The U.S. Inflation Reduction Act of 2022 is a win for clean energy names with U.S. presence, and should help the country drive down emissions. The final legislation allocates US$370 billion to clean energy funding, keeping a majority of what was first laid out in the original Build Back Better (BBB) plan (US$555 billion for clean energy).
The bill passed votes in both houses of Congress with majority Democrat support in August before President Joe Biden signed it into law on Aug. 16, to the benefit of power and utility firms with strong U.S. footprints (notably the more pure-play renewable power firms).
Within our coverage universe, we specifically highlight NextEra Energy Inc. (NYSE-NEE), Clearway Energy Inc. (NYSE—CWEN.A), Brookfield Renewable Partners LP (TSX—BEP.UN; NYSE—BEP), Innergex Renewable Energy Inc. (TSX—INE) and Boralex Inc. (TSX—BLX).
Rising inflation and two consecutive quarters of negative GDP had the Democrats needing a meaningful legislative win before the U.S. midterms.
For the party to procure a Sen. Joe Manchin U-turn (the West Virginia Democrat known for his frequent opposition to his party’s legislation) is a big win, but this bill needed the support of the entire party to become law. Sen. Krysten Sinema (a Democrat from Arizona) had voiced her concerns of a minimum 15 per cent corporate tax rate – which remains in the enacted legislation.
The support and credits per the legislation are projected to drive new clean energy investments that will translate into a 40 per cent reduction in carbon emissions. Notable items in the bill are about three- and roughly 10-year extensions for the dedicated wind production tax credit (PTC) and solar investment tax credit (ITC).
As with the original BBB proposal, the magnitude of credits are tied to certain conditions (wage/apprenticeship requirements, domestic content, siting in certain locations). There is also a new standalone ITC for storage, which should increase the deployment (at new and existing sites).
Further, the act has strong consumer energy incentives that should encourage increased electrification, driving positive benefits for power and utility companies. It also supports the build-out of the domestic supply chain, which could mitigate future disruptions like the recent solar tariff issue.
We believe the act is more supportive for the renewable IPPs/Yieldcos, and less so for those with U.S. utility assets. Equities likely benefiting most are NextEra, Clearway, Brookfield Renewable, Innergex, and Boralex, as noted earlier.
Other beneficiaries include Atlantica Sustainable Infrastructure PLC (NASDAQ—AY), TransAlta Corp. (TSX—TA; NYSE—TAC), Capital Power Corp. (TSX—CPX), and Northland Power Inc. (TSX—NPI) given current assets and/or U.S. growth plans.
Looking outside of the renewables, the law also provides handsome credits for electric vehicles and other clean energy technologies such as nuclear, hydrogen and carbon capture and storage.
Given the emerging nature of some of these, we believe matching fiscal support for the same technologies here in Canada will help in our economy’s transition too.
In essence, we believe this is America’s clean energy “advantage”. The country has more room to “catch up” on zero-emitting power generation, making use of renewable technologies that have been incubated for well over a decade now. Not to mention, plenty of opportunity for solar and wind generating geology across the U.S. The use of tax credits will be instrumental in helping drive this general shift towards renewables.
Canada’s largest emitting sector, alternatively, is oil-and-gas. Like power, the sector is also carbon intensive. However, unlike U.S.-generated power, over 70 per cent of Canada’s produced oil is exported. Its more trade-oriented nature makes Canadian energy more susceptible to carbon leakage. The U.S. arguably doesn’t have the same scale of emissions challenge as Canada.
Such a situation could mean Canada needing to be more heavily involved in building out carbon capture technology, relative to our U.S. neighbours.
Whether Canada chooses to go the carbon tax route or the cap-and-trade route in managing energy emissions, the redistribution of proceeds from either carbon taxes or carbon allowances, conceptually, becomes part responsibility of the government. Additional fiscal support from both provincial and federal governments would help Canada meet this challenge.
Shaz Merwat, Mark Jarvi, Ollie Primak, Ian de Verteuil, Jin Yan and Jinzhu Zhai are equity analysts for CIBC World Markets in Toronto.
This is an edited version of an article that was originally published for subscribers in the September 2, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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Investor's Digest of Canada •12/28/22 •