Senate bill offers new tax option for wind, solar

Source: Gabriel Nelson, E&E reporter • Posted: Friday, June 8, 2012

A freshman Democratic senator from Delaware today introduced a bill that would give wind farms, solar arrays and other renewable electricity sources a new way to line up investors.

The bill from Sens. Chris Coons (D-Del.) and Jerry Moran (R-Kan.) would change the tax code to let renewable power companies be structured as master limited partnerships.

The measure rides a wave of enthusiasm among policy experts for a financing model that has been used by others in the energy industry since the Reagan administration.

The model lets companies divide up their income, taxes and tax credits among their investors, saving them from paying a tax bill at the corporate level. The companies are also publicly traded, and investors are free to buy and sell shares as they please, making the investments more attractive to smaller investors, experts say.

It is only fair that renewable energy developers be allowed to use the same tax structure as oil, pipeline and mining companies, Coons said in a statement upon the bill’s release.

“Despite all the political rhetoric about the need for an all-of-the-above energy strategy, our current tax code clearly picks winners and losers in the energy space,” he said. “Congress should be setting a realistic, stable policy pathway to sustain innovations in domestic energy development and help the market work to its fullest potential. That starts with leveling the playing field and giving renewable energy the same shot at market success as fossil fuels.”

The bill — co-sponsored by Sen. Jon Tester (D-Mont.), Al Franken (D-Minn.), Amy Klobuchar (D-Minn.), Jeanne Shaheen (D-N.H.) and Sheldon Whitehouse (D-R.I.) — has backing from trade groups for the wind, solar, biomass and advanced biofuels industries.

The industries are angling to package the proposal with an extension of a tax credit for renewable electricity that expires at year’s end or to see it rolled into broader legislation dealing with corporate taxes. Democrats mostly want to extend the renewable energy tax credit, and while some Republicans want to scrap it, Moran and Kansas Gov. Sam Brownback (R) have said the threat of its expiration is already harming Kansas’ burgeoning wind power industry.

Though the new proposal rests on an obscure distinction in the tax code, it has recently become a priority of clean energy advocates, even appearing as an op-ed in The New York Times last week.

It is time for policymakers in Congress and at the federal agencies to look beyond just new technology as a way to drive down the cost of renewable energy, said Dan Reicher, a co-author of the op-ed. Now executive director of Stanford University’s Steyer-Taylor Center for Energy Policy and Finance, he previously oversaw energy issues at Google Inc. and led the Department of Energy’s renewable energy office during the Clinton administration.

“We’ve driven down the cost. That’s been fantastic, and we need to continue to do so. But what we may have neglected in that process is the need to improve cost at the capital side,” Reicher said during an interview. “If the cost of finance is lower,” he added, “you can get more built. Getting more built means more jobs, it means more tax revenues — it means lots of good things.”

1980s model

Congress first authorized companies to use the master limited partnership model in the 1980s as part of a plan to spur domestic energy production with gasoline and electricity prices still soaring from the energy crisis of the previous decade. It was limited to resources that can be depleted, such as fossil fuels and timber operations.

Since then, it has proved particularly popular with the “midstream” companies that run pipelines, natural gas processing plants and storage facilities. The number of publicly traded companies that are structured this way has grown from a dozen in 1996 to about 75 today, and most of them are involved in the distribution of fossil fuels.

When another wave of high energy prices arrived in 2008, lawmakers opened the door to ethanol, biodiesel and other biofuels. They also decided to let companies use the partnership model if they are producing, transporting or storing carbon dioxide gas for an industrial use, such as coaxing oil out of soon-to-be-depleted wells.

Some policymakers want to get rid of these special business structures, arguing that they skew the tax code. Sen. Bernie Sanders (I-Vt.) and Rep. Keith Ellison (D-Minn.), two fervent supporters of renewables, have proposed that master limited partnerships be scrapped altogether in the energy industry with the reasoning being that under current law they give an unfair advantage to fossil fuels.

Still, in the past few months, support has grown among clean energy advocates for the master limited partnership model. Among them are the clean energy research group at the moderate Democratic group Third Way and the Maguire Energy Institute at Southern Methodist University, which put out a report this week in favor of the idea.

They say that much of the government’s tax credits are ending up in the hands of financiers, rather than energy companies. All but the largest renewable energy developers must go to the so-called tax equity market to get help from banks and large investors, because the smaller companies do not owe enough in taxes to make use of the substantial credits that the federal government offers for the production of renewable energy.

By making firms less reliant on tax equity, the new model “could attract capital to the sector, reduce the risk of investments, impose some market discipline on the players, and offer a way to grow a sector of the economy that will be important in meeting America’s future energy needs,” the new paper by the SMU researchers says.