Renewable Energy's Plan B: Lobby for Oil and Gas Tax Breaks
The renewable energy industry could suffer a financing drought once tax credits that helped fuel a wind and solar power project boom expire at the end of the year. But don't worry, the industry has a plan: Convince lawmakers to allow renewable energy companies to form master limited partnerships, a Reagan-era tax break enjoyed by some oil and gas companies.
The strategy, reported by Bloomberg earlier this week, isn't as wacky as it sounds. Closing tax loopholes for the oil and gas industry won't happen -- at least not in this political environment. Instead, renewable energy bypasses that battle and opts for a more logical argument: inclusion.
Developers of wind farms and solar have begun lobbying for legislation that would let them form master limited partnerships, a financial structure used by pipeline operators , drillers and mine operators as well as private-equity companies such as KKR and Blackstone. The publicly traded equities, valued at more than $230 billion at the end of last year, pay no corporate taxes, passing tax liability directly to investors.The renewable energy industry has struggled to maintain robust growth because of problems with financing and policy uncertainty that has kept some investors away. And it needs a long-term solution that offers stability and an incentive that will attract investors. The ability to form master limited partnerships would accomplish both goals. It wouldn't suddenly expire like the tax credits and dodging the corporate tax increase potential profits, which investors like.
To be clear, not every oil and gas company is an MLP. Tesoro, an independent oil refiner split off its pipeline business to form Tesoro Logistics LP and avoid corporate income tax, Bloomberg reported.
It's worth understanding how the renewable energy industry ended up in this spot. It started with a subsidy supported by the Bush Administration. A 30 percent solar investment tax credit was passed in 2005 and then extended in 2008 under the Bush administration.
Solar and other renewable energy companies that didn't have enough taxable income to use tax credits relied upon tax-equity investors like Lehman Brothers, JP Morgan, and Wachovia to buy their tax benefits. The banks would provide financing to the renewable energy companies and use those tax credits as a way to shelter other taxable income.
We all know what happened next. The credit crisis, bank failures and a shrinking pool of tax equity investors. The tax credit was converted into a direct payment grant and inserted into the stimulus package so companies could build renewable energy projects and create new clean energy jobs during a recession that saw lots of construction and manufacturing employees out of work. That 30-percent direct payment, which is taken in lieu of an investment tax credit, provided $1.3 billion in funds to build 1,179 solar projects last year.
The grant option was set to expire at the end of 2010. An aggressive lobbying campaign paid off and lawmakers included a one-year extension inside the $858 billion tax bill passed by Congress last December. The traditional tax credits will expire for wind next year and solar in 2016.
Photo from Flickr user zzzack, CC 2.0
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