by Andrew Burger | July 16, 2012 10:00 am
Looking to make the transition from an economy based on fossil fuels, renewable energy businesses across the value and supply chain have benefited from state and federal government subsidies, support and incentives.
State renewable power/portfolio standards (RPS), which have been enacted in 37 states to date, have been critical to the near-doubling of U.S. renewable energy capacity since 2008, along with the creation of hundreds of thousands of jobs.
While the Obama administration has set U.S. energy policy firmly on the renewable path, the federal government — more precisely, a bitterly divided Congress — has relied primarily on tax incentives in the form of investment and production tax credits (ITCs and PTCs) to foster growth and development of the U.S. clean-energy economy.
However, key federal ITC and PTC subsidies, such as the Treasury 1603 grant program and wind energy PTC, have either expired or are due to expire shortly, threatening to starve the broad spectrum of renewable-energy industry participants of capital at a time when weak macroeconomic conditions and market microeconomics threaten to stall further growth and development.
In a move that would significantly broaden and deepen the pool of private-sector capital available for investment in solar, wind, geothermal and other forms of renewable energy businesses and projects, Sen. Christopher Coons (D-Del.), along with Senator Jerry Moran (R-Kan.), on June 7 introduced a bill in the Senate that would allow renewable-energy companies to form master limited partnerships, or MLPs.
Fossil fuel industry businesses — predominantly oil & gas pipeline operators and distributors such as Kinder Morgan Energy Partners LP (NYSE:KMP) and Enterprise Products Partners (NYSE:EPD) — have taken advantage of these subsidized, tax-advantaged investment vehicles for decades.
MLPs have become especially popular with investors searching for relative security, stability and high dividend yields in recent years. The following chart shows the five-year performance of the JPMorgan Alerian MLP Index ETN (NYSE:AMJ), an exchange-traded note that tracks a broad group of U.S. exchange-listed MLPs.
It’s clear that the oil & gas industry and investors alike have benefited from MLPs. The thing is, the legislation that opened the door for them to do so specifically excludes renewable-energy companies from doing so. The Master Limited Partnerships Parity Act seeks to level the U.S. energy investment landscape by addressing and correcting that.
“Master limited partnerships have been largely responsible for the tremendous growth in our country’s energy infrastructure,” Senator Moran stated upon the bill’s introduction. “In order to grow our economy and increase our energy security, sound economic tools like the MLP should be expanded to include additional domestic energy sources.”
In addition to gaining the Obama administration’s support, the Coons-Moran MLP Parity Act has gained the support of five Republican co-sponsors.
Allowing renewable energy industry participants to form MLPs would open up significant new opportunities to raise lower-cost capital at a time when financing options are regressing to the point where renewable-energy financing is increasingly reliant on tapping the relatively small, inadequate market for tax equity financing.
As much as $6 billion in capital that’s currently excluded from renewable-energy projects might be invested in renewable-energy MLPs, according to a study from the Maguire Energy Institute at Southern Methodist University.
As Coons notes, projects put into an MLP portfolio “get access to capital at a lower cost and are more liquid than traditional financing approaches to energy projects, making them highly effective at attracting private investment. Investors in renewable energy projects, however, have been explicitly prevented from forming MLPs, starving a growing portion of America’s domestic energy sector of the capital it needs to build and grow.”
In a June 2 New York Times article, Stanford University’s Dan Reicher and Felix Mormann succinctly explained the boost allowing renewable energy companies to form MLPs would provide to the U.S. renewable energy industry:
“If renewable energy is going to become fully competitive and a significant source of energy in the United States, then further technological innovation must be accompanied by financial innovation so that clean energy sources gain access to the same low-cost capital that traditional energy sources like coal and natural gas enjoy.
“Master limited partnerships carry the fund-raising advantages of a corporation: ownership interests are publicly traded and offer investors the liquidity, limited liability and dividends of classic corporations. Their market capitalization exceeds $350 billion. With average dividends of just 6%, these investment vehicles could substantially reduce the cost of financing renewables.”
If passed, the Coons-Moran MLP Parity Act would allow MLPs to be formed for solar, wind, marine and hydrokinetic, hydropower, combined heat and power, municipal solid waste, geothermal, fuel cells and closed- and open-loop biomass. It also would enable MLPs to be formed for a range of alternative transportation fuels, including cellulosic ethanol, biodiesel and algae fuels.
Renewable energy MLPs, in turn, would offer investors a secure, cost-effective and high-yielding opportunity to contribute to and participate in the success of America’s fast-growing renewable energy markets and companies.
As of this writing, Andrew Burger did not hold a position in any of the aforementioned securities.
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