On June 7, 2012, U.S. Senators Chris Coons (D-Del.) and Jerry Moran (R-Kan.) introduced the “Master Limited Partnerships Parity Act” (the “Act”) seeking to expand the use of master limited partnerships (“MLPs”) to finance renewable energy projects in an attempt to level the playing field between traditional oil and gas development and other sources of energy.
Until now, as the Senators have noted in their commentary, MLPs have been only available to investors in energy portfolios for oil, natural gas, coal extraction, and pipeline projects. Commencing in the 1980s, the structure quickly gained popularity due to savings on corporate taxes and was used by everything from hotels to the Boston Celtics. The government became concerned, however, by the loss of corporate tax revenue. Consequently, Congress adopted Section 7704 of the Internal Revenue Code (IRC), which limited publically traded partnerships to entities earning 90% or more of their income from certain sources. One currently permissible source is income and capital gains from natural resource activities. Natural resources includes any resource that is depletable under Section 613 of the federal tax code. Natural resource activities were included due to rising gasoline prices.
With the adoption of the Act, at just over 200 words long, the IRC would be amended to expand the definition of “qualified income” contained in Section 613 to include income and gains from clean energy resources and infrastructure projects. Specifically included would be energy technologies that qualify under Sections 45(c)(1) and 48 of the IRC, including wind, closed and open loop biomass, geothermal, solar, municipal solid waste, hydropower, marine and hydrokinetic, fuel cells, and combined heat and power. The legislation also allows for a range of transportation fuels to qualify, including cellulosic, biodiesel and algae-based fuels.
What makes MLPs so attractive to investors is that MLPs combine the benefits of a corporation: limited liability, dividends and ownership interests that are tradable and liquid, without the double taxation of a corporation. Furthermore, given the volatility in the stock market, the requirement to distribute 90% of the income is a very attractive feature. The distributions could be especially important for investors in the renewable energy sector who experience a slower rate of return on their investment due to the need to create more infrastructure.
At present, approximately 80% of MLPs are in the energy sector and 20% of MLPs are in the real estate and other investment/financial industries. The renewable energy sector currently relies primarily on tax equity financing for funding. But with the adoption of the Act, the percentage of MLPs used in the energy sector would substantially increase. Some have projected that the Act could result in an influx of an estimated $6 billion in capital that’s currently excluded from renewable energy projects. MLPs could also help realize the potential of the global clean energy market, a market that has an estimated potential value of $2.3 trillion.
Unfortunately, since the Act’s introduction, there has been no movement towards its passage. The bill remains stuck in the Senate’s Committee of Finance.