Search Penny Hill Press

Thursday, July 7, 2011

Master Limited Partnerships: A Policy Option for the Renewable Energy Industry

Molly F. Sherlock
Analyst in Economics

Mark P. Keightley
Analyst in Public Finance

Expanded investment in clean and renewable energy resources continues to be a policy priority of the Obama Administration and an area of interest to the 112th Congress. In recent years, the primary policy vehicle for promoting investment in renewable energy has been tax credits, particularly the renewable energy investment and production tax credits. A lack of tax liability, however, has limited the renewable energy sector’s ability to fully take advantage of these and other tax benefits. The result has been an increased interest in exploring other options for promoting investment in renewable energy. One option might be to allow renewable energy entities access to the master limited partnership (MLP) business organizational form.

An MLP is a type of business structure that is taxed as a partnership, but whose ownership interests are traded on financial markets like corporate stock. Being treated as a partnership for tax purposes implies that MLP income is generally subject to only one layer of taxation in contrast to publically traded C corporations, which are subject to two layers of taxation. The ability to access equity markets in a manner similar to corporations allows MLP to obtain greater amounts of capital. Access to a greater pool of capital, when combined with the favorable partnership tax treatment, may allow MLPs to secure capital at a lower cost than similar businesses operating under a different organizational structure. The lower cost of capital, in turn, could increase investment in the renewable energy sector.

Congress first established rules relating to MLPs in the 1980s. At that time, the MLP structure was limited to businesses deriving 90% of their income from primary sources, which included dividends, interest, rents, capital gains, and mining and natural resources income. Effectively, this definition allowed oil and gas extraction and transportation activities access to the MLP structure, while renewable energy resources were generally excluded. The Emergency Economic Stabilization Act of 2008 (P.L. 110-343) expanded the definition of income from qualifying sources to include transportation of certain renewable and alternative fuels, such as ethanol and biodiesel.

Provisions enacted under the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) enhanced the value of certain renewable energy tax credits for many renewable energy projects. By transforming existing tax credits into cash grants, the Section 1603 grants in lieu of tax credits program enhanced access to capital for many in the renewable energy sector. The Section 1603 grant program is scheduled to expire at the end of 2011. As Congress evaluates other policies to attract additional capital to the renewable energy sector, allowing renewable energy entities to structure as MLPs might be one option.

Extending the MLP structure to renewables could possibly attract additional capital to and stimulate investment in the renewable energy sector. There are, however, a number of potential policy concerns to consider. First, expanding access to the MLP structure could narrow the corporate tax base, which is one of the reasons access to this structure was limited in the first place. Second, if changes to the tax code allowing renewable entities to access the MLP structure are enacted alongside changes to current passive activity loss rules, there may be concerns about the possibility of renewable energy investments being used as a tax shelter. Finally, if the concern is that renewable entities are disadvantaged relative to fossil fuels currently able to use the MLP structure, one option would be to prevent other energy entities from structuring as MLPs.

Date of Report: June 28, 2011
Number of Pages: 16
Order Number: R41893
Price: $29.95

Follow us on TWITTER at or #CRSreports

Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.