Renewable Energy Industries Push for New Financing Options

January 30, 2013 (Source: New York Times) – For years, green energy industries like wind and solar have been telling Congress that they cannot yet compete with fossil fuels without hefty tax breaks intended especially for them.

But with antipathy for renewable energy subsidies running high among many Republicans, the industries are bringing a new plea to Washington: allow wind and solar companies to qualify for some of the tax advantages that are used by the oil, gas and real estate industries to raise money from investors.

“We’ve made great progress in bringing down the cost of renewable energy technologies like wind turbines and solar panels,” said Dan Reicher, who is executive director of the Steyer-Taylor Center for Energy Policy and Finance at Stanford and who has been pushing for the changes. “Where we haven’t made the necessary progress is on bringing down the cost of financing the projects that use that equipment, so the cost of renewable energy is higher than it needs to be.”

The industries are looking to two investment structures — the master limited partnership and the real estate investment trust — to help make financing easier and cheaper. Mr. Reicher estimated that opening them up to renewable companies could cut the cost of their energy by a third.

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There are many challenges to changing the tax code — particularly in an era when many in Washington are trying to raise revenue, not reduce it. But the proposals are receiving serious attention.

The Internal Revenue Service is considering allowing at least one company to form a real estate investment trust, or REIT, for a group of renewable energy projects, with a decision expected soon.
Wind and other green energy technologies have become cheaper, but the cost of investing has stayed relatively high.J. Emilio Flores for The New York TimesWind and other green energy technologies have become cheaper, but the cost of investing has stayed relatively high.

And last month, 31 lawmakers, including Senators Lisa Murkowski of Alaska and Jerry Moran of Kansas and Representative Ted Poe of Texas, sent a letter to President Obama urging him to support the changes. All three are Republicans supported by gas and oil interests, according to OpenSecrets.org.

Senator Chris Coons, a Democrat from Delaware who was a sponsor of a bill on master limited partnerships, or M.L.P.’s, during the last session, said he plans to reintroduce it this year. He said he had been meeting with Obama administration officials and lawmakers and building support for the measure, including among Republicans.

Allowing solar and wind firms to use a tax break offered to oil and gas companies fits into the worldview of “an all-of-the-above energy strategy,” he said, “not picking winners and losers in technology.”

But the effort may run aground in the larger tax overhaul that Congress and President Obama are pursuing.

Although White House officials say they see expanding REITs and M.L.P.’s as keeping with their larger clean energy goals, they are more focused on eliminating direct subsidies and loopholes for fossil fuels and establishing a permanent production tax credit for renewables.

Clark W. Stevens, a White House spokesman, declined to comment on particular programs, saying, “The administration continues to support a number of provisions that provide needed support to the development of cutting-edge technologies and clean energy projects here in the United States, expanding renewable energy production and ensuring the jobs of the 21st century are created here at home.”

As with conventional power plants, the cost of building wind and solar farms can run into the billions of dollars, involving elaborate planning, construction and equipment.

Under current law, the federal government offers renewable energy companies a generous tax credit against their income. But since few of them make enough profit to use the credits, they need to find investors — typically companies seeking to shield nonenergy profit from taxes — to take advantage of the breaks. Because the pool of such prospects is small, the investors that do jump in, like Google, have been able to command high rates of return.

By using a REIT or M.L.P. for renewable energy projects, the companies could reach a broader range of investors. M.L.P.’s and REITs are similar in that they do not pay corporate income taxes, passing most of their income to their investors, who then pay taxes on it at their own personal rates. Both are also often traded publicly like stock, giving companies access to a much larger pool of investors who are willing to take a lower rate of return, according to tax lawyers and experts.

It is unclear how much the proposed financing changes would cost taxpayers. But M.L.P.’s for conventional energy industries like oil, gas and pipelines have a market capitalization of about $300 billion and are expected to cost the Treasury roughly $1.2 billion over five years, from fiscal 2011 through 2015.

Recent forecasts estimated that the renewable energy industries could raise as much as $6 billion from fiscal 2013 through 2020, so the tax break would probably run much lower, less than $1 billion over a 10-year period, according to a rough estimate from Senator Coons.

By contrast, the investment and production tax credit programs now in effect for renewable energy projects are expected to cost the federal government $11.6 billion from fiscal 2011 through 2015.

“If we can get access to these long-term capital-formation strategies, that will lessen the burden on public finance, on tax credits, on subsidies,” said Dan Adler, managing director of the California Clean Energy Fund. “As these technologies continue to mature, and their costs drop — and the cost of capital drops at the same time — it becomes more purely competitive with the fossil energy industry.”

There are differences in the ways the two investment vehicles work. REITs, which are typically used to bundle groups of apartments or office buildings into tradable investments, cannot take advantage of tax credits. So a solar REIT would not be able to use the 30 percent investment tax credit still available to such projects through 2016.

M.L.P.’s can use tax credits, but the partnerships are more complicated, tax lawyers said, which might keep investors away.

The I.R.S. could effectively open up the use of REITs on its own. Mr. Adler’s group has invested in a company, Renewable Energy Trust Capital, that has petitioned the I.R.S. for a private letter ruling allowing it to use a REIT structure.

If the request is granted, others pursuing similar projects would be likely to copy the approach. (Similar rulings have allowed cellphone towers and electrical transmission systems to be bundled into REITs.) The Treasury Department could also push through a more formal regulation change.

It would take an act of Congress to change M.L.P.’s, which have helped drive development of conventional energy infrastructure, particularly pipelines. The partnerships are required to derive 90 percent of their income from certain sources, including only depletable natural resources like oil and coal.

Whether the clean-tech industries’ efforts to gain access to either mechanism will bear fruit is uncertain, but policy advocates and some lawmakers say they are optimistic because there is something in the plan to appeal to both Democrats and Republicans.

For Democrats, “if the idea of investing in these companies is opened up to a broader array of the American public, then people have more of a stake in renewables besides just buying electricity from wind or solar,” said Kelly Kogan, a lawyer at Chadbourne & Parke in Washington who advises clients on the tax consequences of renewable energy investments.

At the same time, she added, Republicans might respond to the idea that “the government’s going to get out of the direct subsidy through credits: they’re going to make renewables equivalent to hotels and office buildings and pipelines and what-have-you, and the free market can play more of a role.”


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