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MLPs: Renewable Energy Bargain or Bad Deal?

Aside from the NSA surveillance program and vacations, it’s nearly impossible to find something both parties in Congress can agree on.

But we may just have another such policy: master limited partnerships, or MLPs.

MLPs help energy project developers and investors avoid getting hit with double taxes. They are publicly traded entities that are allowed to act like traditional corporations, but are not required to pay corporate income taxes. Instead, after raising capital for projects through the public markets, MLPs pass income down to shareholders who pay personal income taxes.

Traditionally, MLPs have been limited only to fossil fuel companies, mostly those developing pipelines. But a simple 600-word bill in Congress could soon allow renewable energy companies to create these partnerships.

Lawmakers may not agree on what specific tools should be used to subsidize energy (or even what types of energy to subsidize), but they love to use the tax code to do it. According to the Energy Information Administration, 44 percent of U.S. government spending on energy in 2010 was through the tax code. 

MLPs, which are just another tweak to the tax code, are seen by pretty much everyone as a way to give renewables the same tax benefits for project development that oil and gas companies have enjoyed. At a time when lawmakers puff up nearly every issue as controversial, MLPs are a decidedly vanilla-flavored incentive with a real shot at passing through Congress this year.

However, there are still some who are not convinced that MLPs are a magical fix that will level the playing field for renewables.

As we reported last month, there are a lot of private concerns in the wind industry and among renewable energy advocates that MLPs will be used as a bargaining chip for ending the production tax credit or investment tax credits. But those who worry about the tradeoff are still supportive of MLPs generally.

Then there are people like John Farrell of the Institute for Local Self Reliance who want to change the paradigm entirely. Farrell sees MLPs as yet another opportunity for large energy companies to dominate the market and prevent community-owned renewables from flourishing.

“It’s a devil’s bargain. I think it ultimately undermines our opportunity to change the ownership model by simply allowing big companies to avoid paying taxes,” said Farrell, who has been trying to inject his passion for small-scale renewables into the conversation around MLPs.

Farrell’s other concern is one written about by former New York Times journalist David Cay Johnston. In his 2012 book The Fine Print, Johnston explained that the Federal Energy Regulatory Commission had allowed MLPs — again, entities that don’t pay corporate income taxes — to charge users for access to energy infrastructure as if they did pay those taxes. Johnston reported that this increased after-tax profits by as much as 75 percent for some entities.

“This just sets up another trough for the hogs to feed,” said Farrell. “I just think we should be more cautious about what we’re doing. If we are creating tax-advantaged structures for investing in renewable energy, it may help shift from fossil fuels to renewables, but it will likely keep the profits in the hands of the same players who were making the initial investments.”

But others aren’t so sure about that claim.

“It’s just not true that MLPs are only held by large, centralized entities,” said Douglass Sims, a project finance specialist at the Natural Resources Defense Council. “They’re also held by individual investors. Without question, there will be more people who are able to hold a stake in these companies.”

Rather than simply allowing the largest tax equity players to invest in projects through tax credits, individual investors would be able to invest in project portfolios through exchange-traded funds and mutual funds. Opening up these new pools of investment means more liquidity and a lower cost of financing.

“There aren’t that many companies able to take advantage of tax credits. Less competition means a higher cost of capital for projects,” said Sims. “If an MLP can borrow money cheaply through the bond market instead of having to do a project finance deal, that lowers the cost of doing business.”

As a staunch advocate of localized renewables, Farrell worries that MLPs will create “path dependency” toward large, centralized projects.

“There’s a consequence every time you encourage one style of investment over another,” he said. “For example, if you build a transmission line, you’re more likely to build a central power plant. The same goes for policies like this. I think there’s a limit to how much we can do both.”

But Sims doesn’t think it’s an either/or decision.

“I don’t understand this zero-sum game theory,” said Sims. “MLPs won’t displace things like community solar gardens or crowd investing like Solar Mosaic. We’re trying to create a more robust ecosystem around finance, and these structures allow for different kinds of money to come in.”

Indeed, with trillions of dollars needed to realize an 80 percent renewable energy penetration, MLP supporters argue that any source of new capital is welcome. Getting to such a high penetration of renewables can’t be achieved simply through individual or community-based investment, they argue.

The debate around MLPs is new, but the philosophy behind it is quite old. It mirrors a previous debate about whether the U.S. should support feed-in tariffs over tax-based policies or tradable credits to encourage a people-powered renewables transition. On one side are idealists who want to change the system completely and bring the financial benefit of renewables straight to individuals; on the other side are realists who believe that large corporate players have a major role to play in bringing renewables to scale.

According to Sims, MLPs could actually satisfy both camps.

“No one is arguing that there’s going to be a concentration of investment dollars through this structure. It’s quite the opposite,” said Sims. “There will be a lot of different investors, and if you allow people to own these partnerships, they’ll see the benefit personally.”

Stephen Lacey's picture

Thank Stephen for the Post!

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Discussions

Max Kennedy's picture
Max Kennedy on Jun 15, 2013 2:10 pm GMT

MLP’s though theoretically good for all will indeed benefit the huge corporations more than the little guy.  One simply has to look at who benefits from the current MLP’s.  The big players have more resources to take advantage of this immediately and can lock out the smaller players.  As an example when Ontario opened the FIT progam I was part of a community Co-op that sought to develop such projects only to find that Chinese corporations had bought the line capacity because they had the resources to do so immediately.  Thus developments that could have meant a great deal of benefit to the local community go solely into the deep pockets of a literally nameless, faceless and souless corporation.  Similarly the large will dominate the MLP’s unless the legislation gives communities, and representative groups there-in, 1st option on development.

dennis baker's picture
dennis baker on Jun 15, 2013 11:54 pm GMT

What ever it takes to get financing for innovation is welcome!

I welcome any break that comes my way

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