The market for distributed energy is still in its infancy, but it could become an impressive teenager. Many building owners, for example, have said they will not tolerate future problems from traditional power sources. Most of them (in both public and private sectors) say they would be partners in distributed energy if they could afford it. Leasing the necessary systems could be a solution for the short-, middle-, and long-term needs of the customer. According to the United States Department of Commerce, American businesses acquired approximately $580 billion in capital assets during 1997, and approximately $180 billion were leased. Furthermore, the Equipment Leasing Association of America reports that more than 80% of US businesses lease some or all of their capital assets. In 2004, more than $208 billion in equipment will be leased in the US.

Why do so many businesses choose to lease products? "Cash flow is the major concern for most companies," explains Bryan G. Davis, a national account representative in the Columbus, OH, office of Leasing Associates, one of the largest volume funders of leases in the western US. "Economic trends and events have made leasing an integral part of a company's capital budgeting process and the way they fund equipment acquisitions. Currently companies are placing a higher value on their working capital and the need for liquidity. With this heightened value of their capital, they are choosing leasing's 100% financing to achieve manageable, long-term, fixed rates and cash-flow benefits. Leasing offers numerous advantages over other types of financing. It preserves cash, offers excellent tax benefits, and can be better than a bank loan." By leasing, you transfer the uncertainties and risks of equipment ownership to the leasing company, which allows you to concentrate on using that equipment as a productive part of your business. You can tailor a solution that meets your specific requirements. Leasing allows you to structure a financing program that addresses your key business issues, including cash flow, budget, transaction, and cyclical fluctuations. Examples include step-up leases, skip leases, deferred payment, and master leases.

"Companies recognize that leasing can improve the company's balance sheet and preserve their borrowing capacity," adds Davis. "They also understand that income is generated from the use of the equipment, not from its ownership. You wouldn't pay an employee five years in advance, so why do it for your equipment? It only works for you."

Recapping the Advantages

According to most leasing companies, the advantages of leasing equipment (for the short or long term or even permanently) could be summed up in these points offered by Davis:

• Speed: Leasing allows you to respond quickly as your need for equipment and technology arises. With minimal documentation, you quickly can have the products, equipment, or systems you need in operation.
• No down payment: Loans frequently require a large down payment in advance. Leasing generally only requires a first- and last-payment security deposit.
• 100% financing: Your lease payments are fixed for the term (whatever the length) and are not subject to the prime interest rate increases. In many cases, the full amount of the equipment and the service, shipping, installation, maintenance, and even software costs can be included in the lease. This spreads out the cost evenly over the term of the lease, thus freeing your money to work harder for you in other recommended areas.
• Tax advantages: Leasing can offer significant tax deductions. Write off up to $100,000 and take another 50% off on your 2003-2005 taxes. Payments of operating leases can be written off 100%. Monthly payments on operating leases typically are viewed as operating expenses, offering significant tax benefits.
• Working capital: Leasing permits your immediate acquisition of equipment and preserves bank credit lines for other uses. It's the pay-as-you-go financing program.
• No compensating balances: For you to get a "low rate," many banks will require you to keep 20-30% of the loan amount in your non-interest-bearing accounts. This effectively raises your rate (a 6.75% loan, for example, might really be a 26% loan).

Short-Term Leasing

In the distributed-energy sector, short leases tend to be solutions to temporary problems: outages, natural disasters, maintenance, or repair downtime. The requirements are not always for little systems to keep one building or factory going smoothly. During the fall of 2003, forest fires were raging out of control in southern California. At one stage, they threatened to immobilize a utility power substation near Running Springs; that would affect thousands of people in the neighboring mountain communities. The Prime Energy Rental Customer Center in southern California received an urgent call requesting that eight 1,500-kW generators and eight 2,400-kVA transformers be delivered to the substation as soon as possible. The scope of the project was to shut down the high voltage in-feed to the substation and connect Prime Energy generators. The intention was to operate the substation until the threat from the forest fires had passed. Within 24 hours of the initial call, the temporary equipment was set up and running. For approximately one week, Prime Energy equipment provided primary power to the substation while damaged transmission poles and power lines were replaced or repaired.

It was maintenance that interrupted the permanent power supply at a large casino in California. A Prime Energy 1,500-kW generator supported all of the power requirements for the casino. Whenever a certain US Navy vessel is docked, a 1,000-kW generator provides shore power to operate the ship's electronics.

Ski resorts are sometimes located in remote areas. The chances of seasonal power interruptions in remote areas are not exactly remote. When the power goes out, the chair lifts stop precisely where they are, with the skiers sitting in them. It can be a cold and frightening experience. At a ski resort in New York state, a Prime Energy 1,500-kW generator system makes sure that such a potentially unpleasant, unprofitable, and unenjoyable event does not occur. In the warmer climes of Florida, the customers again justify a leased power system. In 2003, when Hurricane Isabel was threatening the Eastern Seaboard, a major retailer kept its stores open by using 1,000- or 1,500-kW generators from Prime Energy. The generators used engineered switchgear connections to the main power in–connection in a quick, seamless transition, allowing the stores to switch from the utility to a temporary power supply as power failed in the path of the storm.

