Clean energy is often criticized as too expensive. Wind and solar power still cost more than electricity generated from natural gas or coal. And emerging technologies—such as enhanced geothermal or carbon capture and sequestration—cost even more.
Critics target not just the cost of clean energy itself but also the federal subsidies designed to support it. Badly needed now are more market-oriented and cost-effective ways to scale up clean energy development by leveraging the power of private finance.
Which is why it is good news that a recent “scoring” by the congressional Joint Committee on Taxation (JCT) suggests that the “Master Limited Partnership Parity Act” currently being considered could reduce not only the cost of clean energy but also the subsidies that support it.
Combining the tax benefits of a partnership with the fundraising advantages of a corporation, master limited partnerships (MLPs) are a widely-used investment vehicle that could accelerate the scale-up of clean energy by leveraging the power of capital markets.
Since the early 1980s, MLPs have raised over $400 billion for oil, gas, and other fossil energy infrastructure, at a significantly lower cost of capital than current U.S. clean energy finance. At a time when the cost declines of clean energy equipment have far outpaced declines in the cost of capital and other “soft costs”, financing charges can raise the overall cost of clean energy by up to 50 percent. Clean energy MLPs could match continuing technology cost improvements with much needed capital cost reductions.
There is only one problem. The federal tax code excludes “inexhaustible” natural resources from MLP eligibility, leaving little room for clean energy MLPs.
No wonder many supporters of a cleaner energy economy have high hopes for passage of the Master Limited Partnership Parity Act that would open MLPs up to a wide array of clean energy technologies, including renewable energy, energy efficiency, carbon capture and sequestration, electricity storage, combined heat and power, and renewable fuels.
First introduced in 2012 by Sens. Chris Coons (D-DE) and Jerry Moran (R-KS) with a more limited scope, the current MLP Parity Act enjoys broad bipartisan support in both the Senate and House and widespread endorsement from finance, industry, and environmental organizations.
And now the act has received a major boost. Last month, the JCT gave the MLP Parity Act a big leg up by scoring its revenue impact at just $307 million over 5 years and $1.3 billion over 10 years. By way of comparison, JCT forecasts existing fossil energy MLPs to cost the federal budget $6.7 billion and tax credit support for renewable energy to cost $12.6 billion over the next five years.
JCT’s comparatively low scoring of the MLP Parity Act is all the more noteworthy given that the committee’s “static” scoring methodology does not account for the overall economic growth that clean energy MLPs are expected to stimulate. Such growth across a range of industries and technologies will likely generate federal tax revenue that could cover part if not all of the MLP Parity Act’s cost to taxpayers.
Moreover, clean energy MLPs may not reduce federal tax revenues as much as commonly assumed. Most U.S. solar, wind, and other clean energy deployment already uses partnership structures that lack MLPs’ access to capital markets but, like MLPs, are not taxed on income at the entity level the way c-corporations are taxed. In these instances, the MLP Parity Act would make little difference to federal tax revenue while dramatically reducing the cost of financing clean energy.
So what does JCT’s cost estimate really mean? Is it relatively low because the committee does not expect the MLP structure to be very popular among clean energy developers and investors? A closer look at the numbers suggests the opposite is true.
If the benefits of pass-through taxation for existing fossil energy MLPs with a market capitalization of over $400 billion are projected to cost the taxpayers $6.7 billion from 2013 through 2017 then, simply speaking, every federal tax dollar appears to support some $60 of MLP capital over five years. Based on this back-of-the-envelope calculation, JCT’s scoring suggests that clean energy MLPs could raise on the order of $18 billion of low-cost capital in the first five years alone for wind, solar, carbon capture, renewable fuels, and other clean energy projects.
Assuming the same moderate growth for clean energy as for fossil energy MLPs, our simplistic math may mask a considerable understatement. With clean energy MLPs starting at zero, JCT’s scoring implies strong growth rates following the MLP Parity Act’s enactment with most of the revenue impact coming toward the end of the scoring period. Even assuming that growth eventually tapers off, there is every reason to believe that clean energy MLPs will have raised more than $18 billion at the end of five years. And looking at JCT’s scoring for the second five-year period, the projected cost to taxpayers of $993 million suggests that clean energy MLPs could have a market capitalization of nearly $60 billion after a decade. That’s a very good return on taxpayer dollars.
MLPs are a critical tool but not the only way to reduce capital costs for clean energy. Other options include real estate investment trusts (REITs) and YieldCos. REITs offer tax and fundraising advantages similar to MLPs and currently await a Treasury Department “revenue ruling” to become widely available for clean energy. YieldCos allow sophisticated market participants to assemble a diverse portfolio of emerging and conventional energy assets in classic corporate structures to maximize the value of federal tax incentives.
Ideally, clean energy entrepreneurs will have a choice among these and other structures to facilitate a smooth transition toward smarter, more cost-effective clean energy finance. Such a transition should strike a sensible balance between policy innovation and continuity. For solar energy, for example, congressional approval of clean energy MLPs could help provide a glide path to and beyond the solar investment tax credit’s 2016 phase-down. In the case of wind energy, a smooth and smart transition should include a multi-year extension of the wind energy production tax credit with a gradual phase-down, in conjunction with the phase-in of MLPs. At the same time, MLP financing could help advance critical technologies such as combined heat and power, advanced biofuels, and carbon capture and sequestration for coal.
JCT’s positive scoring of the MLP Parity Act brings clean energy MLPs one step closer to reality. Let’s hope solid and growing bipartisan support will see the MLP Parity Act signed into law, scoring a big win for America’s energy future.