Driving Renewable Energy Growth Through Effective Public Policy: A Financial and Policy Analysis of Cash Grants, Tax Credits and Pass-Through Tax Structures (MLPs and YieldCos)

Abstract

Energy and environmental concerns have motivated policymakers to support renewable energy technology development through various tax policies. Currently, the majority of renewable energy projects in the U.S. benefit from tax credit incentives. The associated tax equity financing structure has received criticism for its inefficient use of taxpayer resources relative to other policies, including the Section 1603 Cash Grant. The cash grant provided renewable energy developers with the option to receive a cash injection in lieu of the prevailing tax credit during 2009 to 2011. Conversely, renewable energy developers have begun to form dividend-oriented investment vehicles that house renewable energy assets with long-term power purchase agreements in a manner that parallels the master limited partnership (MLP) for conventional oil and gas companies. The relatively recent structure, known as a YieldCo, has lowered financing costs while providing renewable developers with access to an alternate investor base with a more competitive source of capital. Through the contribution of a proprietary framework for evaluating the financial impact of various public policies, this thesis seeks to evaluate the relative cost effectiveness of cash grants, tax credits and pass- through tax structures (MLPs and YieldCos) in achieving government policy objectives. The financial model helps determine how efficient each policy is in furthering renewable energy development for each dollar in government tax expenditures. The analysis is supported by a sensitivity analysis of the parameters of the financial model. Although the financial model corroborated existing literature with regards to cash grants being approximately twice as efficient as tax credit incentives, the financial analysis ultimately found pass-through structures to be the most efficient policy solution for furthering renewable energy growth. The ancillary benefits of the pass-through structure, including enhanced liquidity and borrowing cost improvements, propel the business structure ahead of the other policy options in terms of their efficient use of taxpayer resources. Government policy should support pass-through structures, either by facilitating market environments that accommodate YieldCo growth or by legislating the widespread introduction of the MLP structure to the renewable energy industry.