As a reminder, a master limited partnership is a type of corporation that is able to raise money on public exchanges and doesn’t pay income tax at the corporate level. These two qualities lead to a much lower cost of capital for the companies organized as MLPs.
The problem is that only companies in certain industries — like oil and gas pipelines — are allowed to be MLPs. The MLP Parity Act would fix that, by expanding the treatment to renewable energy and energy efficiency. This is a commonsense fix with bipartisan support on the Hill, and a broad range of supporters in the think tank and advocacy community.
Of course, virtually no policy has unanimous support, and MLP parity is no exception. Most intriguingly, John Farrell of the Institute for Local Self-Reliance wrote a piece recently called, “Why Master Limited Partnerships are a Lousy Policy for Solar, Wind, and Taxpayers”. Farrell’s very smart and a strong advocate for clean energy, so when he says something is a lousy deal for solar, wind, and taxpayers, it’s worth paying attention.
Farrell’s argument is essentially that the cost savings from MLPs in the oil and gas sector haven’t flowed through to consumers, and that MLPs in renewables will likely lead to more large-scale projects from large investors. These are fair points, but it’s important to respond. First, note what John doesn’t say: he doesn’t say that MLPs actually won’t lead to more wind and solar. They will. This is the point that Todd Foley made in a piece published today, “MLPs a powerful tool to boost renewables”. There doesn’t seem to be any disagreement on the fact that MLP parity would lead to more renewable energy.
The disagreement seems to be mostly about who we want to have building renewable energy: large corporations, or a mix small investors like individuals, communities, and local governments? The truth is that we need both. Certainly, large corporations have an inappropriately large role in many parts of our economy (for-profit prison operators strike me as particularly loathsome), but we should be careful about dismissing policies out of hand just because they would enable corporations to participate in certain businesses.
The problem in clean energy is that it’s not clear that small investors have enough money to make the transition to a zero-carbon future happen on their own. Let’s go through some numbers.
There are countless estimates of how much investment is needed to move away from fossil fuels, but every estimate is a tremendously large number. For argument’s sake, let’s go with the National Renewable Energy Laboratory’s Renewable Electricity Futures study. They estimate that getting to 80 percent renewable energy in the United States will cost just under $2 trillion (see Figure A-4 here). Since there are about 115 million households in the U.S., that means we would need about $17,000 in investment from every household to pay for new renewable power. Unfortunately, the median net worth of American families was about $77,000 in 2010, which means that we would need the middle-of-the-road family to invest a whopping 20 percent of their wealth in renewable energy. (You could argue, of course, that families will have more money in the future, but keep in mind that median net worth today is actually lower than it was in 1983). This would be great for renewable energy, but it’s almost certainly a bad idea for families to invest 1/5 of their money in one specific industry, when we know the value of diversification.
This means that we’re going to need money to come from other places, and this is where MLPs come into play. The dominant investors in MLPs are individuals, corporations, and various retirement and trust accounts. These are the big pots of money, and it’s what we need to access if we want to get $2 trillion into clean energy. Fortunately, they’ve already demonstrated an appetite for MLPs, so there’s no reason to believe that they won’t like MLPs focused on renewable energy.
That’s not to say that there’s not a place for small investors. Quite the contrary, there are plenty of smart investments for regular people. Putting solar on your rooftop, for example, is a fantastic investment in much of the country (as ILSR’s Farrell has shown). Buying a small share in a Solar Mosaic fund — as part of a diversified investing strategy — can make a ton of sense. Indeed, the clean energy future requires these types of investments. But for most people, putting 22 percent of your family’s wealth into renewable electricity would likely be a mistake, which is why the other sources of capital are needed.
Finally, a word about whether or not ratepayers will benefit from MLP parity. Farrell is right that some oil and gas pipeline MLPs have gotten very generous rulings from the Federal Energy Regulatory Commission that allow them to recover the cost of corporate income tax in their rates despite not paying a corporate income tax. This is ridiculous, and everyone responsible should be ashamed. But instead of using this to say that renewables shouldn’t have access to MLPs, we should call on FERC to do the right thing and not let companies charge ratepayers for phantom costs. And, given the number of different regulators involved in determining how much renewable energy generators get paid, it’s not at all clear that they would follow FERC’s bad precedent.
The scale of the challenge of moving to a clean energy future is tremendous, and it will take trillions of dollars. We need a full policy suite to bring every source of capital to the table. Master limited partnerships are a key part of that suite, and we should welcome them to the effort.
Richard W. Caperton is the Managing Director of Energy at the Center for American Progress.