Growing renewable energy isn’t all about making razzle-dazzle technological advances. Sometimes the key stuff is pretty obscure, particularly when it comes to mechanisms for encouraging investment in the sector. On that count, meet the Master Limited Parternships Parity Act.
Dry as it might sound, if you’re a supporter of clean energy, you’re well advised to get up to speed on this legislation [PDF], brought forward Thursday by Sen. Chris Coons. The Delaware Democrat thinks it could be a game-changer by opening up a vast new capital stream for development of big solar and wind power projects. And he believes it could do so without targeting subsidies to specific companies or costing the taxpayers big bucks – thereby avoiding the political pitfalls that other clean energy programs have run into.
Coons even has a Republican, Sen. Jerry Moran of Kansas, with him as a co-sponsor.
Their bill would allow renewable energy developers to use a tax structure – the master limited partnership (MLP) – that has been a key tool in bringing investment dollars into gas and oil pipeline projects.
An MLP allows a partnership to act like a corporation, trading like corporate stock on a market, while retaining a crucial benefit of a partnership: avoiding corporate income taxes.
Such an arrangement could be especially valuable to renewable energy developers because their long timelines and heavy capital requirements make it difficult to draw in investors. So as it stands, the investors that renewable energy relies on tend to be big money interests who can take advantage of tax credits and accelerated depreciation rates. Plenty of other investors – like tax-exempt pension funds and regular citizens looking to put money into a stock – are pretty much shut out. And meanwhile, the renewable energy developers are paying a hefty premium for investment capital, as much as 30 percent.
But as an MLP, a company doing a solar-power project in the desert, say with a long-term power-purchase agreement providing a revenue stream, could peel off an attractive dividend for investors — 6-8 percent, perhaps — while in the process bringing down its cost of capital dramatically. (That’s why in the energy field, so many MLPs have been pipelines that generate a consistent cash flow over a long period of time.)
According to a study [PDF] put out by the Maguire Energy Institute at Southern Methodist University, “expanding the MLP structure to renewables could result in an additional $3.2 billion to $5.6 billion capital inflow into the industry between now and 2021.”
That would be big.
MLPs are currently open to companies that draw at least 90 percent of their income from “qualified sources” such as real estate or natural resources – but only “depletable” ones. Thus, crude oil, natural gas and petroleum products qualify, but the sun and the wind don’t.
That’s not exactly an “all of the above” approach, Coons said in a teleconference yesterday just before he took to the Senate floor to introduce the legislation.
Also on the call was Dan Reicher, who gave the MLP parity concept a boost last week in an op-ed in the New York Times with Felix Mormann. The pair, both from the Steyer-Taylor Center for Energy Policy and Finance at Stanford, noted that Sen. Bernie Sanders (I-Vermont) and Rep. Keith Ellison (D-Minn.) have proposed leveling the playing field between fossil fuels and renewables by eliminating MLPs for oil and gas. But Reicher – and Coons – said it a better strategy for growth would be to allow renewables into the game.
Plus, Reicher said: “There’s another benefit to expanding the pool of renewable energy investors: It would help democratize, and thus build support for, these new energy sources. Today, all American taxpayers fund renewable energy subsidies, but only a deep-pocketed few can cash in on the tax benefits. Publicly traded master limited partnerships … would empower all Americans to invest and have a stake in the transition to cleaner energy.”
To hear these guys tell it, you’d think there was no downside to the MLP Parity Act. But if investors are paying less taxes on their income from these projects, wouldn’t the federal coffers take a hit? Reicher said there could be some cost, but said it was also possible that by spurring new investment, expanding MLPs to include renewables might actually result in a net gain to the Treasury. Coons said that remains to be determined by Congressional budget scorers, but even if there were a cost, it was likely to be small and well worth it.
“By allowing additional forms of energy development to access this market tool, we can go beyond political rhetoric and start delivering an all-of-the-above energy strategy,” Coons said.