The Way to Reduce Bioenergy Project Financing Costs

By Luke Geiver | December 28, 2012

What does the president of the Advanced Biofuels Association, the Biomass Power Association, Covanta Energy and NRG Energy all have in common with 10 U.S. Senators and a handful of Representatives? They all support the Master Limited Partnerships (MLP) Parity Act, a piece of legislation created by Sen. Chris Coon, D-Del., that attempts to tweak the tax code to support the popular energy philosophy that calls for an all of the above energy strategy.

If the legislation passes, it will not be until 2013, (thank the fiscal cliff for that), but when or if it does, it would allow renewable energy project developers looking for private investment funding the same opportunity enjoyed by oil, natural gas, coal extraction and pipeline developers. Typically, those projects can access capital at a lower cost and are more liquid using an MLP.

This is what Coons and others have said about the MLP Parity Act in a whitepaper explaining the bill, “The Master Limited Partnerships Parity Act is a straightforward, powerful tweak to the federal tax code that could unleash significant private capital into the energy market.”

And, from Dan Reicher and Felix Mormann of Stanford University’s Steyer-Taylor Center for Energy Policy and Finance: “Master limited partnerships carry the fund-raising advantages of a corporation: ownership interests are publically traded and offer investors the liquidity, limited liability and dividends of classic corporations. Their market capitalization exceeds $350 billion.” And, finally they say, “With average dividends of just 6 percent, these investment vehicles could substantially reduce the cost of financing renewables.”

This is how an MLP works. A MLP is a business structure that is taxed as a partnership, but whose ownership interests are traded like corporate stock. While C corporations are taxed on two levels for all profits, the corporate level and the shareholder level, an MLP is only taxed at one level, the shareholder level. The MLP consists of limited partners (investors), and general partners (managers). The limited partners provide the investment (roughly 98 percent) and receive quarterly dividends, but do not play a role in the company’s daily operations; that is left for the general partners. The general partners, who can be made up of several companies, typically hold a 2 percent ownership stake.

According to Coon’s whitepaper, an MLP must generate at least 90 percent of its income from qualified sources, such as real estate or natural resources including crude oil, natural gas, coal, timber or other minerals. The MLP Parity Act expands the definition of qualified, and includes clean energy resources and infrastructure projects. Some of the energy technologies that would qualify include wind, closed and open loop biomass, geothermal, solar, municipal solid waste, combined heat and power, and others. Advanced biofuels, including cellulosic and biodiesel, along with algae-based fuel, would also qualify.

There are roughly 100 MLP’s currently being traded on major exchanges, according to the National Association of Publicly Traded Partnerships, and the majority of them are focused on energy-related industries and natural resources.

In a letter to the president, Coons said that small tweaks to the tax code (altering the definition of what qualifies for an MLP), “could attract billions of dollars in private sector investment to renewable energy deployment, reduce the cost of renewable electricity by up to one third and dramatically broaden the base of eligible investors.” That sounds like a possible reason why so many in the renewable energy sector agree that this bill needs to pass.

For more on MLP’s, or to read the full statements from those in support of the bill, click here