THE MLP, A NEW WAY TO FINANCE RENEWABLES

MLP Parity Act: Disrupting Distributed Energy

William Pentland, June 10, 2013 (Forbes)

“…Senator Chris Coons (D-DE) and Congressman Ted Poe (R-TX) introduced the Master Limited Partnership Parity Act, which would allow renewable energy power generators to take advantage of the tax benefits of master limited partnerships…MLP boosters believe that passage of the legislation would likely be a game-changer for the renewable energy industry, attracting additional capital to the sector and enhancing the sector’s access to equity, which is typically reserved for corporations…MLP skeptics say that the proposed legislation would have at most a modest impact on investments in renewable energy…[and] renewable energy is poorly suited for the MLP structure compared to fossil fuels…

“…[Investing Daily’s Robert Rapier] makes a compelling point. MLPs have typically been used to finance proven technologies with predictable cash flows and limited exposure to commodity risk. These specific attributes are commonly cited as the reason why MLPs have been so successful in the midstream energy sector, which are de facto “toll collectors” charging other energy companies fees for transporting and storing oil and gas. Energy technologies that have not yet been deployed at scale may not be well suited to take advantage of the MLP structure.”

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“…[B]oth the boosters and the skeptics miss the mark…The proposed legislation would significantly alter the structure of the fledgling distributed energy industry….[As] a limited liability company (LLC) treated as a partnership for taxation purposes and traded on a public exchange…MLPs pass 100% of their taxable income through to their investors who pay income taxes…By avoiding double taxation, MLPs have access to lower cost of capital, which allows them to build and operate low-return assets to provide a sufficient rate of return to attract investors.

“Currently, there are more than 100 MLPs trading on major exchanges with a total market capital of about $400 billion. The majority of these MLPs are in midstream…A smaller but still significant share…are focused on upstream…In recent years, MLPs have moved into “downstream” activities…Downstream is ultimately where the most disruptive change may take place if Congress passes the MLP Parity Act by allowing variable-distribution MLPs with access to lower-cost capital to roll up local energy integrators and solutions providers…[It] may accelerate the emergence of unregulated entities of scale capable of competing with regulated utilities…”

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