In an effort to capture the economic benefit of the growing renewable energy sector, lawmakers have proposed new legislation that would allow clean energy producers to form Master Limited Partnerships (MLPs). MLPs are set up to allow companies to raise funds in the same way as a corporation does, and to pay taxes as a partnership. The MLP structure allows the business’s owners to pay tax on their individual tax returns, while providing the flexibility and opportunity to raise capital from smaller investors directly from the stock market.
The oil and gas industry currently uses MLPs to build capital-intensive energy infrastructure, however clean energy businesses are barred from accessing the same tax mechanism. The proposed new Master Limited Partnership Parity Act would change that, expanding MLP financing to clean energy projects.
A Brief History of MLPs
Apache Oil Company formed the first MLP in 1981, and the idea quickly spread to other industries including restaurants, hotels, and even a team in the National Basketball Association.
Six years later, Congress limited publicly traded partnerships (including MLPs) to partnerships in which 90 percent or more of their income comes from qualified sources.
In the energy sector, this includes mineral extraction, natural gas, oil, pipelines, geothermal, and the transportation and storage of ethanol, biodiesel, and other alternative fuels. Other renewable energy generation and commercial nuclear activities do not qualify.
- The market value of MLPs in the U.S. is more than $350 billion.
- About 81 percent of MLPs today are in the energy and natural resources industry, with investment and financial services making up most of the rest.
- Most of the energy MLPs constructed today are related to oil and gas activities; 52 percent of MLPs are in midstream and downstream activities, and 14 percent are in oil and gas exploration and production.
Proposed MLP Parity Act
MLPs provide an opportunity for U.S. businesses to mobilize capital and better compete. The oil and gas industry is in support of expanding MLPs to include renewable energy companies. Earlier this week, the American Petroleum Institute, the main lobbying group for the petroleum & natural gas industry, came out in support of the MLP Parity Act, as a way to “wean” the renewable energy sector away from federal subsidies. By expanding the list of qualifying projects to include solar, wind, geothermal, and other clean energy and transmission technologies, renewable-power projects could access new financing markets, thereby increasing investment and deployment of clean technologies.
As expected, the bill is supported by the renewable energy industry and environmental groups, but is also attracting support from policy organizations and companies such as NRG Energy and DuPont. If approved by Congress, the MLP Parity Act could lower financing costs for clean energy projects, some by as much as 50 percent.
“This bill is an important step toward providing the clean energy sector with consistent, long-term policy that can help leverage private capital and provide certainty to investors and companies alike,” says Phyllis Cuttino, Director of PEW, a charitable trust dedicated to improving public policy to protect terrestrial and marine life.
A draft proposal of the bill is already in the works, and it couldn’t come at a better time, with investment in clean energy at its lowest point since 2009. Expanding MLPs to include the renewable energy sector could be the extra incentive new investors need to revive clean energy capital.