What happened

Shares of Renewable Energy Group (NASDAQ:REGI) rose nearly 44% today after lawmakers reached a last-minute agreement to include a range of new tax-credit extensions into the latest federal spending package. 

The amendment included retroactively reinstating the federal biodiesel excise tax credit (BTC) for all production dating back to Jan. 1, 2018, and extending it through the end of 2022. The BTC provides a $1 per gallon subsidy to the first entity that mixes either biodiesel or renewable diesel into petroleum-based diesel, which is usually the producer of the renewable fuel. 

As of 10:50 a.m. EST on Tuesday, the renewable energy stock had settled to a 28.7% gain.

A businessman tossing cash into the air.

Image source: Getty Images.

So what

Assuming the spending package becomes law, this is the best-case scenario for Renewable Energy Group. 

First, the retroactive reinstatement of the BTC means the company (the nation's largest biodiesel producer) will collect an estimated $450 million windfall for production from the first day of 2018 to the end of the third quarter of 2019. That payment likely would arrive in early 2020. 

Second, the extension of the BTC through the end of 2022 creates an unusual level of certainty for the biodiesel industry. Renewable Energy Group can now plan investments while counting on the financial benefit of the tax credits. Considering the subsidy was worth $237 million in 2018 and will be worth at least $275 million in 2019, the three-year extension could net the company close to $1 billion total if production volumes continue growing.

Just for added clarity, some outlets have incorrectly reported that the extension lasts through the end of 2023 or that the $1 per gallon tax credit gradually steps down to smaller amounts. Lawmakers settled on a different proposal: an extension through 2022 and keeping the subsidy at $1 per gallon throughout.

Now what

Assuming the tax credit extension becomes law and isn't held up by Congress or the White House, Renewable Energy Group now has a clear path to investing in the next phase of growth: renewable diesel. Today's news bodes well for expanding production at its lone renewable diesel facility in Louisiana and finalizing a proposed joint venture with Phillips 66. But the business still needs to execute, and a bevy of competition in renewable diesel could dilute what appears today to be a great opportunity.

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