Banking, finance, and taxes
Alt-Energy: A New Way to Finance Clean Energy (ETE, SUG, WMB, BAC. PLD, NRG)
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Last week pipeline master limited partnership (MLP) Energy Transfer Equity LP (NYSE: ETE) revealed a deal worth $4.2 billion for rival natural gas pipeline company Southern Union Co. (NYSE: SUG). Today, Williams Cos. (NYSE: WMB) made an unsolicited counter-offer of $5 billion for Southern. Both offers include the assumption of $3.7 billion in Southern Union’s debt.
What’s interesting about this deal, from an alternative energy standpoint, is that it shines a light on efforts to allow alt-energy companies to adopt the MLP structure as a way to attract private investment into the sector. This could be a very interesting way to get government out of the business of financing clean energy projects.
A report issued last November by the Center for American Progress and the Coalition for Green Capital recommended that allowing renewable energy to form partnerships similar to MLPs and REITs. By law, MLPs must derive at least 90% of their income from eligible investments in natural resources, commodities, or real estate. The report argues that renewable energy sources such as wind and sunshine are among the natural resources that should be considered for inclusion.
The problems that the recommendation is trying to solve are the lack of certainty in both the tax code and public policy related to renewable energy financing, and the lack of long-term, low-cost financing available to renewable energy businesses. Allowing MLP structures is only a piece of a the report’s overall recommendations for financing renewable energy, but it’s worth a closer look by itself.
One benefit of this approach is that it does not rely on setting a price for carbon. Cap-and-trade proposals have gotten no traction in Congress and proposals for a carbon tax are even less popular. Where the clean energy MLP idea may have the best application is in the transmission and distribution of renewably-generated electricity. In other words, the grid.
The estimated cost to upgrade the US grid ranges from $500 billion on up. Any chance that the federal government will be able to provide that amount of support directly or in the form of loan guarantees is certainly no better than 50-50. More likely is that concern about federal deficits and debt will push renovation and construction of the grid out for years.
Allowing an MLP/REIT-type setup could serve two purposes. First, it is effectively a corporate tax cut. This concept is very popular with some politicians. Second, it is a tax increase on investors, a concept which is quite popular with other politicians. Both sides could claim victory. From a political perspective, what could be finer?
Second, it could lead to a privatization of the national grid. That may not be a universally popular idea, but its merit is that it eliminates the federal government’s responsibility for paying out gobs of money it does not have and it would instill some certainty into renewable energy projects. Federal and state regulation would still exist, of course, but the virtually guaranteed return on investment that comes with MLPs and REITs could be very attractive to investors.
There probably won’t be much action on this idea until after the 2012 elections. But its simplicity and attractiveness to both ends of the political spectrum may give it a chance of being adopted.
If you think that alternative energy financing is dead, let us consider this week’s other big deal. With a Department of Energy-backed loan, Bank of America Corporation (NYSE: BAC) is financing a massive project that is being undertaken in solar where PV modules are being installed on top of buildings owned and operated by Prologis (NYSE: PLD) and being installed by NRG Energy, Inc. (NYSE: NRG). The beat goes on.
Paul Ausick
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