[Editor's Note: This is the second of Shari Shapiro's multipart series on green financing. Part 1 on the 10 rules of green financing and Part 3 on government incentives are available on GreenBiz.com and GreenerBuildings.com.]

Because of the enormous popularity of my post on green project finance, have decided to do a series its various aspects.

Today we will discuss alternative financing mechanisms for green projects. Over the next few weeks, I will do posts on incentives available for green projects, the latest in the PACE controversy, and the basics of renewable energy finance. If you have suggestions for other posts you would like to see as part of this series, feel free to email me. 

Please note, I am not a finance professional, and the goal of these posts is simply to give a high-level overview of potential financing mechanisms. As with all financial decisions, please consult your financial professional and attorney for advice specific to your project.  And now, without further ado, a primer on alternative green financing mechanisms.

Basically, there are only a few mechanisms for financing projects. Self-finance (your bank account); equity finance (someone else's bank account); debt finance (the bank); government finance (Uncle Sam's bank account); and grant finance (your parents' third party bank accounts). 

These mechanisms are no different for green projects. However, there are some interesting variants that have developed for financing green projects of various types. Many of the financing concepts are not mutually exclusive. To the extent that one of the models, like energy efficient mortgages, is applicable mostly to a specific sector, it can be used as a model for a specific project's financing arrangement with a particular financier. 

Leases

For commercial scale (and even residential) green and renewable energy projects, variants on leases have become an interesting project financing model. Essentially, a provider leases the equipment (typically to the owner of a facility through a long-erm lease), which reduces the up front costs.

There are a wide variety of leases available, and the decision among which lease is the best solution is largely based on tax and payment considerations. Most leases radically reduce or eliminate up front costs. Some leases allow the lessee to take advantage of the tax incentives, renewable energy credits and depreciation on the green equipment, others do not. 

For a great overview of lease variants for renewable energy projects, see here.

Performance Contracting

Performance contracting is essentially a loan from the provider of the green/renewable equipment (known as an Energy Services Company, or ESCO) that is paid for out of the savings or benefits of the green project. For example, suppose you want to install energy efficient improvements on a facility which will cost $1,000 and will save $100 per year.