Renewable Energy Investments Made Easier

A relatively small change to the tax code could make all the difference in renewable energy investments, and while it's not likely to happen this year, 2013 could be a decisive year for a more equitable sharing of preferential tax treatment across the energy sector.

While the fossil fuel industry has benefited for three decades from the privilege of Master Limited Partnerships (MLPs), which exempt investors from some corporate income taxes, renewable energy has not enjoyed this preferential treatment, and in fact, the law specifically bans renewable energy investors from getting in on MLPs, but that is set to change very soon.

On 7 June, Senator Christopher Coons (D-Delaware) and Senator Jerry Moran (R-Kansas) submitted legislation that would allow renewable energy investors to benefit from MLPs. The Master Limited Partnerships Parity Act would extend MLPs to include energy-related investments beyond oil, natural gas, coal and pipelines.

To backtrack briefly, MLPs are special purpose investment vehicles that offer exemptions to investors from certain corporate income taxes but require that the majority of income is distributed to partnership shareholders every quarter. The benefits of MLPs are that in comparison with traditional corporations, they lower taxation and capital costs by eliminating double taxation and allowing for access to new sources of capital.

In an early June press release, Senator Moran stated: "Master limited partnerships have been largely responsible for the tremendous growth in our country's energy infrastructure. 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."

The Master Limited Partnerships Parity Act finds its origins in a December 2011 white paper from the Third Way think tank entitled "A Small Tax Change, Big Clean Energy Results".

Third Way has expressed concern that investment in clean energy in the United States would disappear as the rest of the world "races ahead". Part of the solution, according to the think tank, is for Congress to "unleash significant private capital by reforming the tax code to permit the use of master limited partnerships for clean energy projects".

Coons' legislation proposes to add clean energy resources and infrastructure projects to the list of those eligible for MLPs, including in the areas of solar, wind, marine and hydrokinetic, hydropower, combined heat and power, municipal solid waste, geothermal, fuel cells, biomass production and a range of biofuels.

Importantly, the MLP Parity Act would effectively put to rest calls to roll back tax subsidies for the fossil fuels industry and instead simply allow renewable energy to benefit from the same, which in turn could go a long way towards overcoming Congressional deadlock over the issue. This is also why the bill enjoys bipartisan support. Coons has in fact found five Republican co-sponsors for his legislation.

According to Michael Bagley, president of the Washington, DC-based boutique political intelligence firm, Jellyfish, Coons' bill "has the support of pretty much all of the major trade associations in the alternative energy industry and is as much about policy as it is about structure."

But politics will get in the way as far as the third and fourth quarters of 2012 are concerned.

"While the bill has traction and bipartisan support, as this is an election year it probably will not see passage in 2012 for a number of political reasons," Bagley told Oilprice.com.

That said, 2013 could very well see this bill pushed through and investors should be lining up to take advantage of the renewable energy tax breaks that will make it easier to raise lower-cost capital amid declining financing options. Indeed, the Maguire Energy Institute at Southern Methodist University predicts that the passage of the MLP Parity Act could unleash some $6 billion in capital for renewable energy projects.

Specifically, according to Coons, if renewable energy can jump on the MLP bandwagon it will have "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."

By. Oilprice.com Analysts