Obama’s Budget Favors Clean Energy
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President Obama’s budget proposes a radical transformation to the tax code whereby individuals with an annual income of over $1 million would be subjected to a 30% income tax. The tax hike, commonly referred to as the Buffett rule, and the end of tax breaks for oil companies have thus far been the most discussed issues within the outlined budget plan. Allowing the Bush tax cuts to expire, the Obama administration is aiming to cut the U.S. budget deficit with such fundamental tax modifications as taxing capital gains at a 20% rate and applying the ordinary income tax rate to dividends.
Reaffirming his commitment to clean energy, the budget also outlines a plan for increased funding for green energy companies, including increasing federal loan guarantees by nearly $20 billion for nuclear power. Increased research funding for all sort of renewable energy sources from biomass to wind and solar was suggested within the plan. However, many of these key initiatives, while important for the clean energy industry, are overshadowed by the sweeping modifications suggested to the tax code.
Southern Co. (NYSE: SO) will emerge as one of the long-term winners of the government’s interest in nuclear energy. Following the Three Mile Island accident in 1979, safety concerns have stalled nuclear construction projects, until now. Southern Co. is expected to receive approval to build two nuclear reactors in Georgia, the first steps of progress in over 30 years. With extensive government loan guarantees the Atlanta-based utilities corporation has the financial backing to undertake the $14 billion project (it holds a 46% share). As the first utility to build a nuclear facility in over three decades Southern Co. plans for a 2016 startup date for its new project.
Enhanced government funding may also be a saving grace for First Solar (NASDAQ: FSLR). Over the last 12 months the manufacturer and distributor of solar panel systems is down 75% as concerns over financing issues have plagued the company and its stock. According to its Form 8-K, First Solar may have to repurchase the Antelope Valley Solar Ranch contract it sold to Exelon if the project is unable to secure sufficient funding from the U.S Department of Energy by Feb. 24. As has been observed throughout Europe, clean energy companies cannot survive the initial growth phase without backing from the government; hopefully, the proposed budget will shed some light on First Solar’s future prospects.
Clean energy incentives were not provided throughout the entire spectrum of potential alternatives. Government cutbacks are proposed for carbon capture and clean coal technologies. Despite that $3.5 billion were allocated to these initiatives in the 2009 stimulus package, these technologies have failed to gain the necessary momentum required to attract further funding. Many players in carbon storage are major utilities and technology leaders such as Duke Energy and Siemens (NYSE: SI); these diversified players will unlikely feel the pinch of reduced funding. Siemens, for example, has business operations in consumer products, healthcare, lighting, financial solutions and a wide variety of other product groups; carbon capture is almost an insignificant part of its overall portfolio. Smaller players, however, such as Codexis (NASDAQ: CDXS), which in 2010 received a substantial $4.7 million ARPA-A Recovery Act grant, may feel the effect of reduced funding.
Overall, the solar (and broader green) industry is very sensitive to government regulation; in late 2011 seven major solar manufacturers requested that the Obama administration increase import duties of over 100% on Chinese solar products. The allegations accuse Chinese manufacturers such as Suntech Power Holdings (NYSE: STP), the world’s largest manufacturer, of “dumping” heavily subsidized panels to weed out U.S competitors. Although Suntech denies these accusations of unethical business practices, stating "as a global company listed on the NYSE, we are confident in our position and well-prepared to substantiate our strict adherence to fair international trade practices," the government’s commitment to advance the U.S. clean energy sector may not bode well for international competitors.
Tax reform is surely the most crucial component of the released document; however, Obama’s ambitions for budget modifications across a wide variety of issues and industries should not be overlooked.
Motley Fool newsletter services recommend First Solar and Southern Company. The Motley Fool owns shares of First Solar. apinkasovitch has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.