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After a yearlong saga over President Biden's Build Back Better plan, the Democrats finally announced a deal on Wednesday that met Sen. Joe Manchin's demands. The price tag is more than $1 trillion lower, in deference to the generational surge in inflation, and the bill has a bland new name: the Inflation Reduction Act. But it still brings major change to the U.S. economy, speeding a buildout of green energy infrastructure and lowering drug costs. The news boosted EV and solar stocks.
Solar and other green-power stocks rallied, including First Solar (FSLR), Enphase Energy (ENPH), Quanta Services (PWR) and NextEra Energy (NEE). EV stocks such as Tesla (TSLA) rose modestly.
Keep in mind that the legislation could still face hurdles and possible changes. But investors are betting that the Manchin compromise will largely move forward in the next few months.
The tax portion of the bill would raise about $450 billion over 10 years, including an estimated $313 billion from imposing a minimum 15% corporate tax rate on companies with profits in excess of $1 billion. Amazon.com (AMZN), whose taxes are low partly because of deductions that apply to its investment in equipment, is among companies that would likely pay more. Watering down investment incentives as the U.S. heads into recession isn't ideal timing. The e-commerce giant paid about a 6% tax rate on U.S. income in 2021.
The bill also would strengthen Internal Revenue Service enforcement, bringing in an extra $200 billion over a decade, according to estimates. After an extra investment of about $80 billion to boost IRS capabilities, it would net about $125 billion.
The other big source of revenue is a measure allowing Medicare to negotiate prescription drug prices, projected to save the government $288 billion. The measure, a long-term goal of Democrats, aims to limit disincentives for innovative new drugs, which would be protected from price restraints for a number of years.
While limiting the extent of price hikes, the bill wouldn't restrict launch prices for new drugs, which might start at higher levels in the future. In a related measure countering drug-price inflation, Democrats will cap out-of-pocket costs under Medicare's prescription drug program at $2,000.
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Yielding to a key Manchin demand, the bill will devote $300 billion to deficit reduction, leaving $433 billion for government spending. Most of that will go to climate change, with the goal of reducing carbon emissions 40% from 2005 levels by 2030. An additional $64 billion will go to extend more generous subsidies to purchase insurance through the ObamaCare exchanges created by the Affordable Care Act.
The breakthrough between Manchin and Senate Majority Leader Chuck Schumer came after the Senate passed the Chips and Science Act, providing $52 billion for chipmakers and aimed at expanding production in the U.S.
With inflation running at 40-year highs, the U.S. economy possibly in recession and Biden's poll numbers in the tank, the Democrats were sorely in need of a victory.
Solar stocks and other renewable-energy-related issues rallied hard on the news Thursday morning. Among the bill's provisions is more than $9 billion for the federal procurement of American-made clean technology. It also includes $3 billion for the U.S. Postal Service to purchase zero-emission vehicles.
Another key part of the package includes tax credits for clean hydrogen and clean energy manufacturing, with specific amounts for photovoltaic cells and wind turbine blades. There is $60 billion for clean onshore energy production and around $30 billion in production tax credits to accelerate U.S. manufacturing of solar panels, wind turbines and batteries.
First Solar jumped 15% Thursday. The U.S. solar technology company is set to announce second-quarter results after the market close.
Enphase Energy Stock Jumps As Earnings Double, Guidance Strong
Enphase Energy, the California-based solar company and Israel-based SolarEdge (SEDG) were up 7.6% and 4.9%, respectively. Both jumped Wednesday on scorching Enphase earnings. SolarEdge reports next week.
Other provisions in the bill include $9 billion in consumer home energy rebate programs and 10 years of consumer tax credits to make homes energy-efficient and run on clean energy.
There is also roughly $30 billion in targeted grants and loan programs for states and electric utilities to accelerate the transition to clean electricity.
Quanta Services jumped more than 8% Thursday, moving into a buy zone above a 138.56 buy point. Quanta specializes in infrastructure projects for the energy and communications sectors. The subcontractor giant recently announced a Renewable Energy segment, which includes services for solar and wind projects.
Utilities have become major customers to the solar energy industry. NextEra Energy (NEE) rose 5.2% Thursday. AES (AES) rallied 9.5%.
The reaction among EV makers was more muted than that of solar stocks, although the agreement provided a broad list of incentives for buyers and manufacturers of electric vehicles. Tesla (TSLA) gained 2.2%. Rivian (RIVN) climbed 5.7%. General Motors (GM) popped 3.1%.
Ford (F) popped 6.1% after reporting booming Q2 results late Wednesday.
The EV credits are especially important to Tesla and GM, which are no longer eligible for current federal EV credits. Ford is getting close to seeing EV credits phase out.
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Among the incentives provided in the energy bill for individuals are a $4,000 tax credit for buying a used electric vehicle and a $7,500 tax credit for new EVs. Both tax credits would only be available to lower- and middle-income consumers, with luxury EVs would be excluded.
However, by 2024, EVs could only get credits if their batteries have at least 40% of minerals extracted or processed at home or in a country that has a free-trade deal with the U.S. That would rise to 80% in 2027. That, along with the income and vehicle price limits, could explain the relatively muted reaction by EV stocks.
For manufacturers, the bill includes $30 billion in production tax credits to accelerate output of EV batteries, solar panels, wind turbines and critical minerals processing. In addition, there's a $10 billion investment tax credit to build EVs, wind turbines and solar panels.
The package also includes up to $20 billion in loans to build new EV factories and $2 billion in grants to overhaul existing auto plants to make electric vehicles.
The bill also figures in tax credits and grants of unspecified amounts for states and municipalities employing clean fuels and commercial EVs in public transport. This doesn't include the aforementioned $3 billion for the U.S. Postal Service to purchase electric vans and delivery vehicles. And for disadvantaged communities, there's $1 billion in grants for electric school buses, electric buses and electric garbage trucks.
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9:16 AM ET Ford earnings skyrocketed, defying headwinds. And the auto giant hiked the Ford stock dividend while reaffirming 2022 outlook.
9:16 AM ET Ford earnings skyrocketed, defying headwinds. And the auto giant hiked...
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