New strategy targets tax breaks for green energy

WASHINGTON - If you can't beat Big Oil, join 'em. That's part of a pragmatic new green energy strategy that seeks tax breaks for renewable power that were once limited to fossil fuels and biofuels.

Energy experts view the effort as a realistic approach to Congress' partisan gridlock. Demands to kill all tax subsidies for oil, gas and coal are out. Attempts to extend those subsidies throughout the entire energy industry are in.

"The fossil fuel and nuke guys have been around for a while," said green energy advocate Marchant Wentworth, who monitors climate and energy legislation for the Union of Concerned Scientists. "There's no question they are a political force. It would be hard to overcome that."

So Wentworth's message to Congress about Big Oil's tax breaks has changed. "When I talk to decisionmakers," he said, "I tell them, 'Give us what they have.'"

A new Senate bill co-sponsored by Minnesota Democrats Al Franken and Amy Klobuchar tries to do just that.

The proposal would let wind, solar and other renewable energy businesses establish themselves as master limited partnerships, which sell stock like corporations but pay taxes at partnership rates. That can cut tax bills in half or more.

Right now, that incentive exists only for fossil fuel and biofuel businesses, where the value of master limited partnerships grew from $2 billion in 1994 to $220 billion in 2010.

Letting green energy in on this deal "is important because it would attract more investments ... by providing some of the same incentives that already exist for fossil fuels," Franken said in a statement. The Senate bill "wouldn't just even the playing field. It would help renewable energy companies get off the ground and encourage innovation, giving the industry the resources it needs to grow."

Klobuchar, like Franken, has long called for ending Big Oil's tax subsidies, but she has also signed on to the new spread-the-wealth philosophy.

"I support eliminating tax breaks for oil companies," Klobuchar said in a statement. "I also believe we need to level the playing field for other renewable energy industries to compete in the domestic energy production market."

The bill's primary sponsors, Sen. Chris Coons, D-Del., and Sen. Jerry Moran, R-Kan., represent bipartisan support. The bill could end up being part of a tax package that also extends a tax credit for electricity produced from renewable sources that expires at the end of the year. Or it may be rolled into corporate tax legislation.

Environmentally, "the smart thing to do is remove all incentives from fossil fuels and give them to renewable energy," said Rod Larkins of the University of Minnesota's Initiative for Renewable Energy and the Environment. "From a political standpoint, that's not going to happen."

Rep. Keith Ellison, D-Minn., introduced legislation in the House to end all tax subsidies to the oil industry. That legislation and a companion piece in the Senate face opposition. If the oil industry's tax breaks cannot be taken away, Ellison would support expanding those incentives to green energy, a spokeswoman said.

How effective tax incentives would be at attracting new investors to green energy is uncertain.

Felix Mormann, an attorney and fellow at Stanford Law School, said master limited partnerships could broaden the pool of potential investors because existing wind and solar tax credits often benefit only large financial institutions with high tax burdens.

"What this does is it makes renewable energy more democratic," Mormann said. "Retail investors like you and me who maybe trade stocks for their personal accounts ... can start investing in wind farms, and big solar farms in the desert or maybe huge geothermal facilities."

The largest source of energy growth in the United States now comes from renewable energy. A new report by the United Nations says the U.S. increased investments in renewable energy by 57 percent in 2011. But market shares remain small relative to fossil fuels. Non-hydropower renewable energy generated just 4.7 percent of the U.S.'s electricity in 2011, the U.N. reported.

Dan Juhl of Juhl Wind Inc. in Pipestone, Minn., has helped create wind power start-ups for decades. Juhl says renewable energy costs are dropping and storage technology is improving. He thinks renewable energy would eventually prevail over fossil fuels if all energy tax breaks disappeared. "That's not the reality in today's world," he admitted.

Customers needed

Whether the renewable energy industry can survive -- much less prosper -- without government help is a matter of debate. A 2011 study by venture capitalists DBL Investors studied the first 15 years of federal support for the oil and gas industry, the nuclear power industry and the renewable energy industry. Oil and gas received five times more in inflation-adjusted dollars from the federal government in its infancy than the renewable energy industry has in its early phase, the report said. Nuclear power received 10 times more in federal funding in its infancy than renewable energy.

But tax breaks alone won't increase renewable energy market shares very much, noted Todd Taylor, a lawyer with the Minneapolis firm of Fredrikson & Byron. Master limited partnerships should produce better investment returns, he said. Selling shares to the public while avoiding corporate taxes should definitely attract new capital. But nothing substitutes for willing buyers.

Piper Jaffray investment banker Tom Halverson said master limited partnerships work well on projects with predictable revenue streams. They offer investors an alternative to low-yield fixed-income securities. An example, he said, would be a wind farm built for an electric utility under a long-term power purchase agreement.

"You have got to have certainty of cash flow, or no one will buy it," said Halverson.

Among the perks experts say are needed to propel the renewable energy market into true competition with fossil fuels are production tax credits, investment tax credits and accelerated depreciation of equipment. In the end, though, investors want a guaranteed customer base that renewable energy start-ups often lack.

"You need long-term purchase contracts [to attract investors], but you've got to have stuff to buy," Wentworth explained. "It's a chicken and egg thing."

Success in Iowa

Tax incentives did drive wind power in Iowa, where wind now generates one-fifth of all electricity, said Elizabeth Wilson, a professor of energy and environmental policy at the University of Minnesota.

The issue, Wilson and other experts agree, is that tax incentives are a temporary solution. Tax credits and lower tax rates might jump-start the renewable energy industry. They cannot sustain it.

"Leveling the playing field sends a signal to the market that green companies are not being treated as special," Taylor said. But, he added, real change comes when investors and consumers see renewable resources as market-tested "energy providers," not environmental experiments.

Jim Spencer • 202-408-2752 • jim.spencer@startribune.com