The IRA Is Likely to Give a Major Boost to All Kinds of Green Energy Stocks, Now More Attractive Investments
From 2010 through 2020 green energy stocks were unequivocally a good investment. The sector consistently outperformed its fossil fuel peers, as well as the market as a whole, during that time.
Since 2020 the performance of green energy stocks has been less consistent. The surge in oil prices as the pandemic lockdowns ended and the world returned to the roads led green energy stocks to underperform and fossil fuel stocks to soar. Since Congress passed the first-ever major legislation addressing climate change as part of the Inflation Reduction Act (IRA) this past August, green energy stocks have resumed their outperformance, with some assistance from lower oil prices. Looking ahead, the large expenditures for reducing carbon emissions that this law includes should continue to make green energy stocks attractive investments.
The IRA Directs Huge New Investment to the Green Energy Sector
The Act includes provisions to reduce the cost of prescription drugs, bring down the cost of Medicare, and raise taxes on large corporations, among other measures.
These are important measures but it is the climate change section of the IRA that is the most transformative. The legislation aims to reduce US carbon emissions by 40% by 2030. To achieve this goal the bill includes $369 billion in government-financed incentives in the form of rebates, tax credits and grants to accelerate decarbonization across the economy. While many of us would have preferred to see a carbon tax instead of this large array of incentives, that is politically more difficult and this does represent a dramatic re-orientation of climate policy after decades of near inaction by the federal government. It is also a rebirth of industrial policy, with its many provisions aimed at stimulating US manufacturing of green technology.
The following are the IRA’s key climate provisions:
For Housing:
Rebate programs focused on low-income consumers for energy-efficient home retrofits and electrifying appliances.
Tax credits for making homes more energy efficient with heat pumps, solar panels, electric heat and hot water, etc.
Grants to make affordable housing more energy efficient.
For Industry:
Tax credits and some direct funding to accelerate domestic production of solar panels, wind turbines, batteries and critical minerals used in clean technology.
Tax credits to build new clean technology manufacturing facilities for electric vehicles, wind turbines, solar panels and so on.
Grants to retool auto factories to manufacture clean vehicles.
Loans for new clean vehicle factories.
Grants to accelerate clean energy research.
Grants and tax credits to reduce carbon emissions from manufacturing.
Federal procurement of American-made clean technologies to help create a stable market for them.
Funding for a clean energy technology accelerator.
A methane emissions reduction program for the natural gas sector.
For Transportation:
Tax credits for buying new and used clean vehicles.
Tax credits and grants for clean fuels and clean commercial vehicles.
Funding for clean heavy-duty vehicles such as buses and garbage trucks
Tax credits for purchase and installation of charging stations.
Grants to reduce emissions in port facilities by installing zero emissions equipment.
For Power:
Tax credits for clean sources of electricity and energy storage
Grants and loans for states and utilities to accelerate the transition to clean energy
These Investments Should Benefit Green Companies Across the Economy
Many sectors should benefit from the increased investment that the IRA is setting in motion. These include manufacturers of electric vehicles and charging stations, electric heat pumps and hot water heaters, solar panels and wind turbines. Manufacturers of energy-efficient machine tools and other industrial equipment should also benefit from increased demand. Companies vying to develop higher capacity, more efficient batteries for use in vehicles and power generation will see financing made more available. Utilities should be able to accelerate their move towards cleaner electricity generation. Construction companies with expertise in energy efficiency and clean power should see significantly increased demand.
The IRA is likely to give a major boost to all kinds of green energy stocks in the short to medium term. Longer term in order to meet the stated goal of a zero-emissions economy by 2050 there will need to be even more public and private sector investments than those provided for in the IRA. This should be supportive of the green energy sector for a long time.
Urban Larson
Principal, White Pine Advisory, Brookline
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