The 111 th Congress enacted a number of renewable energy tax incentives as part of the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ). As various incentives for renewable energy, renewable fuels, and energy efficiency are scheduled to expire at the end of 2011, the 112 th Congress may want to explore various policy options for encouraging investment in renewable energy. The Obama Administration has also repeatedly emphasized the importance of investments in clean energy technologies and infrastructure. One option for attracting additional capital to the renewable energy sector that Congress may consider is allowing renewable energy activities access to the master limited partnership (MLP) business structure. A master limited partnership (MLPs) 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. Publically traded C corporations, however, are subject to two layers of taxation. Businesses may be able to attract more capital at a lower cost by choosing to organize as an MLP than would otherwise be possible. Qualifying income generally includes dividends, interest, rents, capital gains, and mining and natural resource income. There may be a small fraction of MLP carried interest related to the occasional sale of capital assets used in the operating business that is taxed as a capital gains right, but this amount is likely minimal. Most recently, the definition of qualifying MLP income was expanded to include the transportation and storage of certain renewable and alternative fuels, including ethanol and biodiesel, and other activities involving industrial source carbon dioxide. This change was made as part of the Emergency Economic Stabilization Act of 2008 ( P.L. 110-343 ), at an estimated cost of $119 million over 10 years. Tax-equity financing became increasingly scarce during 2008 and 2009, leading Congress to enact the Section 1603 grants in lieu of tax credits program. It has been argued that the Section 1603 grant program prevented what could have been a substantial decline in renewable energy investments, and may have resulted in additional investments in renewable energy generation capacity. The MLP structure might also help attract investors to the renewable energy sector, particularly if changes allowing renewables to structure as MLPs were enacted alongside changes to existing passive loss rules. Under the MLP structure, tax losses pass through to investors. From this perspective, the renewable energy entity might be able to attract additional capital to the sector with the MLP structure since such a structure could be designed to allow investors to directly benefit from renewable energy tax incentives. While expanding the pool of investors and increasing access to capital may help promote investment in renewable energy, the overall value of the ability to structure as an MLP is likely small relative to existing tax benefits for renewable energy entities. Extending the MLP Structure to Renewables: Potential Policy Concerns

Expanding the definition of qualifying income to allow renewable energy producers to structure as MLPs could raise concerns with respect to the size of the corporate tax base. This policy change, however, could place greater capital constraints on, and potentially reduce investment in, industries currently able to use the MLP structure. Allowing renewable energy facilities to structure as MLPs, if enacted jointly with policies that would exempt renewable energy tax benefits from passive activity loss rules, could raise concerns surrounding "gold plating" of renewable energy projects or the possible use of tax shelters. Concluding Remarks

Additional access to capital has the potential to stimulate investment and growth in the renewable energy sector.
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.