The federal government was set to run out of funds by Friday, Dec. 20, which injected a rare sense of bipartisan urgency into Congress this week. The legislative branch proposed a new federal budget complete with extensions for a range of tax credits. While many subsidies affect renewable technologies, few stakeholders seem happy with the compromises in the amended federal budget.
Individual investors may see things differently. Some renewable energy technologies were surprisingly excluded from the helping hand of tax breaks (for now), but there were clear-cut winners in the proposed budget, too. Here's how it shakes down for several renewable energy stocks.
Electricity winner: onshore wind power
The production tax credit (PTC) for wind power projects had been stepping down in value in recent years and was set to roll off the books soon. Under current law, wind farms had to begin construction by the end of 2019 and enter service by the end of 2021 to claim the last available tier of the PTC. Under the new tax extension, projects can begin construction by the end of 2020 -- a full year later -- and be eligible for the PTC. They still must enter service by the end of 2021.
Due to the long-term planning and approval process that accompanies electric markets, the one-year extension for construction dates is unlikely to result in any additional power capacity relative to current investment plans. But the U.S. Energy Information Administration (EIA) expects a whopping 26,500 megawatts of new wind capacity to enter service in 2019 and 2020.
Still, the PTC extension could provide a lift to power generators and electric utilities such as Xcel Energy (NASDAQ:XEL), which has 2,022 megawatts of wind power capacity coming on line in 2020 and 2021. It isn't immediately clear how much of that capacity will begin construction in 2020 (and therefore benefit from the PTC extension), but wind farms can begin construction and enter service within the same calendar year if transmission lines are available. Perhaps the extension prompts the company to expedite construction plans.
Electricity loser: small-scale solar power
Solar power projects benefit from a different type of subsidy called the investment tax credit (ITC), which allows a portion of the total investment cost to be claimed as a tax benefit. Projects that begin construction by the end of 2019 can claim a 30% deduction. The benefit then steps down to 26% in 2020, drops to 21% in 2021, and finally reduces to 10% in 2022. Under current law, large-scale solar projects can claim the 10% benefit in years after 2022, but the ITC phases out completely for small-scale solar projects. Lawmakers left the phaseout intact.
Considering that the ITC provides an average benefit of $5,000 to individual households that invest in rooftop solar, many renewable energy supporters were unhappy that Congress didn't extend the tax credit or remove the phaseout for small-scale projects.
That could create headwinds for hardware suppliers such as SolarEdge Technologies (NASDAQ:SEDG). The business is currently the leading global supplier of solar energy inverters and owns over half the residential market in the United States. It plans to expand into energy storage products and smart, integrated inverter solutions to grow its presence in rooftop (small scale), commercial (a mix of small and large scale), and utility (large scale) markets. But with a giant chunk of sales wrapped up in small-scale solar applications, the planned phaseout of the ITC is something investors still need to watch.
Transportation winner: biodiesel and renewable diesel
The biodiesel industry is one of the single biggest winners in the new federal budget. Congress proposed retroactively reinstating the federal biodiesel excise tax credit (BTC) dating back to the first day of 2018 and extending the subsidy through the end of 2022. The BTC provides a $1 per gallon tax credit to companies that blend biodiesel and renewable diesel into petroleum-based diesel, which are typically the producers of the renewable fuel.
Renewable Energy Group (NASDAQ:REGI), the nation's largest biodiesel producer, is a clear winner. The business estimates that it will receive a $450 million windfall from renewable fuel production from the start of 2018 through the third quarter of 2019. If production volumes continue to increase in the near future, then the three-year extension could result in an additional $1 billion in total tax credits for the company.
The well-run business can use the help. Renewable Energy Group desperately needs to invest in renewable diesel, which is different from biodiesel and chemically similar to petroleum-based diesel. The next-generation fuel also benefits from the lucrative California Low-Carbon Fuel Standard (LCFS) and appears poised to supplant biodiesel in the long run. With the windfall in hand, the company should be able to finance expansions at its only renewable diesel facility in Louisiana and finalize a proposed joint venture with Phillips 66.
Other alternative transportation fuels including natural gas were winners as well, but they comprise a nearly negligible share of the domestic transportation fuels market. Clean Energy Fuels (NASDAQ:CLNE) would be a relatively big winner, collecting up to $60 million for production in 2018 and 2019 and additional sums during the three-year extension period.
Transportation loser: electric vehicles
Under current law, automakers are allowed to claim a tax credit of up to $7,500 for each of the first 200,000 electric vehicles (EVs) sold. It's typically passed along to consumers to offset the higher price of such cars. Tesla (NASDAQ:TSLA) and General Motors (NYSE:GM) are approaching that ceiling, which prompted them to lobby to raise the cap to 600,000 vehicles. They were unsuccessful, with Bloomberg reporting that the White House stepped in to squash the effort.
Investors will be watching to see if the automaker-specific phaseout of the EV tax credit affects the growth rate of the nascent market. Current plans point to a surge of electrified cars coming out of the industry's pipeline. That's all Tesla makes, of course, but General Motors has 20 battery-powered models launching by 2023 and just invested in a battery-producing gigafactory in Ohio. Essentially every automaker has similar plans to roll out electric lineups in the 2020s.
Therefore, without a future tax extension, the growth of the EV market may hinge on automakers accepting lower margins until further technology improvements in battery manufacturing and reliability kick in. Batteries are currently the largest cost of EVs, but if next-generation battery tech lives up to its potential, then consumers may be just fine in the long run.
These Congressional compromises aren't the end of the world
The proposed tax credit extensions went to the most mature renewable technologies (wind power and biodiesel) while excluding those that are just getting started and could use a helping hand (small-scale solar and electric vehicles). The extensions also focus on tax credits that directly benefit corporations (electric utilities and renewable fuel producers) instead of consumers (individuals buying rooftop solar arrays or EVs).
While few seem to be happy about the results, there are plenty of reasons for optimism when it comes to America's energy future. Besides, there will be future opportunities to extend tax credits for small-scale solar arrays and EVs.