Oil Companies Have Master Limited Partnerships, Why Can’t Clean Energy Companies?

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This article originally appeared on Think Progress.
By Richard Caperton

MLPs

[Last] week, Senator Chris Coons (D-DE) and a diverse group of original co-sponsors introduce a bill that would lower the cost of capital for clean energy, a critical piece of deploying clean energy at the scale needed to fight climate change. The bill — the Master Limited Partnerships Parity Act — would allow renewable energy and energy efficiency to access the MLP structure.

The MLP Parity Act is a common-sense bill with bipartisan, bicameral support that simply levels the playing field for clean energy. Now, when someone tells you that they have a “common-sense bill with bipartisan, bicameral support that simply levels the playing field for clean energy,” you should be skeptical. Allow me to address that skepticism.

First, a little background. (Take a deep breath, and bear with me for just a second.) When a business starts, it can be organized in any number of corporate structures. S-Corporations, C-Corporations, sole proprietorships, limited liability corporations, and countless other structures all have unique implications for how a company can raise money and how they’re taxed.

A master limited partnership is a type of “publicly traded partnership,” which has two valuable characteristics: it can raise money on public exchanges, is traded just like stocks, and it doesn’t pay corporate income taxes. All of the income flows through to shareholders, who pay a personal income tax, so there’s no “double-taxation” as happens with other corporations. (Okay, exhale.)

The problem is that the law that created MLP’s says that only certain types of companies can use this structure. Renewable energy and energy efficiency are not eligible, so most MLP’s in the energy industry are oil and gas pipeline companies. The MLP Parity Act simply adds renewable energy and energy efficiency to the list of technologies that can be MLP’s. This is leveling the playing field by treating all energy technologies the same.

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The bill has bipartisan support in both chambers of Congress. Original co-sponsors include Senators Jerry Moran (R-KS), Debbie Stabenow (D-MI), and Lisa Murkowski (R-AK) and Representatives Ted Poe (R-TX), Mike Thompson (D-CA), Peter Welch (D-VT), and Chris Gibson (R-NY).

While each of these legislators has different reasons for supporting the bill, they all understand that MLP’s are a proven tool for building energy assets, and that it doesn’t make any sense to limit the benefits to oil and gas. Today, there are $350 billion invested in MLP’s, none of it clean energy. Giving clean energy access to this pool of capital would be valuable, because equity raised via a publicly-traded tool — like an MLP — is much cheaper than equity raised from private investors (like private equity firms). Since many clean energy projects are essentially all capital investment and very little operating costs, the cost of capital is a huge factor in how much the project costs. Passing the MLP Parity Act would lower the cost of clean energy.

In addition to these eight co-sponsors of the bill, hundreds of organizations have voiced support for MLP parity for clean energy. Two-hundred thirty-six unions, private companies, environmental groups, financiers, and other advocates for clean energy sent a letter to Congress [last week] urging other legislators to support this bill. In the letter, the groups explain why MLP treatment would be valuable:

The US has the largest and most efficient capital markets in the world, but renewable energy generally does not have access to those markets. Congress thus has chosen winners and losers in the energy sector by extending the most efficient form of capital formation only to companies involved in the fossil fuel industry. MLP treatment can take the clean energy industry from relying on a small base of investors demanding high rates of return to a broader and deeper investment pool that MLPs have created for the fossil fuel industry.

Furthermore, clean energy projects are attractive assets for MLP investors, featuring stable revenue sources and a good long-term risk profile for investors. While different companies and sectors of the industry will utilize the MLP structure in different ways, the structure will be particularly important in creating a strong new market (now virtually non-existent) for owners of existing and even recently completed projects to sell those projects to an MLP, thereby accelerating the investment of capital into new projects. Supplementing successful energy tax credits with access to MLPs for renewables and other clean energy technologies would enhance the sources of capital for the industry and increase investors’ opportunities to take ownership in America’s clean energy future. It has worked for traditional energy technologies and would work for clean energy.

(Read the full letter here)

While the MLP Parity Act would be valuable, Congress needs to keep working on extending the production tax credit. The PTC has a history of demonstrated success in driving private investment in renewable energy. Congress extended the PTC at the end of 2012, and should do so again at the end of 2013.

There are two reasons not to get rid of the PTC, even if the MLP Parity Act is signed into law. First, the wind energy industry has made it clear that they can survive with a phased out PTC, but that the phase-out will need to happen in a predictable manner over a matter of years, no matter what other policies exist.

Second, if the MLP Parity Act is signed into law, it will likely take regulators (like the Internal Revenue Service), financial service providers, and investors several years to actually implement the tool. If Congress wants to alter the PTC, they should do so in the context of comprehensive tax reform, not just because clean energy has access to MLP’s.


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