Technological innovation is driving renewable energy towards
a future where it is cost competitive without subsidies and provides a growing
share of America’s energy. But for all the technical progress made by the clean
energy industry, financial innovation is not keeping pace: access to low-cost
capital continues to be fleeting, and the industry has yet to tap institutional
and retail investors through the capital markets. This is why a bipartisan
group in Congress has proposed extending master limited partnerships (MLPs), a
financial mechanism that has long driven investment in traditional energy
projects, to the clean energy industry.
Last month Senators Chris Coons (D-DE) and Jerry Moran
(R-KS) introduced the Master Limited Parity Act (S. 795); Representatives Ted
Poe (R-TX), Mike Thompson (D-CA), and Peter Welch (D-VT) introduced companion
legislation (H.R. 1696) in the House of Representatives. The bills would allow
MLP treatment for renewable energy projects currently eligible for the Sec. 45
production tax credit (PTC) or 48 investment tax credit (ITC) (solar, wind,
geothermal, biomass, hydropower, combined heat and power, fuel cells) as well
as biofuels, renewable chemicals, energy efficient buildings, electricity
storage, carbon capture and storage, and waste-heat-to-power projects. The bill
would not change the eligibility of projects that currently qualify as MLPs
such as upstream oil and gas activities related to exploration and processing
or midstream oil and gas infrastructure investments.
MLPs have been successfully utilized for traditional
fossil-fuel projects because they offer an efficient means to raise inexpensive
capital. The current total market capitalization of all energy-related MLPs
exceeds $400 billion, on par with the market value of the world’s largest
publicly traded companies. Ownership interests for MLPs are traded like
corporate stock on a market. In exchange for restrictions on the kinds of
income it can generate and a requirement to distribute almost all earnings to
shareholders (called unitholders), MLPs are taxed like a partnership, meaning
that income from MLPs is taxed only at the unitholder level. The absence of
corporate-level taxation means that the MLP has more money to distribute to
unitholders, thus making the shares more valuable. The asset classes in which
MLPs currently invest lend themselves to stable, dividend-oriented performance
for a tax-deferred investment; renewable energy projects with long-term
off-take agreements could also offer similar stability to investors. And since
MLPs are publicly traded, the universe of potential investors in renewable
projects would be opened to retail investors.
The paperwork for MLP investors can be complicated, however.
Also, investors are subject to rules which limit their ability to offset active
income or other passive investments with the tax benefits of an MLP investment.
Despite the inherent restrictions on some aspects of MLPs, the opportunities
afforded by the business structure are generating increasing interest and
support for the MLP Parity Act.
Proponents of the MLP Parity Act envision the bill as a way
to help renewable energy companies access lower cost capital and overcome some
of the limitations of the current regime of tax credits. Federal tax incentives
for renewable energy consist primarily of two limited tools: tax credits and
accelerated depreciation rates. Unless they have sizeable revenue streams, the
tax credits are difficult for renewable project developers to directly use. The
reality is only large, profitable companies can utilize these credits as a
means to offset their income. For a developer who must secure financing though
a complicated, expensive financing structure, including tax equity investors
can be an expensive means to an end with a cost of capital sometimes approaching
30%. Tax credits are a known commodity, and developers are now familiar with
structuring tax equity deals, but the structure is far from ideal. And as
renewable energy advocates know all too well, the current suite of tax credits
need to be extended every year. MLP treatment, on the other hand, does not
expire.
Some supporters have noted that clean energy MLPs would
“democratize” the industry because private retail investors today have no means
to invest in to any meaningful degree in clean energy projects. Having the
American populace take a personal, financial interest in the success of the
clean energy industry is not trivial. The initial success of ‘crowd-funded”
solar projects also provides some indication that there is an appetite for
investment in clean energy projects which provide both economic and
environmental benefits.
Sen. Coons has assembled a broad bipartisan coalition,
including Senate Finance Energy Subcommittee Chair Debbie Stabenow (D-MI) and
Senate Energy and Natural Resources Ranking Member Lisa Murkowski (R-AK).
Republican and Democratic cosponsors agree that this legislation would help
accomplish the now-familiar “all-of-the-above” approach to energy policy.
However, some renewable energy companies that depend on tax
credits and accelerated depreciation are concerned that Republican supporters
of the legislation will support the bill as an immediate replacement for the
existing (but expiring) suite of renewable energy tax credits. Sen. Coons does
not envision MLP parity as a replacement for the current production tax credits
and investment tax credits but rather as additional policy tool that can
address, to some degree, the persistent shortcomings of current financing
arrangements. In this way, MLPs could provide a landing pad for mature
renewable projects as the existing regime of credits is phased out over time,
perhaps as part of tax reform.
So would the clean energy industry utilize MLP structures if
Congress enacts the MLP Parity Act? The immediate impact may be hard to predict,
and some in renewable energy finance fear MLP status will be less valuable than
the current tax provisions. This is in part because the average retail investor
would not be able to use the full share of accompanying PTCs, ITCs, or
depreciation unless Congress were also to change what are known as the
“at-risk” and “passive activity loss and tax credit” rules. These rules were
imposed to crack down on perceived abuse of partnership tax shelters and have
tax implications beyond the energy industry. Modifying these rules is highly
unlikely and would jeopardize the bipartisan support the bill has attracted so
far. But other renewable energy companies believe they can make the structure
work for them now, and industries without tax credits — like renewable chemicals,
for instance — would not have the same concerns with “at-risk” and “passive
activity loss” rules. Furthermore, over the long term, industry seems
increasingly confident the structure would be worthwhile. Existing renewable
projects that have fully realized their tax benefits and have cleared the
recapture period could be rolled up into existing MLPs. Existing MLP
infrastructure projects could deploy renewable energy assets to help support
the actual infrastructure. Supporters of the legislation see the change as a
starting point, and the ingenuity of the market will find ways to work within
the rules to deliver the maximum benefit.
The future of the MLP Parity Act will be linked to the
larger conversation in Congress regarding tax reform measures. The MLP Parity
Act is not expected to pass as a stand-alone bill; if it were to be enacted, it
would most likely be included as part of this larger tax-reform package.
Congress currently is looking at ways to lower overall tax rates and modify or
streamline technology-specific energy provisions. This has many renewable
energy advocates on edge: while reform provides an opportunity to enact
long-term policies (instead of one-year extensions) that could provide some
level of stability, it also represents a chance for opponents of renewable
energy to exact tough concessions or eliminate existing incentives. As these
discussions continue in earnest this year, the reintroduction of the MLP Parity
Act has already begun to generate discussions and mentions in policy white
papers at both the House Ways and Means Committee and the Senate Finance
Committee. Whether a highly partisan Congress can actually achieve such an
ambitious goal as tax reform this year remains uncertain. But because of its
bipartisan support, the MLP Parity Act certainly will be one of the many
potential reforms Congress will consider seriously.
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