One of the ways the US federal government subsidizes the fossil fuel industry — natural gas and oil distributors in particular — is through Master Limited Partnerships (MLPs). These special purpose investment vehicles exempt investors who form them from certain corporate income taxes. The catch is that MLPs have to distribute most of their income to partnership shareholders on a quarterly basis.
Sen. Christopher Coons (D-Delaware) believes renewable energy industry participants could benefit greatly if they were allowed to form MLPs, and he, along with Sen. Jerry Moran (R-Kansas), on June 7 introduced legislation — The Master Limited Partnerships Parity Act — to make it happen.
“Master limited partnerships have been largely responsible for the tremendous growth in our country’s energy infrastructure,” Senator Moran said. “In order to grow our economy and increase our energy security, sound economic tools like the MLP should be expanded to include additional domestic energy sources. This legislation simply builds on a successful model, and I look forward to working with my Senate colleagues on policies that will drive innovation, create American jobs, and grow our economy.”
Leveling the Playing Field for US Clean Energy Development
As it is, the U.S. tax code confers preferential treatment on investors in oil, natural gas, coal extraction and pipeline projects — they’re the only ones allowed to form MLPs. In fact, natural gas and oil companies are have been benefiting from being able to form MLPs for nearly 30 years.
Odd as its seems, the IRS code specifically excludes MLPs from investing in renewable energy companies and project portfolios, 24/7 Wall St. points out. Coons’ wants to level the playing field. In addition to gaining support from the Obama Administration, his bill has garnered five Republican co-sponsors for his legislation.
“At a time when the United States needs to increase domestic energy production and leaders of both political parties say they support an ‘all of the above’ energy strategy, Congress should level the playing field and give all sources of domestic energy — renewable and non-renewable alike — a fair shot at success in the marketplace,” Coons states.
Fast-track passage of the Master Limited Partnerships Parity Act (MLPPA) couldn’t come at a more opportune time. Key federal renewable energy tax credits are on the wane and federal government stimulus spending enacted to avoid a banking system and economic collapse have run their course. Meanwhile, persistent concerns about a debt-credit crisis spreading from Europe and efforts to rein in bank leverage and boost capital requirements are tightening credit and lending conditions.
Opening Up as Much as $6 Billion of Private Capital for Renewable Energy
Affording renewable energy industry participants, the ability to form MLPs would open up significant new opportunities for them to raise lower-cost capital at a time when financing options are regressing to the point where renewable energy financing is increasingly reliant on tapping the relatively small market for tax equity financing.
As much as $6 billion in capital that’s currently excluded from renewable energy projects might be invested in renewable energy MLPs, according to a study from the Maguire Energy Institute at Southern Methodist University, Paul Ausick noted on 24/7 Wall Street.
As Coons notes, projects put into an MLP portfolio “get access to capital at a lower cost and are more liquid than traditional financing approaches to energy projects, making them highly effective at attracting private investment. Investors in renewable energy projects, however, have been explicitly prevented from forming MLPs, starving a growing portion of America’s domestic energy sector of the capital it needs to build and grow.”
In a June 2 New York Times article, Stanford University’s Dan Reicher and Felix Mormann succinctly explained the boost allowing renewable energy companies to form MLPs would provide to the US renewable energy industry.
“If renewable energy is going to become fully competitive and a significant source of energy in the United States, then further technological innovation must be accompanied by financial innovation so that clean energy sources gain access to the same low-cost capital that traditional energy sources like coal and natural gas enjoy.”
“Master limited partnerships carry the fund-raising advantages of a corporation: ownership interests are publicly traded and offer investors the liquidity, limited liability and dividends of classic corporations. Their market capitalization exceeds $350 billion. With average dividends of just 6 percent, these investment vehicles could substantially reduce the cost of financing renewables.”
Coons’ MLPPA would expand the definition of “qualified” MLP sources to include clean energy resources and infrastructure projects. If passed, MLPPA would allow MLPs to be formed for solar, wind, marine and hydrokinetic, hydropower, combined heat and power, municipal solid waste, geothermal, fuel cells, and closed and open-loop biomass. It would also enable MLPs to be formed for a range of alternative transportation fuels, including cellulosic ethanol, biodiesel, and algae fuels.
A diverse group of clean energy industry leaders, industry associations, and public interest groups are coming out in support of Coons’ MLPPA, including the American Council on Renewable Energy (ACORE), the American Wind Energy Association (AWEA), Clean Energy, Third Way, Covanta, DuPont, NRG Energy, the Solar Energy Industry Association (SEIA), the Wind Development Coalition, the Advanced Biofuels Association, the Biomass Power Association, the Advanced Ethanol Council, Environmental Entrepreneurs, and the Natural Resources Defense Council (NRDC).
I've been reporting and writing on a wide range of topics at the nexus of economics, technology, ecology/environment and society for some five years now. Whether in Asia-Pacific, Europe, the Americas, Africa or the Middle East, issues related to these broad topical areas pose tremendous opportunities, as well as challenges, and define the quality of our lives, as well as our relationship to the natural environment.