Fossil fuels have unfair advantage over renewables on US capital markets
Investors in the US energy market have good reason to put their money into fossil fuels but little incentive to invest in renewables
Since the 1980s, companies in the business of extracting carbon-based energy – oil and natural gas – have been able to take advantage of a special investment vehicle called a Master Limited Partnership, or MLP.
As MLPs, they can raise money on public stock exchanges, allowing investors to take direct stakes in energy projects, but crucially they do not have to pay corporation tax like other publicly traded companies. In 2012, MLPs raised over $23 billion of new capital, most of which is thought to be for oil and shale gas projects.
As relative newcomers to the energy sector, renewables do not qualify for MLP status. This puts them out of reach of smaller investors, meaning that have to rely on larger, institutional investors, who tend to demand higher rates of return, which can be prohibitive in nascent industries.
The winds of change are blowing, however. In 2008, under huge public pressure to reduce gasoline prices, Congress amended the tax code to allow MLPs to invest in alternative transport fuels such as ethanol. Now, a bi-partisan group of senators, backed by myriad businesses, trade associations, clean energy organizations and even some producers of fossil fuels, has prepared a bill to put to Congress, calling for MLP status to be extended to renewables.
The hope is that, with MLP status, renewable energy projects could significantly reduce their financing costs, bringing down the price of renewable electricity, and reducing their reliance on subsidies.
Clean-energy organizations have long argued that it is fossil fuels and not renewables that have been the real beneficiaries of government largesse. They say tax breaks and subsidies for solar and wind energy pale in comparison with the advantages conferred by MLPs, which have helped to build much of America’s modern oil and gas infrastructure and are now fueling the shale revolution.
Wherever one stands in this debate, a level playing field for renewables is surely something that doesn’t need to be justified.