You Can Benefit from Washington’s Election-Year Energy Deal

Recent decisions in Washington have benefited both the oil and renewable energy sectors.

It’s been a while since that happened.

Traditionally, a benefit to either oil or renewables (such as solar or wind) has translated into a net problem for the other. That’s because they are usually regarded as competitors for the same energy space.

Yet this time around, political moves to shore up oil have been a primary ingredient in a nice run up for renewable energy – even as the price of oil has continued to slide.

This bodes well for energy investors who know what to look for – in oil as well as wind and solar companies.

Let me show you how to do that. But first, let’s get to the bottom of these policy changes…

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Washington Finally Lifted the Oil Export Ban

As part of a $1.15 trillion budget compromise late last year, signed by the President in order to avoid yet another government shutdown, Congress lifted the 40-year old ban on exports of oil from the U.S.

This ban was introduced in the early 1970s following major Arab OPEC producers cutting oil exports to the U.S. (and the Netherlands) for its support of Israel during the so-called Yom Kippur War in October of 1973 and thereafter.

Back then, this ban was a national security issue and also resulted in the establishment of the Strategic Petroleum Reserve.

However, the rise of huge domestic unconventional (shale and tight) oil reserves and the reality that no global producer will ever again shoot itself in the foot by not selling to the huge American market makes the export ban an anachronism.

And attending to jobs and revenue at home provides a ready-made rationale, especially in an election year…

Relief for U.S. Oil Producers Is Coming

Remember, the primary catalyst behind this legislative initiative is the intent to save American jobs and local tax bases. By providing additional markets where demand is spiking and prices are higher, operating companies are afforded a shot in the arm to offset the negative impact of stubborn production surpluses and a rapidly worsening energy junk bond environment.

During an election year, there may also be a certain satisfaction in “taking the fight to the Saudis” by allowing American producers to sell crude that has a higher average quality (Saudi exports have a very high sulfur content) in higher-priced international markets where the Saudis are more vulnerable.

But at the end of the day, this is all about the U.S. economic situation.

The advantages to local oil producers from the lifting of the export ban will not hit immediately. Global prices will temper the trade, and there will be some run-up time needed to phase the law in.

But the parts of the U.S. oil sector that have ready access to foreign markets will benefit in the medium term.

As do other sectors…

Renewables Are Also Set to Benefit from Budget Deal

The removal of the export ban was not the only energy-related element in the budget compromise.

As part of the deal, solar and wind power also received an extension of federal subsidies, with the benefits kicking in late in December.

The compromise allows solar companies to continue utilizing federal investment tax credits (ITCs). An ITC provides for a 30% credit on the cost of solar energy systems installed either for residential or commercial purposes.

These credits will continue at that level through 2019. After 2019, the credit starts declining down to 10% by 2022. These credits were previously scheduled to expire at the end of 2016.

Wind power has also benefitted.

Here, the production tax credit (PTC), which pays 2.3 cents per kilowatt-hour (KWh) of wind-generated electricity, has been extended.

Now, the PTC technically expired at the end of 2014, a victim of the last major budget impasse. But the new spending deal extends the PTC through 2020, with a complete phase out spread over the next four years.

And the good news for renewable energy doesn’t end there…

Demand for Renewables Keeps Rising

There is a now a significant base for further expansion in renewables, with extended tax credits adding to the boost provided by the climate deal from the recent Paris conference, extension of environmental tax credits in many of the 195 countries signing that international accord, and a marked global move away from fossil fuels.

Several sources have noted that major solar projects and commercial applications had slowed down in 2015, partly as a result of concerns over the tax credit situation in the U.S. That concern has now been removed by the Congressional budget accord.

Even before this deal, demand for renewables had been on the rise, with market share increasing in an accelerated fashion. The Solar Energy Industries Association (SEIA) recently reported that the U.S. market for solar energy should come in with a record-setting year for 2015.

They announced that the American market had reached 4.1 gigawatts in solar generation by the end of the third quarter, with residential installations rising 69% year-to-year for the quarter. The SEIA also estimated that the extension of the solar credits alone will likely add at least 140,000 new jobs to the economy.

In other words, expect select solar (and wind) companies to keep growing this year, regardless of what happens to the markets at large.

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