The Inflation Reduction Act of 2022, a landmark piece of legislation for the Biden administration, holds the potential to spur activity in the US equity capital markets.
The IRA, which was approved by the US Senate and is winding its way through the US House before final sign-off by US President Joe Biden, provides US$369bn of tax incentives and other policies targeting green investments and energy security. Even before it is signed into law, it has affected investment behaviour.
First Solar, a US maker of solar panels, committed to expand US production capacity late last month after US Senator Joe Manchin’s surprising pivot led to narrow passage in the Senate.
“Should the Inflation Reduction Act pass with consistent language on solar-related tax credits, we plan to pivot quickly to re-evaluate US manufacturing expansion,” said First Solar CEO Mark Widmar on the company’s second-quarter earnings call on July 28.
First Solar, which is already spending US$680m to build a 3.3GW solar manufacturing plant in Ohio it expects to complete in 2023, stands to benefit from US$10bn allocated in the IRA for a 30% tax credit on new or retrofitted green manufacturing facilities.
The IRA also allows for tax credits on solar panels manufactured in the US as well as extension of investment tax credits to utilities purchasing solar panels at 30% through to 2032.
Analysts at Guggenheim reckon the incentives would give First Solar significant tax credits to offset production costs. “Even if First Solar does end up passing a substantial portion of the benefit along to its customers in the form of lower pricing, the impact of the proposed credits is dramatic,” they said in a note to clients on Monday.
Lower pricing for solar modules would also provide a tailwind to home installers such as Sunrun and Sunnova Energy.
Since the Senator Manchin pivot in late July, green energy stocks are up some 20%, reversing steep losses over the past year.
“This bill provides a big shot in the arm of decarbonisation of industry, from how power is generated to how it is consumed,” said Keith Russell, a director at global mining consultancy Partners in Performance.
Changed dynamic
All this may change the dynamics between green companies and the ECM market where investors were keen to entertain ideas but potential issuers were reluctant to fund at low valuations and without a clear regulatory framework.
Rev Renewables, a developer of solar and wind power projects, had hoped to go public in April after convincing one of its largest investors, South Korea’s SK E&S, to put up more money via the IPO, according to bankers familiar with the company’s thinking.
After filing documents in January, Rev refreshed its IPO filing in March, filling out the syndicate of banks underwriting the deal and outlining the US$100m concurrent investment by SK E&S.
“When the market sold off in the spring, a lot of companies pulled back on plans to go public,” said one banker involved in Rev's potential deal. “The thinking has been to keep their filings fresh to launch IPOs if the market turned around.
"Realistically, the plan for most was to re-evaluate after Labor Day at the beginning of September. If the window doesn’t open in September, they would take another look in 2023.”
Desri, a DE Shaw-backed alt-energy producer, is on a similar timeline to go public.
The IRA also includes new tax incentives for investments in battery-storage technologies, which stand to benefit both Rev and Desri.
Shares of Fluence Energy, a maker of industrial-scale battery storage that went public late last year, and former-SPAC Stem have soared some 75% over the past two weeks.
Privately held battery makers Powen and Flexgen, both which closed late-stage venture rounds this year, are viewed as potential IPO candidates, say bankers.
The IRA also includes provisions to expand production tax credits to nuclear power produced from existing facilities, providing greater clarity to utilities with large nuclear fleets like Constellation Energy (plus 42% since late July) and Public Service Enterprise (plus 8.5%).
Electric vehicle makers will benefit from consumer tax credits on purchases of both new (US$7,500) and used vehicles (US$4,500), though there are caps on prices (US$45,000 for sedans and US$80,000 for larger vehicles) that have led to criticisms by EV truckmaker Rivian.
The IRA raises funds to pay for all of this by imposing a minimum tax of 15% on corporate book income for corporations with profits over US$1bn as well as a 1% excise tax on stock repurchases. On the margin, those higher taxes could motivate US corporations to accelerate share repurchases before the bill becomes effective on December 31, potentially impacting investment-grade companies, say analysts. (See People & Markets for more).