New Funds for Renewables

Dan Reicher is an expert in environmental policy, finance and technology who has served three presidents. He was a member of President Obama’s Transition Team and served as Assistant Secretary of Energy under President Clinton. Currently, Reicher is the executive director of the Steyer-Taylor Center for Energy Policy and Finance at Stanford University and is also senior advisor to the Atlantic Wind Connection, a project backed by Google to build an underwater transmission line for offshore wind power. An avid kayaker, Reicher was a member of the first expedition to navigate the entire 1,888-mile Rio Grande and to kayak the Yangtze River in China. His work involves finding new financing for renewable energy through Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs).

E Magazine: Why does renewable energy need new financing?

Dan Reicher: There are two different factors that determine the cost of renewable energy projects. First is the cost of technology itself, the cost of wind turbines, solar panels, geothermal, all of that. Second is the cost of financing to deploy those technologies. The good news is we’ve made a lot of progress in lowering the cost of the technology quite significantly. The not so good news is that the cost of financing those projects has remained stubbornly high. That’s what brings into focus these recent opportunities around Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs).

E: Why are current investment tools and incentives insufficient?

D.R.: Federal tax credits have stimulated a lot of investment in renewable energy, but they have some challenges. They only have short term Congressional approval and go back to Congress regularly to get reauthorized. They turn out to have a pretty limited group of eligible investors—those who make significant amounts of money that they want to reduce the taxation on. Corporate structures that you set up to develop a project are generally doubly taxed. They’re taxed at the level of the project and then they’re taxed at the individual level. For complicated reasons they also tend to tie up capital for long periods of time–they don’t tend to be very liquid. Having said all that, I’m the first to agree that they have been a very good tool.

E: Tell me about the benefits of MLPs and REITs.

D.R.: MLPs and REITs were put into place by Congress decades ago and have provided low cost capital to traditional energy projects. They are simple investment structures, they’re only taxed once, they trade like stocks [allowing investors to, for instance, own a portion of a wind farm]. Their track record in terms of capital invested has been quite extraordinary. MLPs have a market capitalization of $350 billion with gasoline, oil and coal, and REITs a market capitalization of over $440 billion.

E: Why is now the time to add MLPs and REITs to the mix?

D.R.: In many situations they will provide a lower cost of capital. And I think they avoid what has been a very challenging situation for the renewable energy industry, which is the on-again, off-again nature of tax credits. If you look at wind deployment, for example, there’s been a boom and bust cycle that reflects the tax credit. It’s important to have more stable investment structures available so all of these industries can grow in a more predictable, reliable way, which makes them more competitive internationally, too.

E: The fossil fuel industry has always received generous subsidies that seem to be more stable than those for renewables.

D.R.: This will actually level the playing field. I’m hopeful that we’re actually going to see increasing support from the gas industry in opening up these structures, particularly MLPs, because they realize how important this has been to their industry and I don’t think they want to see it challenged. Increasingly we’re seeing natural gas as the technology that can be brought on quickly to level electricity generation for renewables. By the same token, natural gas has significant price volatility and renewables can dampen that out.

E: Might natural gas companies also want to go into renewables?

D.R.: Yes, a whole host of energy companies are doing both, working on even more of a suite of technologies. There is a lot of complementarity. Add energy efficiency into that mix and you have a very powerful trio that can take the country forward into a cleaner energy future.