The Upside of Alternative Energy MLPs
A little over a year ago, legislation was introduced to expand the universe of Master Limited Partnerships (MLP) to include a number of renewable energy technologies. The Master Limited Partnerships Parity Act (MLPPA) was sponsored in the Senate by Sen. Chris Coons (D-DE) and in the House by US Rep. Ted Poe (R-TX).
Master Limited Partnerships Parity Act – Amends the Internal Revenue Code, with respect to the tax treatment of publicly traded partnerships as corporations, to expand the definition of “qualifying income” for such partnerships to include income and gains from renewable and alternative fuels (in addition to fossil fuels), including energy derived from thermal resources, waste, renewable fuels and chemicals, energy efficient buildings, gasification, and carbon capture in secure geological storage.
The bill seeks the same tax treatment for renewable energy partnerships as that given to fossil fuel partnerships. MLPs are designed to lower the cost of capital for companies, but when Congress legislated the rules for publicly traded partnerships in 1987 it required that at least 90 percent of an MLP’s income must come from qualified sources, such as real estate or natural resources. Section 613 of the tax code requires qualifying energy sources to be depletable resources or their derivatives such as crude oil, petroleum products, natural gas and coal.
Recent case-by-case Internal Revenue Service rulings have expanded the range of activities qualifying for MLP treatment. The MLP Parity Act would further expand the definition of “qualified” sources to projects involving wind and solar power, as well as closed and open loop biomass, geothermal, municipal solid waste, hydropower, marine, fuel cells, and combined heat and power.
The bill has bipartisan support, but some Republicans have indicated they would only support the MLPPA if certain renewable energy subsidies — namely the current Production Tax Credit (PTC) and the solar Investment Tax Credit (ITC) — are eliminated. The ITC is a 30 percent federal tax credit for solar systems on residential and commercial properties, in effect through the end of 2016. The PTC is a tax credit paid for each kilowatt-hour (kWh) of renewable electricity produced. The PTC provides 2.3 cents per kilowatt-hour (¢/kWh) for wind, geothermal, and closed-loop biomass systems, and 1.1¢/kWh for other eligible technologies (typically through the first 10 years of operation).
Republicans argued that the MLPPA would merely place another layer of subsidy on top of these tax breaks. Senator Coons opposed eliminating the PTC and ITC in exchange for support on the MLPPA, and the bill has been stuck in committee since (which is where the previous incarnation of this bill died after being introduced in the 112th Congress).
Now the Union of Concerned Scientists (UCS) — one of the 235 groups urging passage of the MLPP — has weighed in with an analysis that estimates the bill would expand the investor base for renewable energy and lower the cost of financing projects by 40 percent or more. The analysis further estimates that lower financing costs would reduce the all-in cost of generating electricity from wind projects by 1.2 cents per kilowatt-hour, or about 40 percent of the value of the PTC for wind power.
Citing a 2012 study by the National Renewable Energy Laboratory (NREL) that estimates that $50 billion to $70 billion per year in capital investment would be required to increase non-hydro renewables to 30 percent of US electricity generation by 2025, UCS estimates that this level of funding could be a achieved with a shift of 0.7 to 1 percent of the total portfolio of the $15 trillion US mutual fund market and the $11 trillion U.S. defined-benefit pension market.
As I argued in Is MLP Parity Act a Game Changer?, solar or wind projects with attractive, long-term power purchase agreements (PPA) could work well as MLPs, similar to a midstream pipeline operator with long-term fee-based contracts. This is very different from a biofuel offtake agreement, since in most cases advanced biofuels aren’t yet economically viable and hence will find it difficult to benefit from a long-term offtake deal structure. In the case of solar, the cost of production can be estimated, and it has continued to fall over the years. Thus solar, wind, geothermal, biomass combustion — all of the current commercially available renewable power production options — could benefit greatly from MLP status.
Under the scenario modeled by the UCS, approximately 20 percent of all MLPs could be renewable energy MLPs, which would provide the estimated capital needed to make the shift to 30 percent renewable US electricity generation over the next decade. This is an ambitious target to be sure, but an approach that is preferable in my view to the current system of arbitrary and inconsistent subsidies. But it’s going to require Congress to come together and perhaps compromise — which is why the prognosis is that there is only a 1 percent chance that the current Congress will pass the bill.