NREL Report Highlights Benefits of MLPs in Renewable Energy Financing

Published by Michael Novogradac on Friday, December 20, 2013 - 12:00am

The National Renewable Energy Laboratory (NREL) recently released a report on the use of master limited partnerships (MLP) to raise equity for renewable energy that highlights many of the key issues the renewable energy community has been discussing in recent years. I discussed the report briefly in a recent podcast.

For example, the report discusses new legislative and regulatory changes that could allow investments in renewable energy projects to be organized as MLPs. Organizing a renewable energy project as an MLP would allow it to be publicly traded on a securities exchange. It would also combine partnership-style sharing of a business’s tax items with the liquidity of a publicly traded stock. Currently, investments eligible for the MLP structure are mostly limited to oil, natural gas and other fossil fuels. This would change with the passage of the “Master Limited Partnerships Parity Act.”

If the bill were to become law, could they be used to raise equity from individuals for the renewable energy tax credit market?  Two obvious hurdles are the passive activity and tax credit recapture rules.

Regarding the passive activity rules, a partner in an MLP can only use the investment tax credit (ITC) or production tax credit (PTC) to offset taxes on income they receive from that same MLP. One strategy investors can use to maximize the utility of their tax credits is to bundle renewable energy assets with non-renewable energy assets in a single MLP, using the tax credits from the former to offset the tax burden of the latter.

Regarding the tax credit recapture rules, the PTC would be largely unaffected because it is not subject to recapture. However, the ITC triggers recapture if transfer occurs within the first five years of placement in service. The MLP’s unique benefit is the ability for investors to easily enter and leave the partnership ̶ and thus, as noted by Nixon Peabody’s Forrest Milder in the September 2012 issue of the Novogradac Journal of Tax Credits, changes in addition to those proposed in the Master Limited Partnerships Parity Act would need to be made for the MLP structure to be able to entice new investors into the renewable energy ITC marketplace.

If you want to learn more about the potential for using MLPs to finance renewable energy development, join us at the Novogradac Financing Renewable Energy Conference on April 24-25.