The writer is responsible for the ESG field at Migdal Capital Markets
The renewable energy market in the US has been at the heart of investors’ attention for several weeks now, after the formation of a huge support package by the American government to promote and support this activity market. Towards the end of August, US President Joe Biden signed the approval of the law in which the support package is included in question, shortly after its approval in the US Senate and House of Representatives.
The announcements about the agreements reached regarding the support package and the rapid progress on the matter since then, sent a large part of the shares of the green energy sector to jumps in sharp rates, some of them in double digits. The jumps were horizontal and affected the shares of companies in the fields of electricity generation by solar means, wind, energy storage, the assembly and operation of production facilities, supply of parts and more.
The support package, the scope of which in the field of green energy is enormous and is estimated at about 370 billion dollars, mainly uses tax credits. The law in which it is included offers an expansion of tax credits in the green energy activity – from the end consumers, through the entrepreneurs of the projects to the suppliers of the raw materials required for their establishment. The purpose of the law (in its official name – the Inflation Reduction Act) is to produce a long and continuous effort by the US to address climate change. According to estimates, the bill will help bring the US closer to the goal of the administration led by President Biden to reduce CO2 emissions (carbon dioxide) until the year 2030. This law is considered the most important climate law in the USA ever since.
As defined by JP Morgan, this is the largest policy change in American history in the field of renewable energies and it is expected to accelerate the inevitable change of transition to the use of renewable energies, according to the investment bank’s view.
At the current stage, the direct and immediate connection of the investors in their examination of the future meanings of the law, is made mainly regarding the green energy companies, as shown by the performance of the stocks. These are companies, American or foreign, that have operations in the US, where the law’s effect is expected to be manifested. However, the examination of the law also shows that this is only the tip of the iceberg. Thanks to the vast scope of the law, apart from the green energy industry, it may change its face The reality in additional branches of activity, close and tangential, which have a significant effect on CO2 emissions. These are three of the most prominent of them:
Electric cars: a push for demand
Demand in the electric car market in the US is currently not affected at all by tax credits, but this way of looking at it may undergo a transformation following the law.
In the current reality in the US, there is a cap of about 200,000 cars per manufacturer that can benefit from a tax credit for the consumer who purchases them.
This is only a negligible and symbolic amount (which was crossed a long time ago by all the prominent electric vehicle manufacturers) in relation to the huge car market in the USA, in which, according to the website statista, about 15 million new cars were sold last year (2021) (without SUVs, trucks, etc.) .
The law is expected to abolish the cap and thus dramatically expand the tax benefit that buyers of electric cars will be able to enjoy.
This is an amount estimated at approximately $7,500 per car and which, according to the law’s definitions, is intended mainly for the cheaper models in the electric vehicle market, so that in practice this benefit may offset tens of percent of the cost of purchasing a new electric vehicle.
In our estimation, assuming that the same law is approved as planned, it may provide a tremendous boost in demand for electric cars in the US, for those models that will benefit from the tax benefit, thus broadly supporting the activities of American electric vehicle manufacturers.
Before the law goes into effect, the electric vehicle companies will be required to make adjustments in their activities and focus on the production of the less luxurious models they offer, in accordance with the definitions of the law aimed at the discounted market segment. Expanding production in the relevant market segments could help car manufacturers establish dominance in the field of electric vehicles, encourage them to develop new models and expand the supply.
Nuclear reactors: recognition and growth
Another industry that the bill in question is expected to benefit is the nuclear reactor industry. This industry has recently returned to the headlines mainly due to the energy crisis in Europe, under the influence of the war in Ukraine, and the desire of quite a few countries to create energy independence for themselves – as well as to help in the fight against the climate crisis.
In the US, there is an extensive network of more than 90 nuclear reactors that operate as part of the electricity industry there. Following the bill, those reactors are expected to benefit from a safety net in the form of a tax benefit, which may reach an annual amount of tens of millions of dollars. All this while depending on the amount of revenue it generates Each reactor and at the price at which each megawatt of electricity produced in the reactor is sold.
Thus, apart from the fact that nuclear energy, which currently provides about 20% of the electricity in the US, will enjoy official recognition for the positive climate qualities embodied in it, it is also expected to benefit from a significant growth in income, under the influence of tax benefits.
“Miman Green”: Encouraging traditional societies
Another industry that may benefit from a dramatic growth in activity following the law is the green hydrogen industry.
“Green hydrogen” is defined as that produced from renewable energies. Hydrogen is used as a raw material in the oil refining industry, but it can also be produced from renewable energy, thus reducing pollution and defining it as green.
The bill offers projects that produce green hydrogen, a credit of up to $3 per kilo, assuming that CO2 emissions during its production are low (depending on the threshold to be determined). Such an outline is expected to also encourage the traditional oil and gas companies to promote green hydrogen production moves. Apart from them, those who are still expected to benefit from the contribution of their activity to reducing CO2 emissions are those many companies in the field of generator and battery production, which produce electricity, among other things, on the basis of hydrogen, which may encourage the expansion of this activity and generate for them large-scale tax benefits.
There is no obligation to achieve any return/profit and/or to prevent losses. The above does not constitute any investment recommendation and is not a substitute for investment advice/marketing, which takes into account the special needs of each person. The Migdal Capital Markets Group and/or someone on its behalf may have a personal interest in the subject matter and/or holdings in the assets and/or sectors and/or channels mentioned, and they manage and/or may manage investment instruments in these sectors/channels and/or whose investments may include assets belonging to to these sectors/routes. The estimates in the text constitute forward-looking information and therefore their realization is not certain, and is not under the control of the Migdal Capital Markets Group and/or anyone on its behalf.