Caterpillar (G3500 series), Cummins (various natural gas models), and Jenbacher (GE/INNIO) cover the majority of the installed CHP market in the 100 kW to 5,000 kW range. Smaller systems in the 30 to 100 kW range often use Kohler, MTU, or Tecogen platforms. Microturbine CHP systems from Capstone are used in applications where very low emissions and low maintenance are the priority; their electrical efficiency is lower than reciprocating engines but their thermal output is high and their maintenance intervals are extremely long.

Total installed costs for a packaged CHP system typically run from $1,500 to $2,500 per installed kW for reciprocating engine systems, meaning a 500 kW system might cost $750,000 to $1.25 million fully installed. The generation equipment itself (engine, generator, heat recovery hardware) is usually 50 to 60 percent of that total, with the balance going to electrical interconnect, piping, controls integration, and commissioning. We finance the generation equipment portion of CHP projects directly and can discuss options for packaging the full installed cost with our broader project financing relationships.

Facilities That Benefit Most from CHP

The ideal CHP host is a facility with high, consistent electrical and thermal loads that run year-round rather than seasonally. Hospitals and healthcare campuses are the textbook CHP application: continuous high electrical demand, year-round hot water and space heating, sterilization steam loads, and in warm climates, absorption chilling. The thermal load never goes away, which means the CHP system runs continuously rather than seasonally, improving the economic return on the capital investment.

Universities and institutional campuses with central plant infrastructure are equally strong candidates. Combined electricity, space heating, and domestic hot water loads across multiple buildings served from a central plant can support CHP systems in the 500 kW to several-megawatt range. Several major university campuses have installed multiple MW of CHP capacity and achieved utility bills measurably lower than comparable campuses relying entirely on grid power.

Industrial facilities in food processing, cold storage, chemical manufacturing, and pulp and paper operations have large process heat demands that make them natural CHP candidates. A food processing plant running steam cooking and refrigeration compressors simultaneously has thermal and electrical loads that match the CHP output profile closely. The payback period on a well-sized CHP system in an industrial facility with high utility rates can be four to seven years, which is short enough to justify financing rather than waiting to save the capital.

Financing Structures for CHP Projects

CHP financing can take several forms depending on who owns the system and how the energy savings are accounted for. Direct equipment purchase via an equipment loan is the most straightforward: the facility owns the system, claims the depreciation, and pockets all the energy savings. Section 179 and bonus depreciation have historically been significant benefits for CHP purchasers, as the equipment qualifies as business property in most configurations and the first-year deduction can materially improve the after-tax payback calculation.

Energy service agreements and third-party ownership structures are common in the CHP market, where a developer or energy services company (ESCO) owns and operates the CHP system and sells the energy output to the host facility under a long-term contract. In these structures, we finance the developer's equipment purchase, and the energy revenue stream supports the debt service. The host facility gets lower energy costs with no capital outlay; the developer gets a financed asset that generates predictable cash flow. This is a well-established structure in the ESCO market that we have underwritten multiple times.

For buyers with existing CHP equipment that has been paid off, a sale-leaseback on the existing system can provide capital to fund a capacity expansion without requiring the facility to fund the new purchase from operating budget. The original CHP system stays in service, the facility leases it back and uses the sale proceeds to partially fund the new unit's acquisition.