For decades, fossil fuel companies have enjoyed the benefit of master limited partnerships (MLPs). A MLP is a business structure that acts like a corporation with its corporate stock trading on the open market, but is taxed as a partnership rather than at the corporate tax rate. This allows investors to buy and sell their shares in the public markets, and project developers to access cheaper capital through the markets. It’s an attractive tax benefit to be a MLP; an advantage that is inaccessible currently to renewable energy investment.
Since the 1980s, Congress has enabled investors to bundle energy projects like oil and gas pipelines and other fossil fuel developments from companies that extract, process or transport “depletable” natural resources and exempted them from corporate income taxes. The word “depletable” specifically excludes renewable energy.
U.S. Senator Chris Coons, a Delaware Democrat, introduced a bill last year that would give wind, solar and other renewable projects the same tax benefit. The Master Limited Partnerships Parity Act was re-introduced this week by a bipartisan group of senators.
In order to effectively combat climate change, renewables need to be priced at, or better yet, lower than fossil fuels. It’s easier to sell shares to individuals and institutional investors such as pension funds when renewable projects are set up as MLPs. Widening the pool of potential investors adds new competition, which could lower the cost of financing projects, and in the end reduce the cost of renewable power.
Is leveling the playing field for wind, solar and other renewable projects the magic bullet to renewable energy investment? No, but it is a step in the right direction. The Master Limited Partnerships Parity Act is actually part of a broader toolkit, one that the federal government has used successfully in the past to develop domestic energy resources. Tax benefits such as the Production Tax Credit and Investment Tax Credit remain essential tools within the renewable energy industry.
Other tax reforms the industry and its supporters say will help level the playing field with fossil fuels include allowing renewable companies to organize as real estate investment trusts (REITs) and letting renewable tax credits be claimed by more types of investors. In December of 2012, a bipartisan group of 29 U.S. lawmakers sent a letter to the President calling for changes to both MLPs and REITs.
Even with bipartisan support in a deeply divided Congress, the bill faces some serious obstacles. A 2011 Congressional Research Service report estimated that extending MLPs to renewable energy companies would cost the U.S. Treasury about $2.8 billion between 2010 and 2014. At the moment, the broad political momentum in Congress involves eliminating loopholes and exemptions in order to raise revenue and lower tax rates. The report suggests that if leveling the playing field is the endgame, the alternative is closing the tax loophole for oil and gas companies.
Personally, I want to stop global warming and move into a sustainable energy future. Let your Congressional Representatives know you want them to support the Master Limited Partnerships Parity Act.