Renewables Parity Push Renewed

Last month senators Chris Coons (D-DE) and Jerry Moran (R-KS), along with representatives Ted Poe (R-TX) and Mike Thompson (D-CA), introduced the Master Limited Partnerships Parity Act (MLPPA) of 2015 (S.1656 and H.R.2883). If this legislation sounds familiar, that’s because it’s the third time the bill has been introduced.

Its goal is to give renewable energy partnerships the same tax treatment (“parity”) as that afforded those profiting from fossil fuels.

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 qualifying sources such as real estate or natural resources. Section 613 of the tax code defines qualifying energy sources as depletable resources or their derivatives, such as crude oil, petroleum products, natural gas and coal.

Of course the advantage of the MLP structure for investors is that it is a tax-friendly investment vehicle. MLPs aren’t taxed at the corporate level, passing profits directly to the partners (unitholders) in the form of quarterly distributions. This arrangement avoids the double taxation of dividends affecting traditional corporations and their shareholders and, all things being equal, should therefore lead to more attractive returns.

That edge, in turn, gives MLPs a lower cost of capital than they would likely have as corporations, which can make some projects economically viable that wouldn’t have been in the absence of the favorable tax structure.

While case-by-case Internal Revenue Service rulings have expanded the range of activities qualifying for MLP treatment in recent years, MLPs are still overwhelmingly focused on fossil fuels. The MLP Parity Act would expand the definition of “qualified” sources to include renewable energy resources and infrastructure projects. According to the summary of the bill on Senator Coons’ website:

The MLP Parity Act simply expands the definition of “qualified” sources to include clean energy resources and infrastructure projects. Specifically included are those energy technologies that qualify under Sections 45 and 48 of the tax code, including wind, closed and open loop biomass, solar, municipal solid waste, hydropower, marine and hydrokinetic, fuel cells, and combined heat and power. It also includes waste-heat-to-power, carbon capture and storage, biochemicals, and energy-efficient buildings. The legislation also allows for a range of transportation fuels to qualify, including cellulosic, biodiesel, and algae-based fuels. 

The bill is co-sponsored by a bipartisan group of lawmakers including senators Debbie Stabenow (D-MI), Lisa Murkowski (R-AK), Michael Bennet (D-CO), Susan Collins (R-ME), Angus King (I-ME) and Cory Gardner (R-CO); and representatives Paul Gosar (R-AZ), Mark Amodei (R-NV), Peter Welch (D-VT), Jerry McNerney (D-CA), Mike Coffman (R-CO) and Earl Blumenauer (D-OR).

The notion of tax parity for energy projects regardless of their type seems like a no-brainer, but previous incarnations of this bill have failed to garner much support beyond the sponsors. The primary reason is that while few would object to the idea of giving equal treatment to renewable energy, many 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. Their objection has been that passing the MLPPA while allowing the current tax credits to remain in place doubly subsidizes renewable energy projects.

The ITC is a 30% 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). Eligibility for the PTC also effectively expires at the end of 2016, as projects must be under construction prior to January 1, 2017 to be eligible for this credit.

The Senate version of the MLPPA has been referred to that chamber’s Committee on Finance, while the House version was referred to the House Committee on Ways and Means. Allowing the current tax credits to expire at the end of 2016 while providing MLP status for renewable energy projects might be a compromise reluctant Republicans could stomach. If so, then the third time may be the charm for the MLPAA.

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