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A Sunny Day for REITs

November 6th, 2013


Demand for solar energy has outpaced the private sector’s current ability to finance it.

This is a problem.

Renewable projects are still financed based on the expectation of higher-risk investments yielding potentially higher returns rather than lower-risk, income-oriented investments yielding steady returns. This makes conventional financing very expensive. One small tax reform the Obama Administration could make today, without the help of Congress, could reduce the cost of financing and accelerate the deployment of solar. All that’s required, as Third Way (among many others) have advocated, is making a relatively small clarification to the definition of “real property” to include solar as qualifying property for Real Estate Investment Trusts (REITs).

Created in 1960, REITs let the average individual investor buy shares of commercial real estate assets from offices to shopping malls to communications towers. More like buying a stock than buying a house, REITs provide shareholders with the net rents, but also allow shareholders to easily sell their shares they choose to do so. REITs are attractive to many investors because they are required to distribute virtually all of their net earnings to shareholders, and to the extent they do so, they are only subjected to a single level of tax.

So why REITs and why now?

The price of solar panels dropped far more rapidly than industry analysts expectedThis has fueled 76% growth in installed solar capacity in the US from 2011 to 2012 and a market that grew 34%, from $8.6 billion to $11.5 billion over the same time frame. According to BNEF, this growth is expected to continue through 2020, requiring an average of $6.9 billion each year  to finance the installation of new solar panels in the US.

The liquidity, transparency and tax treatment of a REIT could lower the cost of capital for solar. This would make it a much more attractive way to raise money to help finance large-scale installations. With financing as the bottleneck and the solar investment tax credit set to decrease by 2/3rds by 2017, solar REITs could make up for the growing capital deficit. This is also a rare idea that has bipartisan support. Twenty-nine Members of Congress have expressed their support for including clean energy assets in REITs. Richard Kauffman, chairman of energy and finance for New York State and former senior advisor to the U.S. Secretary of Energy described this change as opening the door to a “wall of money” seeking the kind of stable rate of return that solar REITs would provide.

A growing sector of the American economy needs more affordable capital. And there is an answer that doesn’t require an act of Congress. The Obama Administration has an opportunity today to make a small tweak to the tax rules that could help. Opening REITs  to solar would enable the private sector to meet demand without the hurdle of Congressional gridlock or incurring new government spending.

This piece was originally published via The Energy Collective.

EPA’s New Emissions Regulations Follow the Electricity Market

September 23rd, 2013


There has been a lot of overheated political rhetoric from the right and the left about the EPA’s emissions standards for new power plants. If you strip that away, however, you’ll find that the new rule is really codifying what’s already happening in the utility sector. Thanks in part to the lower emissions and lower cost of natural gas, this is already benefiting public health, the environment, and the economy.

The bottom line is that for all of the build-up about the new standards, energy sector insiders know that low natural gas prices, the growth of renewables, and little demand growth are already reshaping electric generation. As an AEP spokeswoman acknowledged on September 20 in National Journal, “We have no current plans to build any new coal-fueled power plants both because we don’t need additional generation, and it would be difficult to make an economic case for coal with today’s low natural-gas prices.” The new regulations marry these market trends with intensive stakeholder input from the private sector. The result is a clear roadmap for new electricity generation in the United States.

While administrative actions never carry the democratic appeal of a Congressionally mandated solution, Congress has been unable to agree on a path forward. The Supreme Court required the EPA act, and the regulatory revamping was inevitable.

It would be great if Congress could develop and pass bipartisan legislation to accomplish the same goals as the EPA. That’s extremely unlikely in the current political environment.  There’s a lot Congress could do—that’s bipartisan and does not cost much if anything—to create new opportunities in coal states and to ensure we maintain fuel diversity in our electricity fleet. This includes helping the private sector accelerating the development of carbon capture and storage technologies and removing the regulatory uncertainty that surrounds it.

Remember, even the EPA’s new source regulatory decision had to be court-ordered. The regulatory uncertainty for utilities has been a killer, most will tell you, and the business climate has suffered. This is a step forward, both for the environment and the business climate. It had to happen, and it finally did.

This piece was originally published via National Journal.

Congress Sends Hydro Reforms to President’s Desk. What’s the Next PowerBook Policy to Pass?

August 7th, 2013


In a Congress that is setting records for its ineffectiveness, the last week of July 2013 offered a glimmer of hope. For the first time in four years, the Senate and House passed substantive energy legislation and sent it to the President’s desk. Make no mistake, these two successful bills (which reform the licensing of hydroelectric dams) are not going to radically alter the country’s energy system. But that’s the point: despite the enormous divide between the Senate and House and Democrats and Republicans, Congress was able to agree to small, but important, changes in energy policy that will help increase clean electricity in the US. As we found in the development of the PowerBook, a tool we developed for policymakers to build clean energy policies, this is a model that can be replicated.

The two bills Congress passed are simple enough. One expands the ability of the federal government to develop hydropower on its existing water resources. The other streamlines the permitting process for new hydropower projects. These ideas are representative of the targeted, bipartisan ideas we included in the PowerBook. They are built on a basic premise: that there are lots of small “nuts-and-bolts” issues that legislators from both parties can get behind and move through Congress, even if the House and Senate can’t agree on larger pieces of legislation.

