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Clean Energy Finance


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Overview

The market for clean energy technologies is expected to reach $2.2 trillion by 2020,1 but the U.S. will need to make substantial investment in renewables, carbon capture and storage (CCS), and next-generation nuclear to capture a significant portion.2 Even at the peak level of investment in clean energy, the U.S. has underinvested by 60% to meet our clean energy goals.3 Our current financing mechanisms are insufficient, failing to motivate adequate private investment or leverage public funding for deployment, development, and innovation. If the U.S. wants to reap the benefits of the clean energy market of tomorrow, we need to implement the policies to incentivize investment today.

Analysis

Clean energy technologies (“cleantech”) are challenging to develop, often requiring scientific breakthroughs, long timelines, and substantial amounts of capital to reach scale. Unlike internet innovations or even pharmaceuticals, cleantech often must cross a “valley of death”;4 a need for funding between the traditional startup requirements and the point when it can go public or be acquired.

This unmet need could be filled through one of two kinds of capital: government funding or traditional investors—both early-stage, like venture capital, and late-stage, like private equity or investment banks. Government funding, as seen with the DOE Loan Programs,5 can help companies with the costs of scaling. But such programs have been highly controversial.6 Private capital has been even more difficult to obtain, requiring higher returns to compensate for the risk involved.7 With the proper incentives, private capital could help bring more clean energy technologies through the valley of death to scale commercialization, taking advantage of the clean energy economy of the future.

Implementation

Although these efforts won’t completely resolve the challenges faced in financing clean energy, some short-term policy changes would help level the playing field and encourage private capital investment.

Open Master Limited Partnerships to Clean Energy

As proposed in the bipartisan Master Limited Partnership (MLP) Parity Act,8 Congress should allow clean energy to qualify for publicly traded partnership status. Already a mechanism utilized by the oil and gas industry, this tax treatment allows for profits to be passed directly through to investors, avoiding double taxation.9 This lowers the cost of capital for these projects, encouraging investment and ultimately making clean energy more cost-competitive with fossil fuels.

Issue Guidance Including Solar in Real Estate Investment Trusts

Similar to mutual funds, a real estate investment trust (REIT) exempts profits from double taxation—corporate taxes, then income taxes.10 REITs are required by law to distribute at least 90% of their taxable income to shareholders as dividends, making them attractive investments.11 While some property-owning REITs have solar panels on their rooftops, REITs could be utilized to directly finance solar energy by allowing solar assets to qualify as real estate assets under the REIT rules.12 The Treasury Department should issue guidance clarifying the status of solar assets as real property. Congress should continue to support these efforts to lower investment barriers to solar projects and spur additional deployment.

EndNotes
  1. “Sizing the Climate Economy,” Report, HSBC Global Research, September 2010, p.1. Accessed April 22, 2013. Available at: http://www.research.hsbc.com/midas/Res/RDV?ao=20&key=wU4BbdyRmz&n=276049.PDF.
  2. “Renewable Energy Sources and Climate Change Mitigation,” Report, Intergovernmental Panel on Climate Change, 2012, pp. 884-889. Accessed April 22, 2013. Available at: http://srren.ipcc-wg3.de/.
  3. In 2011 Worldwide GDP stood at $69.97 trillion and 2011 worldwide clean energy investment was $280 billion. See “Global Domestic Product,” Chart, Google. Accessed April 22, 2013. Available at: https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&tdim=true&dl=en&hl=en&q=global%20gdp; See also “World Clean Energy Investment Heading for a Drop in 2012, After Mediocre Q3,” Report, Bloomberg New Energy Finance, October 9, 2012, pp. 1-2. Accessed April 22, 2013. Available at: http://www.bnef.com/PressReleases/view/246.
  4. Jesse Jenkins and Sara Mansur, “Bridging the Clean Energy Valleys of Death,” Report, The Breakthrough Institute, November 17, 2011, pp. 3-4. Accessed April 22, 2013. Available at: http://thebreakthrough.org/archive/bridging_the_clean_energy_vall.
  5. United States, Department of Energy, Loan Programs Office, Homepage. Accessed April 22, 2013. Available at: http://www.lgprogram.energy.gov/.
  6. Carol Leonnig and Joe Stephens, “Lawmakers Question Loan to Solar Company,” The Washington Post, September 14, 2011. Accessed April 22, 2013. Available at: http://www.washingtonpost.com/politics/lawmakers-why-did-administration-risk-another-67-million-on-a-company-near-collapse/2011/09/14/gIQAD024RK_story.html.
  7. For example, nuclear power projects have had difficulty securing financing. See “The Future of Nuclear Power,” Report, 2009 Update, Massachusetts Institute of Technology, 2009, p. ix. Accessed April 22, 2013. Available at: http://web.mit.edu/nuclearpower/.
  8. United States, Congress, Senate, “S. 795 —Master Limited Partnerships Parity Act of 2013,” 113th Congress, 1st Session, April 24, 2013. Accessed April 25, 2013. Available at: http://hdl.loc.gov/loc.uscongress/legislation.113s795.
  9. Felix Mormann and Dan Reicher, “Smarter Finance for Cleaner Energy: Open Up Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs) to Renewable Energy Investment,” Report, Brookings Institute, November 2012, p. 2. Accessed April 22, 2013. Available at: http://www.brookings.edu/~/media/research/files/papers/2012/11/13%20federalism/13%20clean%20energy%20investment.pdf.
  10. Joshua Freed and Mae Stevens, “A Small Tax Change, Big Clean Energy Results,” Report, Third Way, December, 2011, p. 4. Accessed April 22, 2013. Available at: http://www.thirdway.org/programs/4/publications/475.
  11. Ibid
  12. “The Changing Environment of R&R (REITs and Renewables): A Discussion of Selected Tax Developments and Considerations,” Report, Deloitte, 2010, p.1. Accessed April 22, 2013. Available at: https://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/FSI/us_re_changingenviroment%20of%20RR_280910.pdf.
  13. Sen. Chris Coons, Sen. Jim Moran, et al., “Bipartisan Support Letter for MLPs,” Letter to President Barack Obama, December 12, 2012. Accessed April 22, 2013. Available at: http://www.coons.senate.gov/blog/post/bipartisan-bicameral-letter-to-president-obama-on-mlps-reits.