There is a transformative wave of solar energy investments on the horizon, with an untapped class of wealthy investors ready to finance installations that could lead to a new world of sustainable energy, job creation and economic growth. But that evolution is not likely to happen if the U.S. continues to favor a tax policy that encourages the proliferation of fossil fuel investments, granting the most lucrative tax benefits to pollution-generating projects.
According to a recent Brookings study, the clean energy market is valued at $2.3 trillion globally over the next 10 years and already employs close to three million people in the U.S. alone. And the market only continues to grow. However, the study finds that it will require intense work for the U.S. to keep pace in the global race for clean energy. It took $48 billion of clean energy investments in 2011 for the U.S. to reclaim the lead from China at $45.5 billion. Much of that money came from the 2009 American Recovery and Reconstruction Act's stimulus funding, and those funds are running out. A new and consistent source of private investment must be enabled to continue the acceleration of this market.
It is the small to mid-scale commercial photovoltaic projects - those that use a method of generating electrical power by converting solar radiation - that harbor the largest growth potential for the solar industry right now, spurred by falling system prices and installation costs, along with an array of federal, state and local tax incentives and financing opportunities from corporate giants such as Google. But any astute investor conducting a minimum of due diligence will quickly learn that although these solar investments qualify for some tax benefits, they are unable to use standard tax-advantaged corporate forms, restricting the ability to raise capital and enable widespread participation in the market, unlike those benefits given to investors in energy portfolios for oil, natural gas, coal extraction and pipeline projects.
Under current regulations, direct participation in sustainable energy investments is restricted unless it's for "qualified" or "accredited" investors - defined as those with a net worth of at least $1 million, not counting the value of their home, or an annual salary of $200,000. Fossil fuel developers, on the other hand, can use corporate structures that allow virtually anyone to invest directly.
The tax benefits of fossil fuel energy projects come largely through vehicles called master limited partnerships (MLPs), a business structure that is taxed as a partnership, but with ownership interest traded as corporate stock on a market. A provision in the federal tax code authorizes the creation of MLPs for fossil fuel exploitation, providing access to capital that creates jobs and economic activity through construction and energy development. MLPs are instrumental in attracting private investment, and fossil fuel projects that use them enjoy access to capital at a lower cost and with greater liquidity than traditional forms of financing.
But while investments in sustainable sources of energy can provide equal, if not more, economic and job creation benefits - not to mention national security safeguards and environmental soundness - they have long been arbitrarily excluded from using the MLP structure. Similarly, real estate investment trusts, or REITs, traded publicly like stocks, offer another valuable vehicle for these projects yet are very difficult for investors in sustainable energy to use under current law.
There is one effort underway in Washington to address at least part of this tax inequity, with legislation proposed by U.S. Sen. Chris Coons, D-Delaware, to give investors in renewable energy projects invaluable access to MLPs. The Master Limited Partnerships Parity Act seeks to level the playing field between traditional and new energy businesses with a simple tweak to the tax code that would open up these vehicles to energy-generation and transmission companies.
But, with unfounded fears looming that the MLPs would be abused as tax shelters, passage is not a given, and more needs to be done to wage this battle on the political front. With the spirit of the legislation and those tax parity objectives in mind, we launched a White House petition to push for equal treatment for sustainable energy investments, allowing them to raise capital using the same structures and corporate forms as the fossil fuel industry. With 100,000 signatures, the White House will review the issue, ensuring it's sent to the appropriate policy experts, and give an official response.
Imagine a world, not too far off, where sustainable energy and fossil fuel energy investments compete for capital as equals. The end result would be staggering: It would not only open up a whole new class of investors and money in the marketplace, but stimulate job growth, provide clean energy without fuel price spikes, and enhance national security by lessening our dependence on foreign oil. With this transformation would also come new innovation and investment in critical technologies, along with a better environment for future generations.
Our energy investment landscape is changing dramatically. New business models are emerging. Traditional players are shrinking away and new players, such as insurance companies, pension funds and other institutional investors, are entering the scene. Our antiquated tax code, however, is serving as the biggest impediment to welcoming their arrival. There is an implicit danger in letting Wall Street and the government play a role in setting double standards and creating inherently weaker classes of investors. They need to let this transformation take its natural course.
We are not living in a world with a bottomless energy supply, or an endless capacity to absorb pollution, and cannot afford to discourage investments when there is such a critical need and a straightforward way to increase clean domestic energy production. If not for the investor, it is a cause worth championing for the American people.