The Inflation Reduction Act (IRA) became the first major climate change act to become law in U.S. history, when President Joe Biden signed the legislation on August 17th. Biden’s signature came just days after the act passed through both congressional houses sparking a rally in the clean energy market.
This article explores the main components of the act and explores which companies are positioned to benefit from a string of tax credits and government subsidies.
The bill, which is being celebrated as a significant step toward combatting the climate crisis, passed through the House of Representatives by a fine margin. The bill received 220 votes in favour with 207 voting against it. Days prior, the Senate’s vote produced a 50 vote to 50 deadlock leaving it to Vice President Kamala Harris to cast the deciding vote making it 51 to 50.
What’s involved in the Inflation Reduction Act?
The bill, which includes several elements, promises $739bn for healthcare and climate action. $369bn of the $739 will be allocated to reducing greenhouse gas emissions and investing in renewable energy sources by improving energy efficiency and restricting the burning of fossil fuels.
According to experts, the bill’s implementation is expected to reduce America’s greenhouse gases, especially carbon dioxide emissions by 40% by 2030 compared with 2005 levels. This significant cut will put the US within striking distance of Joe Biden’s goal to cut emissions by 50% by 2030. According to the best available science, it is imperative that Joe Biden’s goal of a 50% reduction is met, in order to avoid catastrophic global warming, triggering escalating heatwaves, droughts and floods.
How will the IRA lower greenhouse gas emissions?
The IRA represents a breakthrough in the fight against climate change. The bill will direct funding over the long term to help drive forward and develop a collection of industries and technologies which will be relied upon greatly in the future. Included in the funding is the research and development of; carbon-capture technologies, wind turbines, next-generation batteries, green hydrogen production and U.S.-produced solar panels.
Global clean energy market rallies
Markets seemingly kept a close eye on developments with the Inflation Reduction Act; as the likelihood grew of the act passing, the higher the green energy markets rose.
One of the best ways to measure the performance of the global clean energy market is via the iShares Global Clean Energy UCITS ETF. The ETF has rallied just over 30% since June 15th, showing confidence in the clean energy market has returned following a strong rally in 2020 and a subsequent slump in 2021.
The top components of the iShares Global Clean Energy ETF include Enphase Energy, SolarEdge Technologies, Vestas Wind Systems, Plug Power and First Solar.
Which companies are likely to benefit most?
The US government has pledged to increase its amount of spending on clean energy significantly. From this promise, there are three sectors set to benefit most.
There has been a 10-year extension on solar power tax credits. This is a tax credit which can be claimed back by residents of all 50 states, on federal taxes for the installation of solar panels. This has been done to encourage the US homeowner to instal PVC solar panels.
For companies operating in the solar panel sector, this is highly significant as it heavily subsidises installation for US homeowners. For companies, including Enphase Energy, the news has driven their share price up considerably. Between June 16th and August 18th, the stock rallied by 73.5%.
Hydrogen & energy storage
According to Morningstar’s clean energy analyst, the incentives for new technologies in clean energy will drive large gains for companies operating in the hydrogen and energy storage markets.
An example of a company involved in the hydrogen fuel cell market is Plug Power Inc. The company specialises in replacing conventional batteries with more efficient alternatives. Plug Power’s stock rallied 99.51% between June 16th and August 18th.
The outlook for the global clean energy market is positive. This is partly due to governments worldwide waking up to the dangers and severity of climate change and investing in clearer alternatives to reduce emissions. Another major driver behind the rally in clean energy is Western governments looking to diversify away from dependence on fossil fuels imported from politically volatile nations following Russia’s invasion of Ukraine.
For more information on the fossil fuel market click here.
Written by Ciaran McDiamond