How to Make Renewable Energy Competitive
By FELIX MORMANN and DAN REICHER
STANFORD, Calif.
Renewable
energy needs help. Technological innovation has significantly reduced
the cost of solar panels, wind turbines and other equipment, but
renewable energy still needs serious subsidies to compete with
conventional energy. Today, help comes mostly in the form of federal tax
breaks.
These tax incentives, and the Congressional battle
over extending them for wind projects beyond the end of this year, mean
that other, more powerful policies to promote renewables are not getting
the attention they deserve. If renewable energy is going to become
fully competitive and a significant source of energy in the United
States, then further technological innovation must be accompanied by
financial innovation so that clean energy sources gain access to the
same low-cost capital that traditional energy sources like coal and
natural gas enjoy.
Two financial mechanisms that have driven
investment in traditional energy projects — real estate investment
trusts and master limited partnerships — could, with some help from
Washington, be extended to renewable energy projects to lower their cost
and make America’s energy future cleaner, cheaper — and more
democratic.
Federal support for renewable energy today
consists primarily of two tax breaks: tax credits and accelerated
depreciation rates. But both tools have a very limited reach. Only
investors with hefty tax bills, typically big banks or corporations, can
exploit them to reduce their tax burden. Most potential investors,
including tax-exempt pension funds and, importantly, retail investors
trading stocks, don’t have big enough tax bills to exploit the break. As
a result, the few remaining players whose considerable tax bills place
them in the market for tax breaks are able to demand returns of up to 30
percent for investing in renewable energy projects — an investment
known as “tax equity.”
There are better options. They may sound wonky, but they could prove revolutionary.
Real
estate investment trusts, or REITs, which are traded publicly like
stocks, could tap far broader pools of capital to vastly lower the cost
of financing renewable energy. REITs have a market capitalization of
over $440 billion while paying shareholders average dividends below 10
percent — roughly a third of the cost of tax equity investments for
renewable energy.
Master limited partnerships carry the
fund-raising advantages of a corporation: ownership interests are
publicly traded and offer investors the liquidity, limited liability and
dividends of classic corporations. Their market capitalization exceeds
$350 billion. With average dividends of just 6 percent, these investment
vehicles could substantially reduce the cost of financing renewables.
But
current law makes using both of these investment vehicles for renewable
energy difficult if not impossible. Washington could help in two ways.
First, the Internal Revenue Service needs to clarify the eligibility of
renewable power generation for REIT financing. Second, Congress needs to
fix a bizarre distinction in the tax code that bars master limited
partnerships from investing in “inexhaustible” natural resources like
the sun and wind, while allowing investments in exhaustible resources
like coal and natural gas. In 2008, as surging gasoline prices were
infuriating American voters, Congress amended the tax code to enable
master limited partnerships to invest in alternative transportation
fuels like ethanol. We should treat power sources, like wind and solar
farms, similarly.
There is hope. Senator Chris Coons,
Democrat of Delaware, plans to introduce a bill to allow master limited
partnership investment in renewable energy. This approach is preferable
to a recent proposal by Senator Bernard Sanders, independent of Vermont,
and Representative Keith Ellison, Democrat of Minnesota, to eliminate
this investment option for fossil-fuel projects. Both moves would level
the playing field between conventional and renewable energy, but the
Coons bill does so by promoting, rather than limiting, economic growth
across the energy industry.
These approaches could help
renewable energy projects reduce their financing costs up to fivefold.
These cost improvements could significantly reduce the price of
renewable electricity and, over time, erase the need for costlier
subsidies. Of course, making renewable energy eligible for master
limited partnership and REIT financing would amount to a new kind of
subsidy, because both are exempt from income tax. Indeed, some members
of Congress fear that expanding master limited partnerships will erode
the federal tax base. We don’t think so. Investors in master limited
partnerships and REITs still pay taxes on dividends. Moreover, these
investments would most likely bring many more renewable energy projects
online, actually raising overall tax revenue.
A more valid
concern is whether renewable energy master limited partnerships might be
abused as tax shelters, reminiscent of what happened in the 1980s
California “wind rush.” Back then investors cared more about putting
turbines in the ground to secure tax credits to lower their tax bill on
other income than whether the machines actually produced electricity.
History,
however, need not repeat itself. Renewable energy master limited
partnerships can guard against such abuse by ensuring that these tax
privileges actually result in green electricity.
There’s
another benefit to expanding the pool of renewable energy investors: It
would help democratize, and thus build support for, these new energy
sources. Today, all American taxpayers fund renewable energy subsidies,
but only a deep-pocketed few can cash in on the tax benefits. Publicly
traded master limited partnerships and REITs would empower all Americans
to invest and have a stake in the transition to cleaner energy.
Renewable
energy has come a long way since the 1970s energy crisis but much work
remains. We must complement continued technological innovation with
critical financial innovation — to level the playing field, incentivize
growth, reduce subsidies and democratize America’s energy future.
Felix Mormann is a fellow, and
Dan Reicher is the executive director, both at Stanford’s Steyer-Taylor Center for Energy Policy and Finance.
How to Make Renewable Energy Competitive - NYTimes.com
Link:
http://www.nytimes.com/2012/06/02/opinion/how-to-make-renewable-energy-competitive.html?_r=2&pagewanted=all
