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Third party investing in energy programs
Abstract
A new energy industry--the recovery of energy from the industrial sector by means of conservation equipment--is just forming. Capital costs retard progress. This problem has given rise to third party leasing plans. The Alliance to Save Energy has embarked on a feasibility study, and a few preliminary findings are revealed in this paper. Leasing has IRS problems because of the tax classification of ''limited use properties.'' Useful life for tax purposes is also much shorter for general capital equipment than for conservation equipment. The Economic Recovery Act liberalized limited use and useful life rules, with new ''safe harbor'' lease arrangements. But broad interpretation of safe harbor has caused problems. Energy service contract--the second type of third party leasing--carries with it substantial specified risks. Share-the-savings leasing arrangements offer significant benefits to energy users, but all tax risks are shifted to the third party. In conclusion, several legal obstacles must be overcome before energy conservation investment by means of third party leasing can expand.
In this paper, the effect of uncertainty in internal rate of return calculations caused by imperfect predictions of prices, costs, and business conditions are modeled. Comparing the calculated results shows that the effects of uncontrollable parameters such as recession, price competition, and unexpected repair costs have a greater influence on return on investment than tax credits or depreciation rates. In addition, even if a project overcomes some designated hurdle rate, it must then compete with other highly-rated projects, energy-saving or not, on the basis of intangible factors that comprise the art known as business judgment. Thus tax credits and accelerated depreciation will often not have as large an effect on promoting energy efficiency investments as anticipated.
The lack of appropriate equipment has been a major barrier to the technological development in many developing countries. There are three basic ways to acquire equipment, lease it, buy it or rent it. An enterprise must decide for itself, in several occasions, in the light of its own circumstances the pattern of finance most suitable for it.However, in recent years, leasing of equipment has become an increasingly important method of equipment acquisition in Nigeria. A study of equipment leasing was done. Also cumulative cash cost comparative analysis of leasing, purchase and rent as methods of equipment acquisition was carried out. It was found that equipment leasing offers the lessee several clear cut benefits, although like the other methods, these may be wholly or partially offset by some disadvantages. Some aspects for consideration in making decisions on either to lease, purchase or rent are suggested.
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