MLPs: A Potential Game-Changer for Renewable Energy

by Mike Kapsch

On June 1, The New York Times published an eye-opening article called How to Make Renewable Energy Competitive.

The op-ed piece was so impressive, in fact, that Senator Chris Coons used it as a framework to propose a new bill to congress just six days later. And now it could be a game-changer for the renewable energy sector altogether.

It’s called the Master Limited Partnerships Parity Act (MLPPA).

And it’s intended to level the playing field between oil and gas and renewable energy companies for good.

Thirty Years in the Making

Consider this for a moment…

In 1981, the first master limited partnership (MLP) was introduced to investors by an oil and gas company based out of Texas, called Apache Corp. (NYSE: APA).

By 2005, nearly 40 MLPs were trading on the market with a total market cap of $64 billion.

Today, that number has popped to about 100 MLPs with market caps now totaling over $350 billion.

That’s an increase of 450% - in terms of market cap - in just seven years.

Even more astonishing though…

About 80% of all MLPs today are oil and gas companies.

That means, since 1981, the oil and gas industry has raked in over $280 billion in capital thanks solely to the advent of MLPs.

The same can’t be said for renewable energy companies, however.

Government: Renewable Energy’s Best Friend and Enemy

Renewable energy companies do receive government subsidies. According to the Congressional Budget Office (CBO), in 2011, energy subsidies totaled $24 billion, with $16 billion of that money going to renewable energy sources.

But since the 1980s, they haven’t been permitted by law to create their own MLPs.

The New York Times argues, “If renewable energy is going to become fully competitive… in the United States, then technological innovation must be accompanied by financial innovation so that clean energy sources gain access to the same-low cost capital that traditional energy sources like coal and natural gas enjoy.”

As you can see from the chart below, the MLPPA bill intends to do just that.

MLPs: A Potential Game-Changer for Renewable Energy

(Source: http://www.coons.senate.gov/issues/master-limited-partnerships-parity-act)

What’s more, MLPs provide unique advantages for both the companies that create them and their investors. That’s good news for the renewable energy sector.

For businesses, MLPs aren’t taxed at the corporate level and can easily be traded on the New York Stock Exchange.

For investors, MLPs give away nearly all of their profits in the form of distributions. They also tend to have higher yields than regular dividend paying stocks, averaging 6% today.

Here the best part though if you own an MLP. Income received by them is considered a return of capital, not a dividend. So you won’t be taxed on the distributions you receive.

You can find out even more about MLPs from Investment U Associate Investment Director Marc Lichtenfeld by clicking here.

The Bottom Line

Considering how much political influence oil and gas companies have in congress, it could be a while before this bill is voted on.

But many of the renewable energy companies we’ve talked about at Investment U, such as First Solar (Nasdaq: FSLR), Ormat Technologies (NYSE: ORA) and ITC Holdings (NYSE: ITC), are positioned to shoot higher as soon as it’s passed into law.

And since renewable energy is set to be the fastest growing energy sector for the next 25 years, now may be an opportune time to prepare for what’s to unfold.

Good Investing,

Mike

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