On the heels of its initial public offering, and armed with a Private Letter Ruling from the Internal Revenue Service authorizing Hannon Armstrong Sustainable Infrastructure (NYSE: HASI) to operate as a retail estate investment trust (REIT), Hannon is continuing to do what it has done best – invest in energy efficiency assets, which are REIT friendly investments, but also search for and invest in non-REIT friendly renewable and sustainable infrastructure projects such as solar, wind and geothermal. The public offering has provided Hannon with the platform, and liquidity, to make these investments in a manner much larger than it was able prior to its IPO launch.
Hannon Armstrong’s success begs the question of what is possible if Congress were able to send the proposed Master Limited Partnership Parity Act (the “MLP Parity Act”) to President’s Obama’s desk for signature. Whether the MLP Parity Act will deliver on its promise to significantly increase investment in the renewable energy and cleantech sector is up for debate. However, the impact such equity infusion could have on distributed generation, particularly solar, is undeniable.
While utility scale renewable generation is still relevant, the growth in small scale distributed generation projects is unprecedented. Particularly in the solar space, the move from a decentralized utility model has been spurred on by state RPS programs that require continued renewable investment in the respective jurisdictions as well as regulations that provide fast track review and approval for smaller scale projects in the 1-3 MW range. With signs of solar securitization likely to occur in 2013, debt markets have also have found a greater appetite for these types of pooled renewable projects. These facts, taken together by the rapidly developing residential and small commercial rooftop solar project market, are likely indicators that distributed generation is here to stay.
The number, and type, of participants entering the distributed generation market is also very interesting. Private equity firms, independent power providers as well as renewable-energy focused funds just top the list of active investors searching for bundled distributed generation projects. Traditional utilities, identifying the potential likelihood of these unregulated entities having the capability to compete with their regulated counterparts, are also beginning to build and acquire distributed generation portfolios.
However, the due diligence costs for these types of projects are often no less expensive when compared to utility scale projects, causing very good projects to never achieve their commercial operations date. And while debt markets are opened to bundling and possibly securitizing the debt for distributed generations, these programs are still in their infancy.
This lack of liquidity would likely change if the MLP Parity Act were to pass. MLPs are pass-through tax entities, meaning that 100% of their taxable income is passed through to the investors, who then pay the appropriate income tax on their earnings. This structure would provide a renewable project developer with a likely lower cost of capital, potentially leaving room on the balance sheet to deal with those sticky due diligence issues on projects that would otherwise not make it off project manager’s desk. The MLP structure could also be employed to not only buy and hold projects, but to also acquire project development teams and integrators as well.
Unfortunately, no major action has been taken on the MLP Parity Act since April 24, 2013 when versions of the legislation were introduced to the House and Senate. According to Senator DE Christopher Coons’ (D) website, Governors from 23 states are in support of the passage of the MLP Parity Act.
Whether Congress has any intention to act on the MLP Parity Act is up for speculation. However, if (when?) it does and the Act passes, the availability of the MLP structure would likely not only benefit renewable and cleantech industry in general, but would also provide added support to the distributed generation model as well.