This presentation gives an overview of how to increase funding for renewable energy through the use of master limited partnerships (MLPs).

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EXPANDING THE INVESTOR BASE
AND LOWERING THE COST OF CAPITAL
FOR RENEWABLE ENERGY THROUGH
MASTER LIMITED PARTNERSHIPS (MLPS)
April 2014
Prepared by Meister Consultants Group for the Union of Concerned Scientists
Sean P. Flannery
Wilson H. Rickerson

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MLPS: A BRIDGE TO RENEWABLE ENERGY FUNDING
• Increasing non- hydro renewables to 30% of U.S. electricity by 2025 would require
investment of $50-70 billion per year over the next 5 years
• Broadening the investor base will lower the cost of capital and cost of energy for
renewable energy projects
• Two US market segments – defined-benefit pension plans and mutual funds --
could provide the funding with a 1% shift to renewable energy MLPs (REMLPs)
• The MLP market has demonstrated robust growth in size and liquidity over recent
years to support the dramatic increase in energy infrastructure development
• REMLPs could reduce the cost of capital by 3-7%
– Reducing the cost of capital by 3% would lower the levelized cost of electricity of wind
by 17% and would be worth about 40% of the production tax credit (PTC)
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ANNUAL CAPITAL FORMATION:
MLPS CAN SIGNIFICANTLY INCREASE THE AMOUNT
OF FINANCING AVAILABLE FOR RENEWABLES
0
20
40
60
80
2007 2008 2009 2010 2011 2012 2013
Tax Equity
MLPs
$ billion
Source: Tax Equity industry estimates, WellsFargo, MLP data include only debt and equity
issuance and do not include subscriptions or redemptions
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RAPID GROWTH IN MLPS
HAS FUNDED NATURAL GAS EXPANSION
• Quick response to massive increase
in natural gas sector
– 82% of MLPs are energy-related
– 34 energy MLPs in 2004; 107 in 2013
• Extensive industry interviews reveal
– Increasing institutional investment
– Innovations in legal structures to address
tax and regulatory issues
– Rapidly growing Exchange Traded Funds
(ETFs) improves market access and depth
• Liquidity improving
– Average daily dollar volume approached
$1 billion in 2013
$155
$96
$178
$272
$318
$387
$440
0
125
250
375
500
2007 2008 2009 2010 2011 2012 2013
MLP Market Capitalization
is Growing$ billion
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HOW MUCH CAPITAL IS NEEDED
TO FUND RENEWABLE ENERGY INVESTMENTS?
Source: NREL, Renewable Electricity Futures Study, 2012.
• Bloomberg: ~$40 billon in
U.S. in 2012
• NREL: $50-70 billion/yr over
next 5-10 years to reach
30% non-hydro renewables
by 2025
• $85-125 billion/yr after
2030 to reach 80% by 2050
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FUNDING RENEWABLE ENERGY THROUGH MLPS:
WHERE WOULD THE CAPITAL COME FROM?
• Considered two domestic investors pools:
defined-benefit pension and mutual funds
• Analyzed relative appeal of MLPs to current
allocations to determine potential sources
and available capital for RE-MLPs
• Compared to NREL estimates of $50-70
billion/yr over the next 5-10 years
• Calculated % of assets that would have to
shift to provide requisite funding
Source
Defined-
Benefit
Pension
Plans
Mutual
Funds
Combined
2013 Market
Value ($ billion)
$10,949 $15,017 $25,966
Substitution
Asset Class
alternatives
fixed
income
Allocation % 24% 30%
Potential Pool $2,648 $4,505 $7,133
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FUNDING THE SHIFT TO RENEWABLES: HOW MUCH OF
THE MLP MARKET WOULD BE INVESTED IN RENEWABLES?
$50 BILLION PER YEAR SCENARIO
REMLP market cap is not compounded
Assumes MLP market capitalization continues to grow at average annual rate of 19.8% during past 5 years
527 581 657 756
886
1,0510
50
100
150
200
250
$0
$350
$700
$1,050
$1,400
2014 2015 2016 2017 2018 2019
REMLP
MLP X-REMLP
REMLP
Other MLP
REMLPs = 19%
of MLP market
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$ billion

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FUNDING THE SHIFT TO RENEWABLES: HOW MUCH OF U.S.
PENSION & MUTUAL FUNDS WOULD BE INVESTED IN REMLPS?
$0
$10,000
$20,000
$30,000
$40,000
2014 2015 2016 2017 2018 2019
$billion
Equities Fixed Income Alternatives MLPs Cash
REMLP values are not compounded
Pension plan growth = 6.6% per year, mutual funds growth = 6.4% per year
REMLPs
$50b/yr = 0.7%
$70b/yr = 1%
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HOW DOES THIS AFFECT THE COST OF CAPITAL?
• While the cost of capital for
renewables spans a broad range,
financing costs are high and funded
by relatively few investors
• Traditional energy-oriented MLPs are
a good indication of the prices at
which renewable energy capital
might be provided
• BBB- rated MLPs (the lowest
investment grade segment) are a
reasonable proxy for REMLPs over
the medium term
– Significant cost advantage over typical tax
equity deals
NREL, Wells Fargo Securities MLP Primer 5th Edition
18.0%
14.0%
10.0%
11.0%
5.1%
3.8%
10.0%
8.0%
7.0%
5.5%
4.4%
3.6%
12.0%
11.0%
8.5%
7.9%
4.9%
3.7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
TaxEquity-
Levered
TaxEquity-Avg TaxEquity-
Unlevered
Debt-Equity
Mix
MLPBBB MLPAA-
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REMLPs could
reduce the cost of
capital by 3-7%

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UCS: POTENTIAL IMPACT OF MLPS ON WIND POWER
20-YEAR LEVELIZED COST OF ELECTRICITY (LCOE)
Assumptions
Wind cost and performance: $1,900/kW capital cost, $50/kW-year fixed O&M, 40% capacity factor (based on DOE 2012 Wind Technologies Market Report)
PTC: 2.3 c/kWh for 10 years (after-tax value)
Traditional Financing: 60% equity @ 11% after-tax return, 40% debt @ 5.5% interest and 15 year term, resulting in a weighted average cost of capital (WACC) of 7.9%, 2% lenders fee,
1.45 debt service coverage ration (DSCR). For scenario with the PTC, debt/equity ratio changed to 35/65 to achieve DSCR, resulting in a WACC of 8.3%
MLP financing: 100% equity @ 5% and 6.5%, 1% general partners fee
Source: UCS analysis using NREL's CREST model
7.25
4.35
6.75
6.05
0
1
2
3
4
5
6
7
8
Traditional Financing
without PTC
Traditional Financing
with PTC
MLP without PTC
(with 6.5% return)
MLP without PTC
(with 5% return)
cents/kilowatt-hour
• 3% reduction in
cost of capital with
MLPs could reduce
LCOE by 17%
• Consistent with
NREL MLP analysis
• Worth ~41% of the
value of the PTC
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MLPS TO BROADEN INVESTOR BASE FOR RENEWABLES
• The magnitude of required investment and the importance of lowering
the cost of capital for renewable energy underscores the need for
broadening the investor base
• The MLP market has funded oil and gas projects for decades and has
rapidly adapted to changes in both demand and energy sources
• Both the MLP structure and the nature of long-term renewable energy
investments are attractive to a broad base of investors who presently have
very limited access to the segment
• Proxy assets in the current MLP market indicate that the cost of capital
could drop by 3-7% if renewable energy assets were permitted in MLP
structures and result in a lower cost of electricity
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