Bill to extend tax advantages to renewables gets new lifeline 

Source: Joel Kirkland, E&E reporter • Posted: Friday, June 26, 2015

Bipartisan members of the House and Senate reintroduced legislation yesterday that would extend the use of tax-advantaged corporate structures to renewable energy and low-carbon power projects.

The lead Senate sponsor, Sen. Chris Coons (D-Del.), described his “Master Limited Partnerships Parity Act” as a “modest modification” of the tax code. It extends to solar and wind power companies the same tax-free equity financing enjoyed by most natural gas pipeline companies.

Coons is introducing the bill ahead of an energy debate in Congress expected in late summer tied to an energy policy package under construction in the Senate. The effort, which is being shepherded by Sen. Lisa Murkowski (R-Alaska), could ultimately include Coons’ proposal. But in a conference call with reporters yesterday, Coons said his proposal is primarily being introduced because a debate about comprehensive tax reform appears off the table in the near term.

“I think the time really will have arrived,” Coons said about the prospect of Senate consideration as part of an energy policy debate this year.

Under a business structure Congress created in the 1980s called the master limited partnership, or MLP, publicly traded oil and gas pipeline companies are able to distribute profits to investors without paying a corporate tax. The MLP is often credited with encouraging capital investment and the ongoing development of the pipeline industry. While there are arcane aspects of the corporate ownership structures of some MLPs, investors have walked away with steady returns since this corner of the financial sector began booming around 2006.

Those steady returns have made MLPs popular on Wall Street but also captured the imagination of renewable energy advocates who for years have been looking for better ways to raise money and lower their costs of capital.

For example, the Steyer-Taylor Center for Energy Policy and Finance, based at the law school at Stanford University, has advocated for the clean energy MLPs since 2012. Its executive director, Dan Reicher, a former Department of Energy official under President Clinton who until 2011 served as Google’s director of energy initiatives, has led the charge from outside of Washington.

“Under current law, renewables must raise equity capital through classic corporate structures that are doubly taxed at both the entity and investor levels,” Reicher wrote in a paper for the Brookings Institution. “Meanwhile, their conventional energy counterparts have access to MLPs … with only a single layer of taxation.”

Tangled tax issues

Coons’ legislation comes as the Obama administration dabbles in corporate tax reform. The latest administration proposal, along with recent rulings by the Internal Revenue Service, has started restricting the expansion of MLPs across the energy sector.

That could be trouble for both conventional oil and gas and renewable energy if the administration’s goal is to eliminate corporate tax breaks for large energy companies.

The senator also acknowledged it’s possible that the proposed MLP expansion for renewables could get wrapped up in a discussion in Congress about whether to extend existing production and investment tax credits beyond their expiration dates.

Those tax credits are seen differently across the country, depending on the extent to which they’ve changed regional electricity markets. For some in Congress, doubling down on tax credits and breaks for renewable energy adds confusion in markets struggling to integrate low-cost wind power. To others, the tax credits have been critical for boosting prospects for zero-carbon wind and solar in markets dominated by cheap coal and in states desperate for new industries.

Coons said the MLP proposal is more about capital requirements and corporate structures for clean energy having the same growth opportunities as conventional energy. “It’s entirely possible to advocate for MLP parity and support the extension of the PTC and ITC,” he said.

The language in the bill qualifies businesses that lease or loan distributed systems like rooftop solar. Generation from wind, hydropower and fuel cells would qualify along with electricity storage, combined heat and power, biomass and energy-efficient buildings. In addition, operators of new carbon capture and sequestration (CCS) projects tied to coal and gas plants would qualify for tax-free MLP status as long they’re capturing at least 50 percent of carbon emissions.

Electricity companies with an expanding variety of clean energy assets are increasingly exploring creative ways to structure equity financing. In 2013, power producer NRG Energy Inc. spun off power plant assets into what’s called a yield corporation, or “yieldco,” and in 2014, Exelon Corp. flirted with the idea of creating a yieldco to house its renewable assets.

While the yieldco doesn’t have the same tax advantages from Congress that an MLP does, it effectively replicates those advantages under certain conditions. Like the MLP, it’s a corporate structure designed for stable energy assets with steady returns. More and more, that describes utility-scale clean energy projects.

Co-sponsors of the proposal include Sen. Jerry Moran (R-Kan.) and Reps. Ted Poe (R-Texas) and Mike Thompson (D-Calif.).