Return on investment (ROI) indicates the gain or a loss on an investment over a specified period – often expected to be between 12 to 20 percent for CHP projects. Equity investors tend to expect a ROI of 15 to 25 percent or more, depending on the risks associated with the project. These ROI estimates are based on investments made early on in the project; investments made during the development or operational stages of the project often have lower ROI expectations since the risks associated with the project have been substantially reduced.

A payback period is commonly used to assess CHP projects – being the time required for a project to repay its initial capital costs, thereby paying for itself. The payback period is calculated by dividing the initial capital cost by the annual operating savings. Note that this does not present the overall net benefits or savings of a project relative to its costs, for example, the annual net cash flows after the payback period.

The internal rate of return is the discount rate that would yield a zero Net Present Value (NPV) for the project – which measures the profitability of the investment, to compare the CHP project to other projects that require differing initial capital investment and projected future cash flows. Typically, the higher the IRR, the better.

A higher utilization of the CHP system typically results in increased energy cost savings since the facility is less reliant on grid-supplied electricity. Investors look to invest in CHP in market sectors with long operating hours and high thermal demand (see those common target markets listed in the call-out box above).

A payback period is commonly used to assess CHP projects – being the time required for a project to repay its initial capital costs, thereby paying for itself. The payback period is calculated by dividing the initial capital cost by the annual operating savings. Note that this does not present the overall net benefits or savings of a project relative to its costs, for example, the annual net cash flows after the payback period.

CHP systems that are sized to meet thermal demand without selling excess electricity back to the grid or other off-takers often receive more favorable financing. Utilities often purchase excess electricity at low rates that can hinder the economic viability of CHP. Systems that are sized smaller to ensure full thermal utilization with little or no excess electricity sales are generally more attractive to CHP financiers.

CHP systems that are sized to meet thermal demand without selling excess electricity back to the grid or other off-takers often receive more favorable financing. Utilities often purchase excess electricity at low rates that can hinder the economic viability of CHP. Systems that are sized smaller to ensure full thermal utilization with little or no excess electricity sales are generally more attractive to CHP financiers.