You might include standby usage among leasing applications. For some projects, the power is leased just for the length of the project - during street repairs, for example, or when underground construction involves the disruption of electric lines. Many facilities say they cannot shut down, even for an hour or so, but some seem more serious than others. Caterpillar now provides a complete continuous-power solution to protect vital health-care equipment from power disturbances. Designed to work with new or existing generators, the Cat Uninterruptible Power Supply (UPS) delivers reliable, high-quality electric power for today's digital world. The battery-free UPS ranges in power from 125 to 900 kVA and can meet the demands of hospitals and similar health-care facilities. It also eliminates the need for battery-based units. It integrates reliable flywheel technology that protects against sags, surges, and outages. It is 97% efficient. The Cat UPS maintains power continuity when integrated with a Cat standby generator set to provide a complete continuous-power system.

Attitudes and Preferences Are Changing

In the next few years, users' attitudes toward distributed energy are likely to change, if they understand what manufacturers are saying. When one has experienced the advantages of systems initially acquired for standby purposes or temporary situations, one easily might progress to thinking that such systems would be preferable on a permanent basis. "Most customers think of standby generation as a necessary expense and little more," notes Jay Johnson, generator program manager for Ingersoll-Rand Energy Systems. "Essentially they are purchasing an insurance policy. One of our goals at Ingersoll-Rand is to make it as simple and easy as possible for our customers. To that end, we offer both fair-market and dollar-buyout leases, along with preventative-maintenance contracts. The lease minimizes their capital outlay - restricted to 'soft costs,' basically installation - and allows them to have it either on or off the balance sheet, as their needs dictate. The preventative-maintenance contracts ensure that the equipment stays in good working condition so they get the most from their investment. [The contracts] also serve to reduce the magnitude of any unplanned service expenses that do come up."

If the contract is for the duration of an emergency, a lease can be quite short. It might be just a week. With greater forward thinking, a short- rather than long-term lease can be considerably longer. "As you can imagine, rentals or leasing can range from a few days to many months," comments Richard House, sales manager at Prime Energy. "Our expertise ranges from the small, 100-kilowatt needs of a remote construction site just doing the ground preparations, to the provision of backup power via a sophisticated network of synchronized equipment to an entire municipal-utility district. One of the longest power-generation leases we have held was just a little over 12 months."

Contingency agreements are typically established as a precaution or an insurance policy by the customers to protect them against an unscheduled outage or a natural disaster. "Prime Energy will structure a contingency agreement based on the level of commitment from the customer and their requirements," continues House. "In general, after a careful engineered analysis of the client's business and operations - including equipment, connections, delivery time, et cetera - we will draft a contract to provide any mix of power, oil-free air, or temperature control within a specified time, in specified quantities at a predetermined fee. Such agreements are extremely important due to the sometimes-catastrophic outcome when a critical utility is cut off. At the moment, there are few companies other than Prime Energy who are capable of managing contingency agreements like that, due to the significant fleet and transportation logistics required."

Systems and Sources

Some major manufacturers arrange financing for their own equipment and peripherals. Northern Power Systems, headquartered in Vermont but serving the whole country, shows an alternative route. Northern Power is actively cooperating with leasing companies to provide the distributed-power systems customers want.

"We can offer so many services to our customers," says Chach Curtis for Northern Power. "We are not the manufacturers of microturbines, but we are experts in procuring the equipment that public and private entities require. We offer site analysis, engineering studies, project and financial assessment, metering and data collection, system engineering and design, monitoring and control, system construction and site preparation, maintenance, installation, commissioning, and staff training, all in addition to equipment procurement." In 30 years, Northern Power has installed more than 700 systems in 40 countries.

What can a source like Northern Power provide? They offer remote power systems for remote industrial infrastructure and isolated installations. They also offer onsite power systems at or near the point of use for commercial and industrial applications. According to several correspondents, the commercial, onsite applications currently are perceived as most suitable for long-term leasing. Onsite solutions from Northern can include grid-connected (parallel) or off-grid (isolated) applications, combined heat and power (CHP)/cogeneration, demand response and peak shaving, renewable integration, critical load support, UPS, aggregating distributed resources, monitoring and control, cathodic protection, and solar obstruction lighting. Over the years, the company has blended appropriate energy sources (e.g., wind, sunlight, oil, and gas) with today's state-of-the-art controls and power electronics.

