Morgan Stanley
  • Thoughts on the Market Podcast
  • Sep 21, 2021

Special Episode: Unpacking Climate Action in Congress

With Jessica Alsford and Stephen Byrd


Jessica Alsford: Welcome to Thoughts on the Market. I'm Jessica Alsford, global head of Sustainability Research team at Morgan Stanley.

Stephen Byrd: And I'm Stephen Byrd, head of Morgan Stanley's North American Research for the Power & Utilities and Clean Energy Industries.

Jessica Alsford: And on this special Climate Week episode, we'll be talking about some landmark climate and environmental policy proposals in the U.S. and the future of energy. It's Tuesday, September the 21st, at 2:00 p.m. in London.

Stephen Byrd: And 9:00 a.m. in New York.

Jessica Alsford: So, Stephen, earlier this month, the U.S. House of Representatives released a draft of some climate and environmental policies as part of its $3.5T budget reconciliation package. I want to dig into your takeaways, but first of all, maybe you could walk us through some of the headline proposals.

Stephen Byrd: Absolutely, Jessica. This is one of the most exciting pieces of proposed legislation we've seen in the United States, at least with respect to clean energy. And I'll just highlight a handful of very important provisions that are currently in the draft. First, there's a very bold, clean electricity performance program or CEPP that would provide significant incentives for utilities and other loads of green entities to increase their renewables every year. Secondly, there would be a new tax credit for energy storage and biofuels. Third, a major extension of tax credits for wind, solar, fuel cells and carbon capture and payment levels are higher in many cases. Fourth, significant incentives for domestic manufacturing of clean energy equipment. Fifth, what we would call direct pay for tax credits, which basically provides owners with the immediate cash benefit of tax losses. That provides enhanced financing efficiency and better cash flow. Six, a nuclear power production tax credit. Seven, a major clean hydrogen tax credit. And lastly, number eight, significant capital to reduce the risk of wildfires. So very significant. Covers a lot of different areas within the entire clean energy spectrum.

Jessica Alsford: Absolutely. There's a huge amount in there. I guess maybe just to pick out some key points, are there any particular technologies that you think could really incrementally benefit from this bill versus what the status quo is at the moment?

Stephen Byrd: Yes, there's definitely a handful of technologies that would benefit in a very significant way. I would say. Probably first on my list is green hydrogen. The proposed payment is three dollars a kilogram - this is the subsidy amount - which is a very large amount of subsidy, in our view, would really kick start growth of green hydrogen across the board in the United States. We did a deep dive into the economics of producing green hydrogen over time, and we do think this amount of subsidy would be a huge boost to the growth of green hydrogen, would defray much of the cost producing green hydrogen. So any company involved in green hydrogen, I think would see a significant benefit here.

Stephen Byrd: Another, nuclear power, not new nuclear projects, but existing nuclear assets would receive significant financial support. That is going to serve essentially as a stabilizing force to ensure that we don't see additional shutdowns of nuclear power plants. So that's a big win. I'd say, also, energy storage gets a tax credit for the first time and demand for energy storage is already very high in the United States, but a tax credit that would essentially line up with wind and solar would, we think, provide further incentive for more rapid growth of energy storage. So those are a couple that I would highlight as significant beneficiaries from this proposed legislation.

Jessica Alsford: Now, this text is the initial draft and say we should probably expect to see changes. What are you hearing in terms of these proposals and how much could actually make it into a final bill?

Stephen Byrd: This is really interesting. We do think that much of this language will survive. There is one provision, a very important one, that has received pushback. That's the first on the list that I mentioned. This is the Clean Electricity Performance Program or CEPP. Senator Joe Manchin, who's quite important, as well as a few others, have pointed out concerns with this, the current drafting of the language, a few companies have also expressed concerns. So, we could see changes there, maybe even elimination of that provision. However, many of the other elements of this package do appear to have quite a bit of support. So solar, wind, energy storage, even green hydrogen, we think has a significant amount of support. So, we do think much of this will survive. The one that's been singled out recently is that CEPP.

Jessica Alsford: Now also on climate, the Biden administration and the EU have actually jointly announced that Global Methane Pledge, which is aiming to reduce methane emissions by at least 30% from 2020 to 2030. Now, what are your thoughts on this? How significant is it for the utility sector?

Stephen Byrd: Yes, Jessica, I think this cuts both ways in terms of the methane emissions goal. I think on the positive side, I think many investors, especially ESG investors, would like to see significant commitments to reducing methane emissions. And, you know, we can see why certainly methane is so much more harmful from a greenhouse gas perspective relative to CO2. So, I think many investors will applaud this. The big concern will be the cost and the customer bill impact. Right now, given the increase in natural gas prices in the United States and really globally, there is already a concern around the increase in customer bills for those customers who buy natural gas. So, this would increase the cost.

Stephen Byrd: That said, utilities have a long history of being able to recover these costs. So, on the positive side, this could result in better growth in earnings per share, as well as improved ESG perception and reality in the sense of lower emissions. The key question is how are we going to manage the cost of this? And right now, that's causing quite a bit of investor concern. So, it's a bit of a mixed message. I'd say in the long term, though, a positive from a better growth perspective and lower emissions perspective.

Jessica Alsford: And finally, from me in this context of the U.S. really increasing its focus on halting climate change, what are the opportunities that you think investors should be looking at?

Stephen Byrd: So we do see several business models and technologies that should benefit significantly from this policy shift. I would say developers of solar, wind and energy storage will see continued strong support under this legislation. Their incentives would remain in place until the next decade. We would see a lot of benefit for fuel-cell companies and companies involved in the development and transportation of green hydrogen - that would be a major area of support. Existing nuclear power plant owners would receive quite a bit of support as well. So, we do see quite a bit of benefit within this legislation, really providing strong economic support really across the board, but a few areas such as hydrogen that do stick out. But I'd say broadly, if this legislation is passed, clean energy investors would view this as a significant benefit for the entire sector because it is so comprehensive.

Stephen Byrd: Before we close, Jess, I wanted to ask you about how this might move the needle globally. Europe is clearly out in front on climate legislation, but assuming some or all of these proposals make it into a final bill, how likely is it that we could see similar government action globally?

Jessica Alsford: It's a timely question, Stephen, really, because we now have COP 26 conference coming up in November. It's being held in Glasgow this year, and we're expecting over 100 world leaders to attend. So, this really should be a catalyst for seeing far more climate focused action globally. Aside from the EU and the US, all eyes are certainly going to be on China. And here, our chief China economist has been writing about a shift in regulatory priorities, so China now are thinking more about a balance between growth and sustainability. And specifically on climate, there are three pillars where we expect to see action from China. First of all, investments in technology. Secondly, carbon pricing and finally on the green financing side.

Jessica Alsford: Stephen, on Climate Week, thanks for taking the time to talk.

Stephen Byrd: Any time, Jess. Great speaking with you.

Jessica Alsford: And as a reminder, if you enjoy Thoughts on the Market, please do take a moment to rate and review us on the Apple Podcasts app. It does help more people to find the show. 

This Climate Week, we preview environmental policy proposals within the $3.5 Trillion Budget Reconciliation Bill. What will it mean for investors and the response to climate change?

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