The biggest climate investment in U.S. history

On Sunday, Senate's Democrats narrowly passed the “Inflation Reduction Act of 2022”, a $739bn long-awaited reconciliation package of which $369bn are to be spent on climate and energy programs.

Bottom line

If voted by the House of Representatives, this $739bn bill would represent U.S.’ largest climate investment in history. Companies exposed to the manufacturing, development, and installation of clean technologies (solar, wind, batteries, electric vehicles, hydrogen, heat pumps, etc.) in the U.S. should directly benefit from the various tax credits and the resulting accelerated adoption. We believe that the market hasn’t yet fully integrated the significant consequences of such a bill if approved and signed into law.

What happened

On July 27th, Senate Majority Leader Chuck Schumer and Senator Joe Manchin unveiled the “Inflation Reduction Act of 2022” (IRA), a $739bn bill aimed at reducing carbon emissions and curbing healthcare costs by essentially imposing a 15% corporate minimum tax.

Last Sunday, Senators passed the bill by a margin of 51 to 50, with all Democrats voting yes and all Republicans voting no. Democrats used the so-called “reconciliation process” to pass the bill, a special process that necessitates only a simple majority rather than the 60 votes usually needed in the Senate (however, reconciliation requires compliance with a strict set of budget rules).

The proposed package comes as a relief to the U.S. cleantech industry, as senator Manchin has been blocking all climate bill attempts in the past few months (notably the $1.75tn build Back Better Act which included $555bn to climate change). As written in our mid-year review, policy uncertainty was indeed one of the main headwinds to the U.S. cleantech industry, delaying large-scale projects and adding volatility to the market. The passage of the IRA would arguably be the biggest event for U.S. climate-related technologies.

Out of the $739bn, about $369bn are planned to be dedicated to various energy security and climate actions, with the aim to cut greenhouse gas emissions by roughly 40% by 2030 from 2005 levels (note that Biden’s targets were a 50% cut by 2030).

The package introduces a series of measures, ranging from extension of tax credits for renewables and new tax credits for other clean technologies, support for domestic manufacturing, funding to reduce air pollution, methane emissions, and support research and development efforts, etc.

Impact on our Investment Case

A boost to low-carbon generation

The IRA is directly improving the profitability of renewables’ investments in the U.S., notably by raising existing tax credits and creating new ones.

The existing solar investment tax credit (ITC) provides a 26% tax credit for solar systems installed until the end of 2022. It was planned to decrease to 22% in 2023 and 10% in 2024 for commercial and utility-scale projects, and 0% in 2024 for residential projects. This new bill intends to increase solar ITCs to 30% through 2032 and to step down to 26% in 2032, 22% in 2034, and 0% in 2035, for both utility and residential projects. In other words, after raising these tax credits, the economical attractiveness of solar systems will directly be improved. This should act as an additional catalyst to an industry that was already growing at a fast pace. Companies within the U.S. solar value chain, such as SolarEdge, Enphase, or SunPower, will directly benefit from the faster adoption of solar systems.

The wind industry will also be positively impacted by the bill if approved, given that the production tax credit (PTC), which expired at the beginning of this year, is to be re-introduced. The new PTC is expected to provide a base rate of $0.003 per kWh and an increased rate of $0.015 per kWh (rates are subject to annual inflation adjustors, which result in an increased rate of $0.026/kWh for 2022) for all projects starting construction before the end of 2024. From 2025, the PTC rate will be subject to U.S. power sector emissions, and PTC is scheduled to begin phasing out not before the end of 2032. Developers of wind projects in the U.S., such as Orsted, are direct beneficiaries of this PTC extension.

Making electric vehicles more affordable

The U.S. electric vehicle (EV) industry is the other beneficiary of the new act. Indeed, the bill intends to provide lower/middle-income consumers (making less than $150k per year) with a $7.5k tax credit on the purchase of new clean vehicles (either battery electric or fuel-cell), and a $4k tax credit for the purchase of used ones. The bill also removes the 200k vehicles cap for manufacturers (tax credits were applied only for the first 200k EVs a manufacturer sells), which has already been reached by both Tesla and General Motors.

While the adoption of EVs has been lagging behind in the U.S. (compared to China and Europe), the IRA will likely spur the adoption, notably for entry-level vehicles (given the targeted beneficiaries of the tax credits).  

Foster local manufacturing

The IRA puts a great emphasis on local manufacturing. Indeed, the bill includes provisions (through PTC) for the domestic manufacturing of a wide range of products, like solar cells polysilicon ($3/kg), solar modules ($0.07/kWh), batteries ($35/kWh), wind blades ($0.02/W), etc. These production tax credits are to benefit domestic producers within the cleantech sector, such as First Solar (making thin-film solar modules), and TPI Composites (making wind turbine blades).

Additionally, the IRA would provide an additional 10% ITC for solar systems where >40% of components (steel, iron, etc.) are sourced in the U.S. 

Support for other clean technologies

The goal of this new bill is to remain technology agnostic (in opposition to old/existing supportive policies), hence the IRA is to provide PTC for nuclear projects (of $0.03/kWh), and new ITCs for stand-alone energy storage solutions, water heaters, and heat pumps.

The green hydrogen industry (hydrogen produced by zero-carbon electricity) gathers a lot of interest, with a new PTC of up to $0.60/kg of green hydrogen produced. The goal is to improve the cost competitiveness of such a solution, which remains still far from price parity with existing fossil-based alternatives (currently, U.S.’s green hydrogen costs around $10-15 per kg, and needs to go down to about $2/kg to become competitive).

In any case, this bill will likely foster research and development activities in early-stage technologies that haven’t yet reached economical competitiveness.

Our Takeaway

Now that the Inflation Reduction Act has passed the Senate, the next step for Democrats is to gather a majority at the House of Representatives. The House should vote on the legislation this Friday, August 12th, where it is expected to pass with a simple majority (assuming all Democrats vote for it). After this, President Biden will have to sign it into law.

If passed, this $739bn bill would represent the largest climate investment in U.S. history. Companies exposed to the manufacturing, development, and/or installation of clean technologies (solar, wind, batteries, electric vehicles, hydrogen, heat pumps, etc.) in the U.S. should directly benefit from the various tax credits and the accelerated adoption. We believe that the market hasn’t yet fully integrated the significant consequences of such a bill, if approved and signed into law.

Our Sustainable Future strategy remains well exposed to U.S. cleantech pure-players and international companies serving the U.S. market.


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