Opening up an investment vehicle long used in fossil-fuel markets to renewable energy resources could unlock billions of dollars in wind energy investment, according to a new report released by the Maguire Energy Institute at Southern Methodist University.
According to the study, federal tax-code restrictions currently limit investment in renewable energy infrastructure by $5 billion to $6 billion while, at the same time, prohibiting thousands of jobs from being created.
If the federal production tax credit for wind energy is not renewed beyond the end of this year, up to $15 billion in private investment could disappear. Absent support for renewables at the federal level, the market will have to find other ways to keep the industry afloat and the capital flowing.
One way to secure that investment could be through master limited partnerships (MLPs), in which regular investors are allowed to purchase shares in publicly traded partnerships just like stock shares. MLPs have been a key investment tool in the oil and gas industries since the 1980s, but they are not currently available to renewables such as wind power.
MLPs have been quite successful in the energy sector, and as a result, their use has increased dramatically over the past couple of decades. According to the report, in 1996, there were just 12 MLPs, with a market capitalization of about $8 billion. By 2011, those numbers had grown to 75 MLPs representing over $270 billion in market capitalization.
Eighty percent of MLPs are in the energy sector, according to the report, but renewables are currently excluded. The study's authors used financial modeling to expand the MLP structure to include renewable energy, and the results were astounding: Opening up MLPs to renewables could lead to an additional $3.2 billion to $5.6 billion in investment between now and 2021, they said, noting that the specific number would depend on economic and market conditions.
According to the report, MLPs are a strong fit for renewable energy investments because power purchase agreements for wind and solar projects are generally long-term contracts that offer cashflow stability.
Access to capital in the wind industry has relied significantly on debt and tax equity. However, MLPs could allow a new class of investors – "Main Street investors," so to speak – to tap the market, the report says.
MLPs could also encourage utilities to invest in renewables, because MLPs currently trade higher than traditional utility stocks, the authors note.
It would take congressional action to modify the current tax structure to make this new opportunity come to fruition. However, some policymakers have already taken note of MLPs' potential to spur renewable energy investment and boost the economy.
Sens. Chris Coons, D-Del., and Jerry Moran, R-Kan., have introduced legislation to make MLPs available to renewables like wind and solar.
The bill, called the MLP Parity Act, also has support from several co-sponsors, including Sens. Jon Tester, D-Mont.; Al Franken, D-Minn.; Amy Klobuchar, D-Minn.; Sheldon Whitehouse, D-R.I.; and Jeanne Shaheen, D-N.H.
"The MLP Parity Act helps level the playing field by giving investors in renewables and non-renewables access to the same highly attractive master limited partnership business structure," Coons said when introducing the legislation. "Congress should be setting a realistic and 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."
Coons joins many in the wind industry in recognizing the benefits that MLPs could offer to the wind energy market.
‘MLPs show promise as another tool to drive renewable energy investment if structured properly to match renewable tax incentives,’ Rob Gramlich, the American Wind Energy Association's senior vice president for public policy, said in a statement. ‘This policy could be an interesting addition to a national energy strategy, and should be a part of the renewable energy landscape.’
Jim Lanard, president of the Offshore Wind Development Coalition, said the legislation also has the potential to help grow the U.S. offshore wind industry.
‘MLPs will help to support the establishment of a sustainable offshore wind industry, since they can reduce the cost of capital and attract more investors," he said in a statement. "While extension of the investment tax credit (ITC) remains our industry's No. 1 legislative priority, MLPs will serve as a nice complement to ITCs.’
The bill has also been lauded by renewable energy developers, including NRG Energy.
"The MLP Parity Act is a phenomenal idea," David Crane, NRG's president, said in a statement. "It's a fairly arcane part of the tax law, but it's worked well and has been extremely beneficial to private investment in the oil and gas space. The fact that it doesn't currently apply to renewables is just a silly inequity in our current law."