Delphi Group

Climate Change Policy & Sustainability Update


Courtesy of Delphi Group

Proven Investment Vehicles May Spur New Renewable Energy Grow

Harnessing two types of investment vehicles for renewable energy investing; Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs), would speed adoption rates for renewable energy, level the playing field with fossil fuel investments and attract billions in new investment.

REITs and MLPs are publically traded entities and each has special tax considerations which make them attractive investment options. REITs invest in real estate through directly owning property and collecting rents or through holding mortgages and collecting interest, but have also invested in oil and gas infrastructure. MLPs are available only in the US at this time. MLPs are publically traded partnerships which must adhere to the same regulations as publically traded companies, but are taxed like a partnership. MLPs must obtain at least 90% of their revenue from natural resource activities and have historically invested in oil and gas development and midstream energy infrastructure.

Because of the conditions of MLPs and REITs, many organizations have suggested using these vehicles for renewable energy investment. The tax benefits combined with the ease of trading on stock exchanges could make the structure attractive for individual and institutional investors, and lower the cost of capital for renewable energy project developers.

Using MLPs and REITs for renewable energy investment has become a serious topic in the US. The current tax code prevents MLPs from being used by renewable energy developers and IRS rules are unclear about whether or not renewable energy projects can qualify as REITs. In December 2012, a bipartisan group of Senators and Representatives sent a letter to President Obama, asking for MLP and REIT rules to be changed to help spur renewable energy investment. In 2013, the Master Limited Partnership Parity Act, a bipartisan bill that would add renewable energy resources and infrastructure to a list of qualified sources under an MLP, was re-introduced to the US Senate. It has been referred to a congressional committee for consideration.

Skeptics of MLPs for renewable energy investments suggest that if renewable energy portfolio standards and tax credits for renewable energy were eliminated, renewable energy MLPs would become an extremely high risk investment. These individuals note the importance of maintaining these credits and mandates as well as getting long term supply agreements for renewable energy projects.

In 2012, worldwide investment in renewable energy was US$244 billion. If MLPs and REITs are added to the investment vehicles permitted for renewable energy investing, billions more could be added to this figure.

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