Congressional lawmakers from both parties are taking a step to catalyze the nation’s clean energy economy: After 32 years of restricting a crucial investment tool to expanding fossil fuels, they’re pushing to open it to renewables.
Legislation is moving through both houses to tweak the tax code to let clean energy developers form a master limited partnership, or MLP, a type of publicly traded company structure not subject to corporate taxes.
For three decades, coal, oil and gas companies have used MLPs to raise hundreds of billions of dollars for pipelines, refineries and other projects. The financing vehicle is credited with helping sustain the nation’s current drilling boom.
But renewables have been shut out of the benefit, because the tax code prevents companies involved in “inexhaustible” natural resources like solar and wind from forming MLPs. This year, there’s momentum to change that, in part because of uncertainty over the future of clean energy tax credits and the end of the federal stimulus. The bills in Congress would extend MLPs to 10 types of renewable electricity sources, cellulosic ethanol, energy efficient buildings, electricity storage and renewable chemicals, among other projects.
“It’s been talked about ever since I can remember,” said Patrick Eilers, a managing director at Madison Dearborn Partners, a private equity firm in Chicago, and a member of the U.S. Partnership for Renewable Energy Finance, a group of renewable energy financiers.
No one expects much opposition to the Master Limited Partnerships Parity Act, the companion bills introduced last month. Co-sponsors include conservative Republicans and legislators from oil and gas states. The American Petroleum Institute, the oil industry’s main trade group, is among its backers.
“MLP is a perfect example of an investment vehicle that can facilitate renewable energy,” API President and CEO Jack Gerard said at a panel discussion last month at the Bloomberg New Energy Finance Summit.
However, the legislation could get caught up in the overhaul of the U.S. corporate tax system.
“The challenge has nothing to do with the popularity of the bill, but simply with the fact that all tax legislation is going to move very slowly as Congress considers tax reform,” said Richard Caperton, managing director of the energy program at the Center for American Progress, a liberal advocacy group.
There are two options, Caperton said. One is to pass the current legislation. The other is to incorporate the bills into a comprehensive tax reform package later this year. The decision over what to do could be many months away. For now, the bills are in committee and have yet to be scheduled for hearings or a vote.
Sens. Chris Coons (D-Del.) and Jerry Moran (R-Kan.) sponsored Senate Bill 795, and Rep. Ted Poe (R-Texas) sponsored House Resolution 1696.
How Much Will MLPs Help?
Master limited partnerships have two main advantages as an investment vehicle. One, they’re publicly traded on the stock market so a broad range of investors can invest in projects, such as pension funds and individuals. Two, unlike typical businesses MLPs don’t pay corporate taxes.
In 1981, the Apache Oil Company formed the first MLP to raise capital for oil drilling and production. Over the next five years, the number of MLPs swelled to 100 and included oil and gas, real estate, hotel, restaurant and amusement park industries.
Worried that companies were becoming MLPs to avoid corporate taxes, however, Congress passed legislation in 1987 to limit the financing structure to mainly fossil fuels, mining and real estate. It also blocked access to renewable resources. Interest in MLPs waxed and waned over the years. But by 2006—as the shale drilling boom started to heat up—the number of oil and gas MLPs skyrocketed again.
Today, more than 100 MLPs are traded on stock exchanges. Of the nearly $450 billion in MLP capital, 90 percent is for energy and natural resource projects. Nearly three-quarters of the money—$320 billion—finances oil and gas pipelines and other midstream projects.
Clean electricity developers could raise $7 billion through MLPs between now and 2020, according to estimates by Southern Methodist University’s Maguire Energy Institute. That’s about the cost of 40 average-sized wind farms and is equal to one-fifth of U.S. clean economy investments, which totaled $35 billion last year. For renewables, that’s “significant,” said Felix Mormann, an associate professor at the University of Miami School of Law and an expert on clean energy finance.
Experts agree that extending MLPs to renewable power could help level the playing field.
“It would take away a preferential advantage that fossil fuels have relative to renewable energy sources,” said Steven Corneli, a senior vice president at NRG Energy, one of the nation’s largest power companies. NRG owns 835 megawatts of wind and solar power, about 4 percent of the U.S. total.
MLPs “really help facilitate the private sector to invest,” Corneli said.
But MLPs are not a substitute for clean energy policy, such as state renewable energy mandates and federal investment and production tax credits for solar and wind, Corneli and others said. Both policies are under attack from mainly Republican legislators and fossil fuel industry and free-market groups.
Joshua Freed, vice president of the clean energy program at Third Way, a centrist Democratic think tank, said the MLP structure “helps individual projects get off the drawing board and into the ground—but it’s not the only action that needs to be taken.”
Why the Support Now?
In 2008, the National Association of Publicly Traded Partnerships, the MLP trade association, proposed extending MLPs to non-petroleum transportation fuels to help companies meet the Renewable Fuels Standard. Later that year, Congress approved a tax-code tweak that let ethanol, biodiesel and industrial carbon dioxide projects qualify for MLPs.
The bills now in Congress would do the same for clean electricity, energy efficiency and liquid biofuels from non-food feedstocks. Similar legislation was proposed last year but was never taken up. Since then, bipartisan support has grown for extending MLPs to renewable energy—something that is almost unheard of in this Congress.
“In an era where partisanship is the practice of the moment in every issue, the fact that you’ve got bills … introduced by such a geographically and politically diverse group of elected officials is striking,” Freed of Third Way said.
In addition to the American Petroleum Institute, the Business Roundtable, a coalition of CEOs, recommended that Congress open MLPs to renewables in its February report, Taking Action on Energy: A CEO Vision for America’s Energy Future. Its members include executives from some of the nation’s biggest energy firms, including Arch Coal, Chesapeake Energy, Chevron and ExxonMobil.
Caperton of the Center for American Progress suggested the motives of these companies could be self-serving. Letting renewables qualify for MLPs creates an insurance against attempts to end MLPs altogether by mainly taxpayer groups that view the structure as a loophole for companies to avoid paying income tax.
Fossil fuel companies “want to broaden the base of support for an incentive that currently is only available to them,” Caperton said. “As long as they’re the only people that benefit from it, then they’re more of a target.”
How MLPs would work under new legislation, image courtesy of Sen. Chris Coons (click to expand)
