Historical factors sometimes result in favoring Oil & Gas over the newer renewable energy technologies. Eligibility for MLPs is one such area that can be easily fixed.

Note: This summary presents the key points of the article  The Case For Master Limited Partnerships (John Joshi & Malay Bansal, July 20, 2011) published on  AOL Energy.

The need for additional capital to flow into renewable energy is clear. The sector has a strong dependence on government incentives while it develops towards price parity with conventional energy sources. Recently, Section 1603 Cash Grant program and the section 1703 and 1705 loan guarantee programs have provided some support. However, many of these programs are scheduled to expire in near future. In the past, the sector depended on tax-equity market for financing of projects. But, with lower profits especially at commercial banks which were active in the tax-equity markets, that market will not be able to play the same role as in the past. The clean energy sector needs more help.

The traditional energy sector has available to it a source of capital in form of MLPs (Master Limited Partnerships) that can invest in Oil and Gas. The MLP structure was created by Congress following the energy crisis of the 1970’s to spur investment in the energy sector for oil and gas exploration, storage, refining, and transportation by providing specific tax advantages to investors. The MLP structure provides the tax benefit of a limited partnership and at the same time provides liquidity of common stock since the PTP (Publicly Traded Partnership) units trade on exchanges just like common stock. Since the MLPs generally hold income producing assets, the resulting high dividend attracts a lot of investors, providing capital to the sector.

Income earned from renewable energy projects, however, is not considered eligible for MLPs. This is because of historical reasons more than anything. When this law was passed in 80s, renewable energy sources were not in the same state as today. This historical factor results in favoring the old energy over the newer renewable sources. Political factors aside, a simple legislation by Congress can correct this to level the playing field. Infrastructure is another sector that is in need of capital, and could also be included.

This, by itself, will not be sufficient, but will be a logical and helpful step in the right direction.

Update 6/8/12: Sens. Chris Coons (D.-Del.) and Jerry Moran (R-Kan.) introduced the Master Limited Partnerships Parity Act (no bill number yet), which would amend the federal tax code to allow investors in renewable energy & bio-fuels projects to form master limited partnerships.

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