This Congress has been sharply criticized for not passing legislation with bipartisan support to benefit the American people. In the energy area, Congress now has a chance to take action which flies in the face of that criticism. By enacting the provisions of Master Limited Partnerships Parity Act, Congress can benefit the environment, promote American jobs, and foster diversity in our energy sources.
This should not be a difficult task. The legislation enjoys broad bipartisan support in the Congress and also throughout the country.
It is easy to conclude that we have solved all of our energy problems. But that is not correct. We are still importing large quantities of oil. Our natural gas now seems plentiful; but it is, after all, a depletable resource which will not last forever. And oil and natural gas are fossil fuels with a resultant impact on the environment.
What we need in our mix of energy supplies to ameliorate this situation is a strong and vibrant renewable energy industry, particularly wind turbines and solar panels. To the extent they are a significant contributor to the total energy supply in the United States, we reduce our use of depletable carbon-based fuels with benefits and create parity across sources of energy.
Unfortunately, these renewable energy sources lack the same access to affordable equity capital as their competitors such as natural gas, which currently benefits from Master Limited Partnerships (or MLPs).
This adversely affects not only the competitiveness of renewable energy sources in the United States, but also in our competition with China. In 2011, the U.S. invested $48 billion in renewable energy to reclaim the lead from China. But much of the U.S. funding for this increase in production came from the 2009 American Recovery and Reconstruction Act. These funds have run out, and China is prevailing in this competition.
For these reasons, it is strongly in the country’s interest to put renewable energy on the same plane as other energy supplies. Fortunately, there is an easy way to accomplish that: Amend the U.S. tax laws to permit renewable energy projects to utilize MLPs—the tax structure currently utilized by oil, gas, and other carbon based energy projects.
This would be a little appreciated technical change to our tax code that could provide a simple fix, allowing entrepreneurs to invest in new sources of American energy. By changing how that law allows new businesses to treat their investments, this Act could unlock tremendous private resources.
An MLP is a business structure that is taxed as a partnership, but whose ownership interests are widely held and traded like corporate stock on a market. Whereas profit from publicly traded corporations is taxed at both the corporate level and the shareholder level, income from MLPs is taxed only at the shareholder level because it is treated as a partnership for tax purposes.
MLPs have been in existence since 1987 and used as a competitive source of equity capital for fossil fuel related companies. Since the end of 2008, the number of companies that are MLPs increased from 73 to 112 at the end of 2013, and the market capitalization of the sector grew 5.7 times, from $92 B to $524 B in the same time period. In 2012 and 2013 alone, there was a total of over $60 B of new equity issued: this is a deep and liquid source of capital.
The advantage of MLPs is that they are attractive to investors and have been proven to bring new capital into American energy projects. If MLPs were available for renewable energy, it could access to competitive, cheaper sources of capital. As Mormann and Reicher of Stanford University’s Steyer-Taylor Center for Energy Policy and Finance concluded, these investment vehicles could substantially reduce the cost of financing renewables, thus expanding the pool of renewable energy investors and help democratize, and thus build support for, these new energy sources (NY Times, June 2, 2012).
In short, basic fairness argues for permitting renewable energy sources to utilize MLPs. Since the early 1980s, the oil and gas industry has been permitted to use MLPs to build the infrastructure for oil, gas, and other carbon-based energy projects, thereby reducing their cost of capital. And they have used MLPs extensively to raise over $400 billion of equity capital for companies. However, the federal tax code only permits exhaustible resources to be eligible for MLP treatment, thereby excluding renewable energy.
Finally, allowing renewable energy sources to utilize MLPs would have a small impact on federal revenue compared with the benefits being realized. In November 2013, the Congressional Joint Committee on Taxation (JCT) assessed the revenue impact of legislation to permit renewable energy sources to utilize MLPs at $307 million over 5 years and $1.3 billion over 10 years. That’s a small fraction of the $6.7 billion that is flowing to existing fossil energy MLPs.
In view of all these factors, it is not surprising that the current bill to extend MLP tax status to renewables introduced by Sen. Chris Coons (D-Del.) and Rep. Ted Poe (R-Texas) enjoys widespread bipartisan support. It has been endorsed by a large number of business firms and environmental groups, including the American Petroleum Institute. There is no serious opposition.
The difficulty is that allowing renewables to utilize MLPs has been viewed as a part of comprehensive tax reform. Indeed, this week Sen. Ron Wyden (D-Ore.) reiterated his commitment to address it in a comprehensive reform package. Unfortunately, we are unlikely to see comprehensive tax reform in the foreseeable future.
This means MLPs for renewables, an excellent energy tax policy with strong bipartisan support, is being held hostage to the legislative process.
There is a simple solution: include MLPs in tax extenders legislation currently being considered by both the House and Senate. Congress should take this action to get MLP parity legislation across the goal line. Doing so will be a result which everyone in Congress will be able to point to with pride.
Gaynor is CEO of First Wind, an American wind energy company.