What is Next for Renewable Energy Project Financing?

By Brian Seaman

Cleantech Law Partners

The Treasury § 1603 program was authorized in 2009 as part of the American Recovery and Reinvestment Act, and supported $38.6B of investment in renewable power development, and 16.9 GW of new installed renewable energy .  But with the 2011 expiration of the program – and the associated grants of up to 30% of qualifying project costs – developers, investors, and environmentalists are looking to the federal government to make minor, common-sense changes to current tax code to accelerate private investment in the renewable energy industry.  The most promising changes which have been proposed would affect existing investment vehicles like Master Limited Partnerships and Real Estate Investment Trusts.

MLP’s combine the tax benefits of a limited partnership with the liquidity of publicly traded securities.  Tax benefits are realized by passing tax liabilities directly to the partners (shareholders) rather than first through a corporation; and the liquidity results from the fact that MLP’s can be traded on public exchanges.  The current market capitalization of energy MLP’s is in excess of $160B, but under the current tax code their income must be derived from at least 90% eligible natural resources which is inexplicably limited to oil, natural gas, coal, timber, and mineral production, and the associated pipelines and refining facilities.

Even as the cost of solar panels and wind turbines has dropped steeply over the past four years, this limitation on the availability of private capital to fund renewable projects has been a drag on the growth of the renewable energy industry.

In response to criticism from both environmental advocates, and the business community, Senator Christopher Coons (D-DE) sent a bi-partisan letter   to President Obama, and introduced the Master Limited Partnership Parity Act to the Senate  , in an attempt to enact minor legislative changes to the tax code to expand MLP investment to renewable energy and release billions of dollars of private investment.  Unfortunately the Senate never took action on the bill and it died in committee when the new Congress was sworn in on January 3rd, 2013 . 

In contrast to MLP’s, there is optimism about the proposed extension of REIT’s to renewable energy investments because of the support of influential investors like Garvin Jabusch, who manages the SierraClub Green Alpha Portfolio, and because Congressional action is not needed .  A REIT, like a MLP, avoids the double taxation of traditional corporate structures.  REIT’s pass their income to investors as dividends which are treated as ordinary income provided at least 75% of their income is secured from investments in real property.  While there is a strong case to be made that solar assets are part of real property as currently defined under the tax code, most REIT managers have demonstrated a reluctance to use their capital to invest in renewable, and specifically solar, energy .  

Seizing a potential investment opportunity, the Renewable Energy Trust Capital, Inc. has pressed the IRS for a Private Letter Ruling to determine whether REIT’s can own solar assets.  A response from the IRS is expected in the near future, and if favorable it is expected that Renewable Energy Trust Capital, Inc., and its partner TrueSouth Renewables, will be the first to offer Solar REIT’s as an investment vehicle.  

Additionally, there will be environmental benefits of a favorable ruling by the IRS.  By some estimates, existing REIT’s control enough rooftop acreage in the United States to generate 15,000 megawatts of solar power and reduce the emissions of those properties by up to 50%, or 30 billion pounds of carbon dioxide .  In fact, a recent investment in solar energy at retail properties by Kimco Realty shows that such arrays may be able to produce up to 80% of the power required by a building’s occupants  .

A final opportunity for reducing the cost to raise capital for renewable energy projects is the securitization of renewable energy investments.  Such a product may be another important tool to increasing available capital for renewable energy projects, but questions remain about how the proposed securities will be rated.  In light of the recent and numerous scandals regarding the ratings of mortgage backed securities, both banks and rating agencies have been reluctant to release any methodology, or timeline, to support the release of securitized renewable investments.

Source: Ben Seaman, Cleantech Law Partners