By Nathan Homan, Solar Power World Contributor
Momentum is steadily building for the Master Limited Partnerships (MLPs) Parity Act, moving us one step closer to a tax policy that awards renewable energy the same advantages as fossil fuels.
The legislation would modify the tax code to open up MLPs to renewable energy projects. There is now growing bipartisan support for the legislation, which seeks to level the playing field between traditional and new energy businesses.
The stakes couldn’t be higher. The tax benefits enjoyed by fossil fuel energy projects come largely through MLPs, business structures that are taxed as partnerships, but with ownership interest traded as corporate stock on a market.
A provision in the federal tax code authorizes the creation of MLPs for fossil fuel exploitation, providing access to capital that creates jobs and economic activity through construction and energy development, but inexhaustible natural resources are currently excluded from eligibility. MLPs are instrumental in attracting private investment, and fossil fuel projects that use them enjoy access to capital at a considerably lower cost and with greater liquidity than traditional forms of financing.
MLPs are widely seen as an ideal accelerant for clean-energy development through private finance. They have grown rapidly since the 1980s, raising more than $400 billion for oil, gas and other fossil energy infrastructure at a much lower cost of capital than current U.S. clean-energy finance, according to the Brookings Institution — a private Washington, D.C., based nonprofit organization devoted to independent research and policy solutions.
The institute also states that the debate over MLPs comes at a time when the cost declines of clean-energy equipment have outpaced those in the cost of capital and other soft costs. Those soft costs are financing charges that can increase the cost of clean energy by as much as 50%. Clean energy MLPs serve a vital purpose because they could match technology cost improvements with capital cost reductions, it says.
Enacting MLP parity legislation would also drive support for other financing options, including real-estate investment trusts (REITs), which offer similar advantages to MLPs, and have yet to become widely available for clean energy projects. REITs, traded publicly like stocks, are difficult for investors in sustainable energy to use under current law.
In an ideal world, clean energy pioneers would have a multitude of structures to choose from to launch into cost-effective financing for their projects.
There are still critics of the MLP Parity Act, including those who believe opening the vehicles would have a limited impact on nurturing the renewable-energy industry. But the oil and gas industry became the dominant and lucrative force it is today because of similar support in the form of federal law. If the renewable energy industry could use the same investment vehicles that fossil fuels receive, it could begin to truly thrive.
The MLP Parity Act is not just a political development to tweak the tax code. It’s about democratizing the energy industry to pave the way for entrepreneurs to participate in solar projects with the same prowess as fossil-fuel companies. The momentum behind renewable energy will continue to grow, from the small entrepreneur who buys a new turbine to the established company that creates industry-wide solar technology.
The government, local communities and developers all need to play an active role in eliminating barriers to the advancement of these critical clean-energy technologies. One way or another, our world will have to adapt to solar power, but whether that transition happens rapidly or haltingly will largely depend on our ability to amend and alter these antiquated laws that favor fossil fuels.
Nathan Homan is a co-founder and principal at Wiser Capital, a financial services firm that enables new sources of capital to participate in the funding of financially attractive, stable and secure sources of renewable energy projects.
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