(Photo by David Ingram via Creative Commons)

Tax writers warm to giving renewables parity with fossil fuels

©2013 E&E Publishing, LLC
Republished with permission

By Nick Juliano

A proposal to allow renewable energy developers to take advantage of a tax structure that has long been popular among fossil fuel companies is gaining traction among lawmakers tasked with overhauling the tax code.

Rep. Kevin Brady (R-Texas), who is leading a working group examining energy tax provisions, praised the idea of opening master limited partnerships (MLPs) to renewable energy companies. The structures have been popular among oil and gas, pipeline and coal companies as a way to attract investors, but current law does not allow renewable companies like wind and solar developers to use them.

Legislation allowing wind, solar and other renewable energy companies to establish MLPs will be reintroduced in the House and Senate later this month, and the idea has emerged as a key focus of the renewable energy industry and policy watchers as Congress pursues its overhaul of the tax code.

“We’re going to dig into it, because it is one of the most efficient ways to both raise and distribute capital from individual investors at a time where renewed energy infrastructure [is needed] in a serious way,” Brady told E&E Daily last week.

Rep. Mike Thompson (D-Calif.), the vice chairman of the energy tax working group, plans to reintroduce his bipartisan bill opening MLPs to renewable energy developers in two weeks; a bipartisan Senate companion bill will be reintroduced at the same time by Sens. Chris Coons (D-Del.) and Jerry Moran (R-Kan.), aides said Friday.

A Coons spokesman said the ongoing tax reform discussions will be a key venue to advance the MLP proposal but stressed that it was not the only avenue for getting the proposal enacted.

“This is an idea that has really gotten this attention because it’s simple and it’s basic and it’s fair and this is the time,” spokesman Ian Koski said.

MLPs are taxed as limited partnerships, but they allow investors to purchase shares in companies that are traded like stock on an exchange. Proponents say they allow for a more diverse array of investment and reduce overhead costs.

Renewable energy developers currently rely primarily on federal tax credits to reduce their costs — the production tax credit, which provides $23 for every megawatt-hour of electricity generated, benefits wind, geothermal, biomass and some hydro developers, while the investment tax credit is primarily used by solar companies to recoup up to 30 percent of their costs.

But because many companies’ tax bills are too small to fully claim those benefits, they have to rely on tax equity markets to partner with banks or other large firms that essentially purchase the tax benefits. Industry sources have complained that that arrangement creates high overhead costs, and some in the industry are looking at MLPs as a cheaper way to raise the money they would need.

Brady’s working group spent two hours meeting with eight companies in his suburban Houston district during the congressional recess earlier this month. The meeting included several energy stakeholders, including representatives of the oil, natural gas and wind industries, he said.

“Cost of capital” was a key concern of all the companies present, with the wind representatives expressing interest in expanding MLP eligibility while the oil and gas officials stressed the importance of their existing intangible drilling costs deduction, which allows companies to avoid taxes on a variety of expenses from rig rentals to worker salaries.

“Energy is just capital intensive, no matter where you are in that space, and then of course the certainty of provisions moving forward,” Brady said in a brief interview off the House floor Friday. “And they recognize that status quo, overall, is not an option. But there are various segments focusing on what are the best existing provisions for the cost of capital, the ability to recover.”

Moniz expresses interest

Brady’s is one of 11 working groups that have been meeting since February to delve deep into the details of specific tax reform topics (E&E Daily, Feb. 28). The groups will submit their findings today to the Joint Committee on Taxation, which is expected to have a report back to the House Ways and Means Committee by next month.

MLPs also received some positive attention last week from President Obama’s nominee to lead the Department of Energy, Ernest Moniz, who pointed to MLPs and real estate investment trusts as two opportunities to streamline financing for renewable energy development.

“I’m certainly aware, and very interested in a number of discussions about different approaches, such as extension of master limited partnerships [or] REITs to clean energy,” Moniz said during his confirmation hearing before the Senate Energy and Natural Resources Committee. “Those, or others that can help move a lot of kind of private capital into the game would be very, very, very interesting, and I would love to work on those with the members.”

The president’s budget proposal last week included no mention of MLPs or related “pass-through” entities, and there are lingering questions over how supportive the administration would be. Last year, the White House released a tax plan that “obliquely, but unmistakably” criticized the existing uses of such structures, noting that they allow large companies to avoid some tax liability, according to a note released last week by the research firm ClearView Energy Partners.

“Given last year’s precedent, we would suggest it may be too soon to conclude that the White House has abandoned its rhetorical stance vis-à-vis publicly traded partnerships,” ClearView’s note said, “although recent Administration flirtation with proposals to broaden the list of MLP/REIT qualifying sources reinforces this ambiguity.”

4 thoughts on “Tax writers warm to giving renewables parity with fossil fuels

  1. Renewable energy sources like wind, solar, and geothermal should be allowed to enhance investor prospects through tax provisions of a master limited partnerships. Oil, gas, and coal have benefited from this tax advantage along with many other subsidies for decades. In Illinois, the Department of Commerce and Economic Opportunity has an Office of Coal Development to establish coal resources as a fuel for the 21st century. DCEO has 6 programs that promote, fund, and market Illinois coal. Although DCEO has a legislative mandate to develop solar energy in Illinois (The Comprehensive Solar Energy Act of 1977), there is just a shadow of effort by DCEO to establish solar energy in Illinois. In a Washington Post article by Brad Plumer posted March 27, 2013, the International Monetary Fund in a recent report states that if we want to fight climate change we should get rid of $1.9 trillion in fossil fuel subsides. The IMF report argues that governments should be taxing fossil fuels to cover the external costs of damage due of air pollution and climate change. Coal, oil, and gas are subsidized in the US to the tune of $502 billion per year.

  2. Oil and gas companies are normally profitable, so they can use depreciation and other costs to reduce their tax bills. Wind and solar projects are not profitable so there is no benefit to tax credits unless they can sell them to some other enterprise that has profits. So subsidies to wind and solar have to be direct cash grants or “must take” laws that require utilities to buy their energy, often at above market prices.
    We often do this to help new ventures, but since wind and solar have a fundamental weakness, a few of us are starting to wonder.

  3. Should our energy sources be rated by profitability and political influence, rather than their ability to decrease pollution and promote sustainability.? To think that wind and solar resources have “fundamental weaknesses” compared to fossil furls is very disturbing. Coal, gas, and oil have irreversible effects on health and the environment in their extraction, processing, combustion, and waste management. The ongoing damage from fossil fuel is ignored and is allowed to continue destroying the quality of life in communities.

  4. What about parity? I don’t think this discussion needs to be about a choice between access to the MLP structure and other tax incentives. Frankly, I’m having trouble understanding how this can be controversial. There just doesn’t seem to be any justifiable reason for denying producers of energy using renewable sources the same opportunities in terms of access to varied forms of capital as is currently afforded to those who produce energy using fossil fuels.

    I would note that Sen. Ron Wyden (D-Ore) did not miss the opportunity on Earth Day to support this legislation on that basis. According to Bloomberg BNA’s Daily Tax Report (April 23, 2013), Wyden stated in an interview with reporters: “It would say renewables would get, in effect, parity with these other energy perks … which is really one of my bedrock principles.” [reprinted from my April 23, 2013 blog post in Akin Gump’s “Tax Equity Telegraph.”]