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.
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.
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.