On April 22, 1970, 20 million Americans demonstrated for a clean and sustainable environment. In October 1973, Americans experienced the first oil embargo, and for the first time thought about the real costs of our reliance on oil for energy. On the 40th anniversary of Earth Day, we know how the Smart Grid helps achieve environmental, economic, and energy surety. However, let’s focus on a different sort of green – money.
Financial innovations for Smart Grid investments have not kept pace with technologies or even regulatory policies, which move slower than a pre-global warming glacier. But there’s reason to be optimistic that one unlevel playing field could become leveled, and therefore provide renewable energy generation and energy storage projects with the same access to low-cost capital currently enjoyed by the fossil fuel industries. The innovation? The Master Limited Partnerships Parity Act. It is currently under consideration by the House Ways and Means Committee, the first step to getting to a full vote from both the House and Senate in 2013.
A Master Limited Partnership or MLP is a publicly traded partnership for an energy asset. First launched in 1981, today’s MLPs are traded on public stock exchanges, offering average Main Street investors as well as institutional investors the necessary structures to buy and sell shares in gas/oil/coal extraction and pipeline projects. There are two primary benefits of MLPs – they operate on a pass-through tax structure, which lowers the cost of capital. Note: A pass-through means that the MLP does not pay tax, just the shareholders (typically called unit holders). Second, they allow companies to build and operate energy-producing assets and offer a sufficient rate of return that is appealing to investors.
If something similar were available for renewable energy and energy storage projects, it would give motivated investors opportunities to be green with their money and make a steady income return on their investments. For example, an innovative financing structure from Solar Mosaic leverages crowd-funding to enable average investors in selected states to participate in solar project investments for as little as $25. Their last round of funding for three projects was fully funded in 24 hours. Investors were thrilled to chip in a total of just over $300K to make anticipated profits on solar generation projects. MLPs are a more formalized version that could be a game changer for utilities and corporations seeking sources of capital for renewables and energy storage projects.
REITs (Real Estate Investment Trusts) operate under similar structures (in fact, most converted from MLPs), and there’s plenty of discussion encouraging us to think about renewable energy projects like real estate instead of a sale of goods or commodity transaction. Sales of goods like energy are transacted as Power Purchase Agreements or PPAs, which can be complicated contracts that add performance contingencies, clauses, and caveats that also add risks to projects organized this way.
In 2012, traditional MLPs attracted $23B for projects, for a total of about $325B in market capital. In 2008, Congress expanded the definitions of MLP projects to include ethanol, biodiesel, and other alternative fuels projects. Imagine what a similar pool of money could do for investments in clean generation from solar, wind, and geothermal as well as energy storage. This sort of capital dwarfs the $4B spent on the Smart Grid in the American Recovery and Reinvestment Act (ARRA) or stimulus fund of 2009. It creates local jobs, reduces carbon emissions, and helps states achieve their RPS objectives. You can help make all of these worthy goals happen. For starters, read more about the MLP Parity Act and see if your Congressional representatives are listed there as sponsoring this legislation. If they aren’t listed, ask them to get on board. It’s one incredibly important green step that can have significant positive ramifications for decades to come.