"There are thousands of leasing companies and brokers in the US," advises Lori Fike, finance manager at Ingersoll-Rand, whose Energy Systems division has as much experience as anybody in power problems and solutions. "Lenders who have been in familiar markets like automobiles or computer systems are looking for niches where they can serve old and new customers. Distributed energy is one of those niches now. The leasing companies will be trying to change the mindset of their potential customers from purchase to leasing." One of the best points in favor of power equipment from a leasing point of view is that it is reliable and almost always stays in the same place. "That makes it good collateral," adds Fike. "A leasing company will look at the equipment proposed for leasing and calculate how much of it can be repossessed advantageously if anything goes wrong with the lease. The more there is that you can take out and sell, the more attractive equipment would be to a leasing company." Power systems, such as those from Ingersoll-Rand, look good in that scene because of their history of reliability. Other manufacturers can make the same claims, so it is clearly something that the prospective customer should investigate. How reliable is this equipment? What is its reputation? If there is a negative aspect to leasing equipment for distributed energy, it would be that there probably are going to be soft costs - for wiring and installation, for example - that might have to be paid up-front.

"One of the most attractive reasons for leasing power equipment is that the savings it generates can offset its monthly cost, all of it sometimes," comments Fike. "Leasing will help with cash management, preserve the lessee's credit line, and require lower monthly payments. Lease structures can be formulated that match the cycles of the customer's business. They can be seasonal, as it were. If November and December are your slow months, the lease payments can reflect that. If May, June, and July are good months, you could make larger payments. Ask about all of the options available; go shopping for the lease that suits your application best."

Find the Right Leasing Company

"It is essential that developers and vendors have an experienced and knowledgeable financial partner who has parallel interests, to get their clients and transactions funded," advises William J. Garnett III, senior vice president at PFG Energy Capital in Pasadena, CA. "The successful leasing companies involved in this business - and there are only a few - have become highly specialized, focusing all of their efforts on the DG [distributed-generation], CHP, energy-efficiency, and retrofit markets. Simply put, the successful funding of clients and transactions is our objective, and we have funded several hundred million dollars in projects."

The leasing business most definitely has a prominent place as a long-term financial tool in the DG, CHP, and central-plant industries. Says Garnett, "It has been the dominant player in the energy-efficiency retrofit business - lighting and HVAC, for example - which started back in the mid-'80s. In that sector, it has provided more than a billion dollars for capital, operating, and structured lease transactions." PFG Energy Capital reinforces what others have said about the advantages of leasing, but it is worth repeating them here.

"Leasing, through the right financial partner, provides vendors and developers with numerous financial and marketing advantages," asserts Garnett. "It offers 100% financing. It offers a menu of financial structures designed to maximize tax benefits and minimize the balance-sheet impact for customers or vendors. Rates today are competitive, and there are longer terms of amortization possible, based on greater familiarity with the equipment and systems. Leasing companies like ours understand credit and business structures, for office buildings and LLC- or LP-structured ownership projects. In general, leasing provides an asset-based point of view and risk analysis that leads to a larger universe of acceptable transaction structures."

One can see the types of energy-related projects that might be suitable for leasing by examining the areas in which such experienced companies as PFG Energy Capital have undertaken financing. There are four markets: institutional, municipal, federal, and commercial. In the institutional market, there have been lighting and central-plant upgrades to a multibuilding medical-college campus and hospital, and there have been lighting and HVAC system upgrades for numerous colleges and universities. In the municipal market, you will find lighting and HVAC upgrades for public schools and buildings, cogeneration systems for municipal building complexes, and a state-prison central-plant outsourcing project.

"Federal, state, and local governments all across the US are large consumers of energy as they try to heat, cool, ventilate, and illuminate their governmental facilities," notes Garnett. "Energy-related projects that provide operational savings, in the sectors of both energy and maintenance, are an important and growing facet of their annual operating budgets." Also in the federal domain, central-plant improvements have included retrofits of lighting and air-conditioning systems for military bases, federal government buildings, and hospitals.

In the commercial market, an interesting range of equipment, for an equally interesting range of clients, has been appropriate for leasing. An energy sales and trading company (with both domestic and international deployments) developed a series of DG systems to supply additional power during peak demand. Shopping-center malls and entertainment and sports facilities have found leasing/financing for central plant improvements and energy conservation projects, factories have installed pollution control systems, refineries have required cogenerative systems, and housing developers have arranged leasing for water treatment plants. Multitenant office buildings, college campuses, corporate facilities, and manufacturing facilities now have HVAC and lighting retrofits.

One feels a surge of human energy in conversations with those who have been seeking practical methods of financing for the energy needs of our country. It is clear too that the momentum is derived from those who need better systems and those who design and manufacture better systems rather than from any government or academic agency. Several correspondents observed that, in today's careful investigation of the advantages of leasing distributed-energy solutions, the practical aspects of the problems are being addressed by the right people for the right people.

PAUL HULL writes on construction and environmental topics for several international magazines.

DE - May/June 2004