Policies and Resources for CHP Deployment: Financial Incentives


State financial incentives are an important instrument for increasing the use of technologies that provide benefits to both residents and the state overall.  The incorporation of a financial incentive can make energy efficiency investments more alluring for private and public entities.  Homeowners and businesses not only save energy but also reduce pollutants, improve electric system reliability, and save significant amounts of money over the life of their investments.  Financial incentives also help newer technologies, such as micro-CHP, to overcome barriers to market entry.

Financial incentives can take many forms: rebates, grants or loans for energy-efficiency improvements, direct income tax deductions for individuals and businesses, and exemptions from sales tax on eligible products.  The majority of financial incentives for CHP systems, however, are loans and grants; tax exemptions, grants and bonds are less commonly used.  Eligibility often depends on meeting specific energy savings goals, such as a 20% reduction in facility energy use over five years.  Below we will discuss specific examples of each type of incentive as they apply to CHP (taken from the Database of State Incentives for Renewables & Efficiency (DSIRE)).


States offer low-interest loans for a wide variety of energy efficiency measures.  Rates and terms vary by program, though a maximum 10-year term is common.  For example, New Jersey's Clean Energy Solutions Capital Investment Loan/Grant Program provides interest-free loans and grants to New Jersey-based industrial, commercial or institutional entities for end-use efficiency and combined heat and power projects.  Loans are limited to $5 million, of which up to $2.5 million may be taken as a grant.  Loans have a maximum 10-year term, and a minimum of 50% of project costs must be financed by the project sponsor.  The loan program receives revenue from the sale of greenhouse gas emission allowances under the Regional Greenhouse Gas Initiative (RGGI).

Connecticut's Low-interest Loans for Customer-side Distributed Resources program, in effect since 2006, provides loans to customers for the installation of distributed generation systems, including CHP, with a capacity range of 50kW – 65MW.  Interest rates are 1% below the customer's applicable rate, or no more than the prime rate.

The Energy Efficiency Loans for State Government Agencies program, run by Green Bank of Kentucky, offers three types of loans for state government agencies undertaking efficiency improvements; loan specifics and program requirements depend on the level of funding requested.  The program is funded by the American Recovery and Reinvestment Act (ARRA) State Energy Program.


Most grant programs are designed primarily to offset the costs of eligible technologies, although some promote research and development or support project commercialization.  For example, MassachusettsGreen Communities Grant Program provides funding for municipalities to pursue energy efficiency and renewable energy projects.  Among the conditions for eligibility include a requirement to establish an energy use baseline and develop a plan to reduce energy use 20% below this baseline within five years.  Approximately $7 million will be available for award in June 2010.

Ohio's Advanced Energy Fund Grants program offers grants up to 25% of project cost (with a maximum of $100,000) for, among other things, CHP and waste heat recovery projects up to 25 MW.  Applications are evaluated according to a number of criteria, including overall system efficiency, the balance of financing committed, and project cost per kW produced.  

Tax credits and exemptions

Like most property tax exemptions, Arizona's Energy Equipment Property Tax Exemption program excludes the added value of eligible renewable and energy efficient systems from the valuation of the property for tax purposes.  Oregon's Business Energy Tax Credit provides tax credits to businesses for a wide variety of renewable and energy efficiency initiatives.  A 50% tax credit is awarded to high efficiency CHP projects that achieve 20% annual energy savings.  


New York's Energy $mart New Construction Program provides technical assistance and cash rebates for the installation of energy-efficiency measures, including CHP, in new or substantially renovated buildings owned by businesses, state and local governments, not-for-profits, colleges and universities and other facilities.  The program will award $53 million over the course of 2010.  The state also offers a smaller scale program for existing facilities.


The use of bonds to incentivize CHP deployment is rare. New Mexico's Energy Efficiency and Renewable Energy Bond Act authorizes up to $20 million in bonds to finance energy efficiency and renewable energy improvements in state government and school buildings. State agencies or school districts may request an energy assessment from the New Mexico Energy, Minerals and Natural Resources Department to identify specific energy saving measures. Combined heat and power and waste heat recovery systems are eligible for funding. Bonds are to be paid back by realized energy savings.



Financial Incentives Resources

  1.  [DSIRE] Database of State Incentives for Renewables & Efficiency. 2010. Financial Incentives for Energy Efficiency websiteThe Database of State Incentives for Renewables & Efficiency (DSIRE) is the most comprehensive resource for current state, local and utility incentives for energy efficiency and renewable energy. The link above provides a sorted list of financial incentives and policies in twenty states that specifically identify combined heat and power as an eligible technology.