Would Fossil Fuel Style Benefits Be Good For Clean Energy?

midwest-energynewsEditor’s Note: EarthTechling is proud to repost this article courtesy of Midwest Energy News. Author credit goes to Dan Haugen.

Since the 1980s, U.S. oil and gas companies have benefited from a tax loophole big enough to build a pipeline through.

By organizing as a type of partnership instead of a corporation, companies that extract, process or transport “depletable” natural resources have been exempt from corporate income taxes.

That word — “depletable” — specifically excludes renewable energy, but a long-simmering effort to change that now appears to be gathering some steam in Washington.

U.S. Sen. Chris Coons, a Delaware Democrat, introduced a bill last year that would give wind, solar and other renewable projects the same tax benefit that fossil fuels have enjoyed for decades.

The Master Limited Partnerships Parity Act has picked up bipartisan support, including Republicans from oil-rich states such as Alaska Sen. Lisa Murkowski and Rep. Ted Poe of Texas.

image via Shutterstock

image via Shutterstock

But the bill also finds itself going against broader political momentum in Congress to eliminate loopholes and exemptions in order to raise revenue and lower tax rates.

Leveling the playing field

The first master limited partnership, or MLP, was devised in 1981 by a Minneapolis drilling and exploration company, Apache Oil Corp., now based in Houston. The structure offered a way to sell publicly tradable stock without being taxed as a corporation.

The model quickly spread to other oil and gas firms, as well as other industries seeking the same tax advantages, including real estate, hotels and motels, and restaurants. By the time Congress intervened in 1987, even the Boston Celtics had formed an MLP.

Worried that too many corporations would become MLPs to avoid taxes, Congress prohibited them except for companies that earn 90 percent of their income from specific investment, real estate and natural resource activities, including oil and gas operations.

“It just doesn’t make any sense. It never made any sense why MLPs were available to them and not to us,” says Blake Nixon, president of Geronimo Wind, a Minnesota wind developer that has been lobbying for MLP changes since 2009.

Allowing renewable companies to organize as MLPs is among a handful of tax reforms the industry and its supporters say will help level the playing field with fossil fuels. Others include allowing them to organize as real estate investment trusts, or REITs, and letting renewable tax credits be claimed by more types of investors.

Need for financial innovation

Setting up renewable projects as MLPs would make it easier to sell shares to individuals and institutional investors such as pension funds. Widening the pool of potential investors would inject new competition, which could lower the cost of financing projects, and ultimately lower the cost of renewable power.

Currently, there are only about 20 large financial institutions that have large enough tax bills to claim the full value of federal credits awarded to renewable projects. Wind and solar developers that want to take advantage of the credits need to recruit one of these players to invest in every single project.

“They basically get to set terms,” says Nixon. “Because there’s so few of them, there’s very little flexibility in the terms and in the costs of the money. There’s very little competition among them to drive those costs down.”

Even though borrowing rates are at historic lows, these large renewable investors charge interest rates of 8 to 9 percent, after tax, per project, says Nixon, compared to 4 to 5 percent that’s common for MLPs.

As the cost of wind and solar technology has fallen, financing costs have stayed high and become a bigger share of overall project costs, says Felix Mormann, an associate professor of law at the University of Miami and a fellow at Stanford’s Steyer-Taylor Center for Energy Policy and Finance.

“It’s time for us to complement ongoing technology innovation with critical financial innovation,” says Mormann.

Mormann co-authored a Brookings Institute report published in November called “Smarter Finance for Cleaner Energy: Open Up Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs) to Renewable Energy Investment.”

Not a ‘magic potion’

MLPs aren’t a “magic potion,” however, warns Joe Condo, vice president and general counsel for Chicago renewable developer Invenergy, which has lobbied for MLP changes for several years.

“One concern we have is that some folks who support MLP are saying maybe this is a replacement for [production tax credits],” says Condo. “We don’t agree with that.”

The Bipartisan Policy Center, a Washington, D.C., think tank, agrees. In a 2011 policy brief it concluded, “Because MLP s would only increase the eligible investor pool … by themselves they would most likely not supplant the tax incentives currently in place.”

Coons’ bill is getting more attention than previous efforts to extend MLPs to renewables, but they’ve still been getting “a fair amount of pushback from Capitol Hill,” says Keith Martin, a lawyer and lobbyist with Washington, D.C., firm Chadbourne & Parke.

Martin is scheduled to speak about MLPs and REITs next week at the Wind Power Finance & Investment Summit in San Diego.

If the bill advances, it would likely move forward as part of a broader corporate tax reform bill that Congress is expected to take up either this year or next year, says Martin. Even if it succeeds, the impact could be muted if Congress decides to tax partnerships, as some have proposed.

