On March 31, 2021, President Biden proposed the American Jobs Plan ("Biden's Plan I"), a $2.3 trillion infrastructure plan to invest in roads, transportation, water, broadband, and clean energy. In response, on April 22, 2021, Republican lawmakers unveiled a $568 billion roadmap ("the Republican Plan") that focuses on traditional infrastructure exclusively. Most recently, on April 28, 2021, President Biden announced the $1.8 trillion American Families Plan ("Biden's Plan II"), which does not focus on tangible infrastructure but contains proposed tax increases to pay for both Biden's Plan I and Biden's Plan II (together, the "Plans"). The investment contemplated in the Plans is frequently cited for its potential to increase M&A activity in the clean energy sector, particularly given President Biden's focus on clean energy as a central piece of his climate change goals. Even before enactment, the prospect of the Plans themselves may already be having an impact.
While the Republican Plan concentrates only on traditional infrastructure, Biden's Plan I targets sectors within which investment is likely to have an environmental impact. For example, Biden's Plan I will invest an additional $165 billion into rails and mass transit while the Republican Plan cuts the current budget for the same by $3 billion. Additionally, Biden's Plan I includes $100 billion to upgrade electric grids, $300 billion to boost manufacturing and supply chain capacity, $16 billion to clean up oil and gas wells and mines, $174 billion to invest in electric vehicles and related infrastructure, $46 billion in procuring clean energy manufacturing, and investment in carbon capture to help decarbonize power plants, cement and steel manufacturing.
However, the potential for Biden's Plan I's heavy investment in clean energy may not be the only relevant driver of M&A transactions in the clean energy space this year. Rather, uncertainty around how the Plans will be funded, the types of tax hikes involved, as well as the Plans' effects on oil prices might impact M&A activity. To pay for Biden's Plan I, President Biden is proposing increasing the corporate tax rate to 28% and eliminating $35 billion worth of fossil fuel tax subsidies. Biden's Plan II would be funded by tax increases, including taxing capital gains as ordinary income for high-income earners. These potential tax increases are likely playing a significant role in contributing to the recent surge in M&A deal activity in the clean energy space.
Additionally, these Plans come at the same time as a historical change in financing for renewable projects. In the past, a large portion of the economics of renewable deals was in the form of federal tax credits (both production tax credits for a ten-year period and investment tax credits at the time the property is placed in service). Monetizing those credits required attracting tax equity investors, which involved complex structures and limitations on developers. These tax credits, however, are scheduled to phase out and the Plans do not propose to extend these tax credits or interrupt their phase-outs. Instead, as noted above, they focus on infrastructure to support renewables projects. Ironically, the tax increases in the Plans may increase the demand for the reduced tax credits and the accelerated depreciation (which has more value if investors face a higher tax rate). The impact on developers and financing makes the current market even more ripe for M&A.
Whether the Plans will pass in their current forms hinges on ongoing negotiations in Congress. In any case, speculations about the enactment of the Plans and their attendant tax consequences could likewise stimulate a surge of activity in the remainder of this expected banner year for clean energy M&A.
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