MLPs: Leveling the Energy Finance Playing Field
June 8th, 2012
By Jeremy Twitchell and Josh Freed
In a week rife with political bickering over government’s role in energy R&D, a bipartisan duo of senators proposed a tiny piece of legislation that could once and for all place fossil fuels and clean energy on the same playing field.
The Master Limited Partnerships Parity Act would allow clean energy projects to form under the same low-tax business structure that has enabled the oil and gas industry to raise $350 billion in private capital. As we noted in a Third Way report released in 2011, master limited partnerships, or MLP’s, are attractive to investors because they face the low tax rate of a partnership, but have the capitalization potential and liquidity of a publicly traded corporation.
With a 200-word tweak to the tax code, Sens. Chris Coons (D-Del.) and Jerry Moran (R-Kan.) propose to unleash a torrent of private investment on the clean energy market. If Congress has been running its energy policy like a beauty pageant, as the accusation goes, then this proposal puts every contestant behind a curtain and makes private investors – not Congress – the judges.
To qualify for an MLP under current law, an entity must make 90% of its income from a limited list of sources, including natural resource usage. The MLP Parity Act would simply add clean energy generating and transmission facilities to that list, thereby freeing clean projects from the restraints of seeking capital solely from banks and wealthy individuals.
The implications are enormous. One study estimates that allowing the clean energy sector to form MLP’s would generate as much as $5.6 billion in additional private funding through 2021. Solar costs have fallen more than 40% since 1998 to all-time lows; wind energy costs are expected to reach all-time lows this year as well. As the European financial crisis causes many nations that were once leaders in clean energy policies to scale back their efforts, the MLP Parity Act, coupled with the extension of the production tax credits for wind and solar, would create a golden opportunity for the U.S. to reclaim its leadership of a global market expected to soar to $2.3 trillion.
Critics of MLP’s argue that they erode the tax base. While it is true that permitting clean energy projects to form MLP’s will result in the government collecting less revenue from each project, the argument ignores the corollary – that the explosion of projects that $5 billion in additional funding will bring means that government will be drawing revenue from a much larger pool. At worst, it’s a small expense. At best, it’s a net source of revenue. And that doesn’t even mention the economic ripples that will buoy the R&D and manufacturing sectors as they rush to accommodate the burgeoning market.
And the best part is that it is a pro-business, private market approach. In a debate wherein each party claims to pursue an “all-of-the-above” strategy and accuses the other side of “picking winners and losers,” the MLP Parity Act is a truly bipartisan proposal that will separate those who support “all of the above” from those that simply want to play favorites.