Supporters eager for action on new financing mechanisms
Master limited partnerships (MLPs) and real estate investment trusts (REITs) were among the hottest topics yesterday at a daylong conference hosted by the American Council on Renewable Energy focused on policies that could aid wind, solar, alternative fuels and other renewable industries.
An Energy Department official said talks are ongoing, though the administration has not taken a formal position on the policies. “But a number of folks in the Department of Energy, Secretary [Steven] Chu himself, are really serious about this, and there’s been a lot of analysis to figure out how this would work if it were a decision that were to be made,” said David Danielson, DOE’s assistant secretary for energy efficiency and renewable energy.
Danielson said DOE has convened several workshops to explore how it could assist companies that want to organize MLPs or REITs to attract investment. He mentioned ongoing efforts focusing on how to standardize power purchase contracts to make them easier to use as investment vehicles and on continuing DOE’s role as an information clearinghouse for the private sector.
The policies are seen as mechanisms to attract much more private capital to the renewable sector at almost no cost to the government and could gain favor as a way out of the boom-and-bust cycle that has accompanied the industry’s heavy reliance on tax credits.
Renewable developers typically partner with a tax equity investor that provides financing in exchange for the benefits provided by renewable energy tax credits, but that increases financing costs and limits the universe of possible investors. Patrick Eilers, managing director of Madison Dearborn Partners LLC, said about $3 billion to $5 billion was available from tax equity markets — far less than could be raised using MLPs or REITs.
“If the MLP product were available, that’s a $350 billion market, and if the REIT product were available, that’s an $800 billion market capitalization,” Eilers said at the American Council on Renewable Energy forum.
The discussion comes weeks after the wind industry won a last-minute reprieve from Congress with an extension of the production tax credit through the end of this year. The PTC extension included a key change that will allow wind, biomass, hydropower and geothermal developers to claim the credit for projects completed over at least the next few years, as long as construction begins before Dec. 31 (Greenwire, Jan. 2).
A separate investment tax credit, which primarily benefits solar projects, remains in place through 2016, although some utility-scale solar developers are already feeling deadline pressure because of the time it takes to build the massive installations. The ITC requires solar projects to be complete before its expiration, although some in the industry are hopeful that Congress will change that trigger to the same “begin construction” requirement that was added to the PTC. Two dozen Democratic senators signed onto a December letter outlining that request.
Long-term policy certainty remains elusive, a continuing source of frustration for renewable developers and Wall Street.
“Capital markets are going to require more stability. We can’t keep changing the rules,” Jeff Holzschuh, chairman of the institutional securities group at Morgan Stanley, said during an earlier panel.
While the PTC has bipartisan support in Congress, there is a growing sense in the industry and on Capitol Hill that it will not be around much longer amid continued tight budgets. The one-year PTC extension that passed as part of last month’s “fiscal cliff” deal is projected to cost $12 billion over a decade.
That’s where MLPs and REITs come in. Neither is a direct subsidy for the industry, so costs to the government would be negligible. Rather, they are designed to attract additional private investment in renewable projects.
MLPs allow a business to organize a partnership where ownership interests are traded in financial markets like common stock, allowing a broad pool of investors to put up needed capital. The structure is common among fossil fuel and pipeline operations, but renewable energy is not eligible.
Sen. Chris Coons (D-Del.) introduced legislation last year that would extend MLPs to renewables, but the bill never made it to the floor (Greenwire, June 7, 2012). Coons plans to reintroduce an MLP bill next month, a spokesman said yesterday in an email.
REITs, meanwhile, could be extended to renewable energy through administrative action by the Treasury Department, or Congress could pass new legislation authorizing renewable developers to access the tax structure.