Even on hydropower, there are more incremental steps Congress can take. Most pressing is to make it easier for utilities to modernize existing power dams. More than five-dozen major dams are still stuck using inefficient, 1960s-era technology to generate electricity. Minimal funding by the US Bureau of Reclamations could change that, and lead to the addition of 225 MW of clean energy to our grid. That’s enough energy to power approximately 168,750 houses, which is the entire housing stock in the city of Pittsburgh. The legislation that just passed, combined with the other hydropower proposals in the PowerBook, could create as many as 48,000 jobs and power at least 6.2 million homes, primarily across the South and Midwest. That’s a huge benefit to the country, all from just three little policy proposals.

The good news is that there are plenty of similarly small policy ideas that could make a big impact in the PowerBook. If all of our current policies in the PowerBook were implemented, the U.S. would save 473.6 million barrels of oil, add over 1.8 million gigawatt-hours of new clean energy to the grid, and eliminate 2.45 million tons of conventional pollutants (CO, NOx, SO2, PM10, Hg) from its skies. If the action by the House and Senate on hydropower is any indication, there’s even a chance that energy policy offers Congress an opportunity to buck it’s “do-nothing” label.

This piece was co-written with Sam Cramer, Clean Energy intern at Third Way.

MLP Bill, With or Without Tax Reform

May 1st, 2013

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Comprehensive tax reform is long overdue, but it’s also going to be difficult and may not happen during this, or even the next, session of Congress. In the meantime, we can’t hold up other tax code fixes, especially in vital areas, such as energy. The MLP Parity Act, a fix to our unequal tax code, shouldn’t be delayed just because it doesn’t fix all of the problems with our current tax code.

As it stands now, the government is implicitly telling investors what to invest their money in. Master limited partnerships are attractive investments, passing profits through to investors without being taxed at a corporate level. This appealing financial structure draws in more capital and lowers the cost of capital for projects owned by an MLP. Unfortunately, under our current tax code, qualifying projects are generally oil and gas related – pipelines, extraction, refining or exploration – excluding many types of energy, from biomass to nuclear to wind. As a result, a project such as a wind farm is less attractive to investors and must offer a higher return than a comparable natural gas project.

This bias in the tax code unfairly picks energy winners and losers, incentivizing the types of energy projects that were common in 1981 when master limited partnerships were first created. Although our fuel supply has changed, the tax code has not, leaving clean energy out of the investment pool. While it may not fix all the inequity in our arcane and complex tax code, the MLP Parity Act is a much needed first step towards an even playing field for our energy future.

This piece was originally featured in National Journal.

Tough Choices in the Wake of Hurricane Sandy

November 2nd, 2012

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Everyone from Mayor Bloomberg and Businessweek to Bill Clinton and LA Times are linking Hurricane Sandy to climate change. Do we know for certain that this highly destructive hurricane is the result of climate change?

The short answer is: we don’t. There will always be contrary opinions, but when we look across all the weather events of the past 10, 20, or 50 years, the trend is clear. Climate is the average of weather over a period of time, and we’re seeing 100-year floods occurring every 3-20 years. We’re seeing each year become one of the hottest years on record. And we’re seeing more severe droughts more frequently. This has contributed to a rise in sea level across the East Coast, which makes cities like New York and destinations like the Jersey Shore more prone to flooding when storms do hit.

Why should you care? Read the rest of this entry »

Energy Policy after 2012

October 23rd, 2012

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Summary points

  • Thanks to continued partisan gridlock, major congressional action on energy is unlikely after the 2012 elections. However, this could change if there is a deal to address the budget deficit or if one party makes significant gains in seats.
  • Domestic oil and natural gas production will continue to grow under either Barack Obama or Mitt Romney.
  • A second Obama administration would be likely to seek to accelerate the commercialization and deployment of clean energy through a mix of tax incentives, encouraging private financing, and regulation of conventional and climate pollutants.
  • A Romney administration would be likely to focus on increasing domestic conventional energy production by reducing environmental regulation, particularly on coal-burning power plants, and opening more public land to oil and natural gas development. Excluding basic research, government incentives for clean energy would most likely be eliminated.


In 2008, the price of natural gas in the United States was roughly $8 per thousand cubic feet (tcf), coal was used to generate more than 47 per cent of all electricity, and there was a consensus among Democrats and Republicans that climate change was real, caused by humans, and needed to be addressed immediately. It seemed only a matter of time before the country adopted a cap-and-trade system similar to one backed by both parties’ presidential nominees.

Four years later, the energy landscape has changed dramatically. Cap-and-trade is on the ash heap of history, and climate change and clean energy have become enormously politicized. The price of natural gas has dropped as low as $2.25 per tcf thanks to the hydraulic fracturing drilling process (fracking) that has given the United States access to more than 500 trillion cubic feet of natural gas and sent domestic coal use into a precipitous decline. That same fracking technology has led to a domestic oil boom, with imports dropping to 42 per cent of use, the lowest level in two decades. Clean energy, particularly wind and solar, also saw a boom in the early years of the Obama administration thanks to the American Recovery and Reinvestment Act of 2009 (ARRA).

The growth in domestic shale oil and gas production seems inevitable. But the broader future of US energy faces much more uncertainty. There are enormous differences in how the two candidates would approach regulation of energy production and generation, climate change and America’s competition in the global clean energy race. Polling shows that these issues will have little impact on the decisions voters make. But they will have enormous implications for the price and source of the energy Americans consume, the success of America’s energy industries and the fate of international efforts to stem climate change.

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