Shares of solar and wind-power producer AES Corporation (AES -8.12%) plunged 8.2% on Tuesday after the Senate Finance Committee crafting the new budget bill released details of the proposal.
Industry participants had held out hope that the very quick elimination of solar and wind tax credits in the House bill, passed in May, would be changed significantly. While there were some key changes in the Senate bill, it looks like wind and solar executives were hoping for more, given the reaction of the stocks today.
A phaseout by 2028
The wind and tax credits had initially been passed in the Inflation Reduction Act passed in 2022 under the prior administration and had initially been written to last until 2032 at which point they would be phased out. However, since the new administration took office and the Republicans took both houses of Congress, the tax credits for renewable energy projects have come into the crosshairs.
In May, the House passed its version of the "One, Big, Beautiful Bill" that phased out the tax credits more quickly and severely than anticipated. As the bill moved to the Senate, many industry participants, as well as officials in red and blue states alike, lobbied for changes to the credits in order to preserve construction timelines.
Today, the Senate Finance Committee released its version of the bill, including a 60% reduction in the renewable-project tax credit in 2026 before going to zero in 2028.
There were some changes and loosening of the rules. For instance, for solar and wind projects, qualifying projects must now start construction by a certain year to qualify up until Dec. 31, 2028 rather than having to have the project put into service by that time, as had been outlined in the House bill. And certain tight restrictions on the use of foreign components were also loosened somewhat, perhaps easing the way to get large-scale projects constructed more quickly and more cheaply.
Still, on the whole, it appears the industry was hoping for bigger changes to the House bill.
Image source: Getty Images.
AES has a setback but should be OK
AES should still get through this period even with the phasedown, as only 52% of its deployed power assets were dedicated to renewables, with the remainder divided between natural gas, at 29%, and coal, at 17%. Of the total renewables, some 23% were in hydropower, whose tax credits will remain in the Senate bill until beginning their phaseout in 2033 through 2036.
Although AES' pipeline of projects is close to 100% renewables, it appears the current projects in the pipeline all have commencement dates before 2028.
While growth beyond 2028 may therefore be tougher to come by, AES management will have some time to figure things out. Therefore, dividend investors may want to look at this 6%-yielding stock on the pullback.
