Basic Funding Information for Landfill Gas Energy Projects
Basic Funding Information
For stakeholders new to landfill gas (LFG) energy projects, a basic overview of project economics and financing is provided below. A key component to successful LFG energy projects is identifying and using available financial mechanisms. Potential funding resources include tax credits and exemptions, production incentives, loans and grants. It is important that stakeholders understand the range of available financial mechanisms to select the best options to meet project goals.
More detailed information about project economics is available in Chapter 4 of LMOP’s LFG Energy Project Development Handbook, which provides guidance for performing site-specific economic analyses and discusses the various financing alternatives available for LFG energy projects.
Evaluating the Economics of an LFG Energy Project
Conducting an economic assessment helps to determine if an LFG energy project is viable at a specific landfill. Evaluating a project typically consists of five steps:
- Quantify capital and operations and maintenance expenses
- Estimate energy sales revenues and other revenues streams
- Assess the feasibility of the proposed project design, including modifications to the project design to improve project economics
- Repeat steps 1-3 for any project alternatives
- Assess project financing options
Many financing approaches may be available for a project, including:
- Private Equity Financing – Widely used for LFG energy projects, it involves an investor who is willing to fund all or a portion of the project in return for a share of project ownership. For small projects without access to municipal bonds, private equity financing may be one of the few ways to obtain financing.
- Project Finance – Lenders consider a project’s projected revenues rather than the assets of the developer to ensure repayment. This allows the developer to obtain financing while retaining ownership control of the project.
- Municipal Bond Financing – In the case of municipally owned landfills and municipal end users, the local government might issue tax-preferred bonds to finance the LFG energy project. This approach is the most cost-effective way to finance a project, because the interest rate is often 1 or 2 percent below commercial debt interest rates, and can often be structured for long repayment periods.
- Direct Municipal Funding – The operating budget of the city, county, landfill authority or other municipal government is used to fund the LFG energy project. It eliminates the need to obtain outside financing or project partners, and it avoids the delays caused from their project evaluation needs.
- Lease Financing – The project owner/operator leases all or part of the LFG energy project assets, which usually allows the transfer of tax benefits or credits to an entity that can best make use of them. The benefit of lease financing is that it frees up capital funds of the owner/operator while allowing them control of the project. The disadvantages include complex accounting and liability issues, as well as loss of tax benefits to the project owner/operator.