Martin says both parties want to lower the current 35 percent corporate income tax rate. Democrats want to lower it to 28 percent and Republicans are aiming for 25 percent.

“It’s a monumental task to take the rate that low,” says Martin.

Adding exemptions will make it tougher. A 2011 Congressional Research Service report estimated that extending MLPs to renewable energy firms would cost the U.S. Treasury about $2.8 billion between 2010 and 2014.

An alternative, that report suggests, if the goal is a level playing field: close the loophole for oil and gas companies.

Midwest Energy News, launched in 2010, is a nonprofit news site dedicated to keeping stakeholders, policymakers, and citizens informed of the important changes taking place as the Midwest shifts from fossil fuels to a clean energy system.

    • http://www.facebook.com/people/Joe-Murtaugh/100003480326456 Joe Murtaugh

      Oh, lets just stop taxing everybody. Can we all just get along?

    • http://www.facebook.com/people/William-Branham/1307690940 William Branham

      Yes!

    • http://twitter.com/aligatorhardt aligatorhardt

      I would like to see an end to subsidies for energy systems that damage health and resources. Without fossil fuel subsidies, fuel free energy sources are naturally cheaper. It is only because dirty energy is subsidized that renewable energy is seen as more costly by utility companies. For consumers, solar ownership is already less costly over the life of the equipment than buying electricity from a utility.

    • josephtoomey

      There are two important issues posed here and, not surprisingly, the article above misses the point on both of them.

      The first issue about Master Limited Partnerships income taxation sidesteps the real issue. Yes, MLPs permit partnership income to escape corporate income tax the way any partnership avoids corporate income tax. Income generated by the MLP allocates earned income and capital gains on a pro-rata basis to shareholders, usually subjecting shareholders to far higher personal income tax rates. Make no mistake, the Treasury get its money from MLP shareholders, just not from the MLP. This amounts to a distinction without a material difference.

      But had they not organized as partnerships, MLPs could have incorporated as Subchapter S corporations enjoying the same “pass-through” corporate tax avoidance advantage. So the discussion above about corporate tax avoidance misses the real point, which is: Why should there even be a corporate income tax? Why should not all corporate income simply pass through to individual shareholders on the same pro-rata basis used by partnerships and Sub-S corporations? That would eliminate the economically distorting impact that corporate taxes impose upon the economy.

      The second issue completely missed in the discussion above concerns whether ‘green energy’ investment projects should ever be permitted to sell shares to the public in the same way that MLPs do. MLPs that invest in pipelines and oil and gas drilling projects don’t rely upon taxpayer subsidies to maintain their economic viability. Marketplace realities assure the market value, and thus the economic viability of those investments. While most ‘green energy’ boosters don’t know or acknowledge it, ‘green energy’ investments are massively subsidized by federal and state government. In 2010, renewable energy received federal subsidies equal to 23-to-24 times the subsidy value accorded to oil and gas on a per BTU basis according to analysis by the Department
      of Energy and the CBO. And oil and gas “subsidies” were not really even subsidies at all but simply depreciation- or amortization-related income deductions similar to those accorded every other business.
      But the real question concerns securitization. Should investors who know little about the complex dynamics of financial markets be exposed to the inherent risk of publicly-traded shares in ‘green energy’ investment projects when such a large measure of the investment returns of these projects is predicated upon maintenance of public subsidy arrangements? ‘Green energy’ survives upon political willingness to institute lucrative mandated feed-in tariffs, tax credits, mandated purchase thresholds or other subsidy arrangements to assure a project funding mechanism. Without it, there would be no ‘green energy’ because it’s simply too expensive.

      Maintenance of those subsidy provisions is based solely upon political will to keep them in place at originally agreed-upon levels. As we have already seen in Spain, Germany, Italy, Poland, Czech Republic, France, the UK, South Africa, and Japan, when political will foundered, feed-in payment streams were reduced or eliminated. So had there been publicly-traded MLPs involved, the value of these shares that had invested in those projects would have plummeted as the flow of public money was curtailed or eliminated. The investing public would have been burned badly.
      Mortgage-backed bonds are securitized by pools of inviolable private contracts that even the most desperate politicians are incapable of altering or abrogating. And yet they caused a near collapse of the world’s financial system. By contrast, securitized pools of ‘green energy’ projects depend solely upon maintenance of subsidy arrangements that, in turn, rely upon the forbearance of the political class not to amend or alter the public funding spigot. Good luck there. This should make these securities far riskier than the lowest rated junk bonds. It seems entirely fitting; junk bond ratings for junk energy.

      Joseph Toomey
      Baltimore, MD