PTC and MLPs: the U.S. clean energy industry needs both now, but the PTC off-ramp is just over the horizon
Yesterday, the American Wind Energy Association (AWEA) announced their vision of the future of the Production Tax Credit (PTC) for wind energy. After 20 years of on again, off again spigot-action that has resulted in both an extraordinary increase of installed wind, as well as terrible cases of heartburn each year it is set to expire, AWEA has now outlined a plan to phase out the credit after 6 years.
On the same day of this announcement, Senator Coons of Delaware and Senator Moran of Kansas held a press conference announcing bipartisan, bicameral support for new renewable energy investment legislation that would spur continued growth in renewable energy by giving the industry access to a low cost capital structure that is already available to the fossil fuel industry.
These two developments give us an insight into the future of clean energy in the United States: it entails the phasing out of the PTC and the phasing in of supporting this maturing critical industry through increased access to the public markets.
This transition is commonsensical as the industry matures. Yet it also vitally important for Congress to extend the PTC now, especially in light of historically low natural gas prices, which strongly contributes to making forms of nonpolluting energy relatively more expensive in the short term. In the longer term, these technologies have no fuel costs and are a hedge against historically volatile fossil fuel prices. At the same time, they are integral to the fight against climate change and increase energy security through fuel diversification. Without the PTC, the industry withers, ramps down and may not be able to fill the breach as quickly and efficiently when fossil fuel prices rise, which they inevitably will, sooner or later.
The senators’ recently proposed legislation, called the MLP Parity Act, would allow renewable energy technologies like wind to more easily access the low cost finance of the public equity markets. This is achieved by permitting the industry to benefit from the “master limited partnership” (MLP) structure in which a company “goes public”, like a C-corporation, but is not subject to corporate-level taxation, like a partnership.
Fossil fuel companies have benefitted from this structure since the 1980s. Allowing renewable energy companies to have access would contribute to leveling the playing field with the fossil energy industry – hence the senators’ decision to call their legislation, “The MLP Parity Act”.
As I previously wrote, MLPs help companies gain access to capital at a lower cost and are more liquid than traditional financing approaches to energy projects, making them highly effective at attracting private investment. MLPs are expected to drive significant amounts of new private sector investment to renewable energy deployment, reduce the cost of renewable electricity, and dramatically broaden the base of eligible investors. For these reasons, NRDC supports the senators’ efforts and looks forward to Congressional action.
While MLPs are part of the future of clean energy finance in a post PTC world, that future has not yet arrived, and tax credits remain a critical part of our country’s policy to develop and deploy renewable energy. Implementing new financing structures now will increase the rate of the leveling of the energy playing field while helping to smooth the transition away from tax credits in years to come.