use of those incentives is potentially much more important to the structuring process. An unregulated utility has a couple of options for preserving those incentives within a REIT, MLP, or Up-C structure. In an Up-C structure, the public entity is itself a taxpaying C corporation that may be able to use the tax incentives. But even in a REIT or MLP structure, the assets whose incentives have not been exhausted can be held through a TRS of a REIT or a taxable corporate subsidiary of an MLP. Once the incentives have been exhausted by that TRS or MLP subsidiary, the assets could be transferred to the REIT or MLP (subject to compliance with the relevant requirements), where the income generated by those assets will no longer be subject to corporate-level tax.
Another option, which is available to all three capital vehicles, is to hold the non-exhausted assets in a partnership with other tax equity investors— i.e., investors that have sufficient taxable income to make use of the renewable energy tax incentives associated with the project. Within limits, the tax rules permit a disproportionate amount of renewable energy tax incentives to be allocated to the tax equity investors, which may increase the amount that those investors are willing to pay to join the partnership. Once the benefits have been exhausted, the assets would revert back to the public vehicle.
A complex interaction of political and market forces has led unregulated utilities to search for new capital at a time when traditional investors have been exiting the space. This has forced unregulated utilities to think outside the box and consider nontraditional sources of capital for renewable energy investments.
Fortunately for unregulated utilities, three nontraditional capital vehicles—REITs, MLPs, and Up-Cs—may be able to provide low-cost financing for renewable energy investments. Although these nontraditional vehicles may not have been suitable sources of capital under market conditions as they existed five or 10 years ago, the conditions today may make them suitable. An unregulated utility that is not satisfied to wait on the sidelines in hopes of a return of past conditions should take a close look at the benefits that REITs, MLPs, and Up-Cs have to offer.
1. In the past couple of years, rumors have abounded regarding unregulated utilities seeking to sell interests in their renewable energy portfolios in order to monetize their investment in those portfolios and to find a partner to share the future development costs associated with those portfolios. For example, in 2012, Duke Energy sold a 50 percent interest in two of its wind farms to Sumitomo Corp. of America, and AES Corporation reportedly was in talks to sell its U.S. wind assets to State Grid Corp. of China. See Press Release, “ Duke Energy and Sumitomo to Jointly Own Kansas Wind Farms ,” Mar. 27, 2012; Wan Xu & Don Durfee, “ China’s State Grid in Talks to Buy AES’ U.S. Wind Assets ,” Reuters, Feb. 27, 2012.