On Dec. 18 President Obama signed into law the Consolidated Appropriations Act, 2016. This $1.15 trillion spending bill funds the federal government through next September and has big implications for the energy sector.

Today I will cover the provisions that I believe will have the greatest impact on the energy sector, and identify the biggest likely beneficiaries. But first here are all of the energy provisions I could find in the bill, illustrating the extent of the government’s involvement:

• Sec. 101. Oil Exports, Safety Valve, and Maritime Security
• Sec. 181. Extension and modification of credit for nonbusiness energy property
• Sec. 182. Extension of credit for alternative fuel vehicle refueling property
• Sec. 183. Extension of credit for 2-wheeled plug-in electric vehicles
• Sec. 184. Extension of second generation biofuel producer credit
• Sec. 185. Extension of biodiesel and renewable diesel incentives
• Sec. 186. Extension and modification of production credit for Indian coal facilities
• Sec. 187. Extension of credits with respect to facilities producing energy from certain renewable resources
• Sec. 188. Extension of credit for energy-efficient new homes
• Sec. 189. Extension of special allowance for second generation biofuel plant property
• Sec. 190. Extension of energy efficient commercial buildings deduction
• Sec. 191. Extension of special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities
• Sec. 192. Extension of excise tax credits relating to alternative fuels
• Sec. 193. Extension of credit for new qualified fuel cell motor vehicles
• Sec. 301. Extension and phaseout of credits for wind facilities
• Sec. 302. Extension of election to treat qualified facilities as energy property
• Sec. 303. Extension and phaseout of solar energy credit
• Sec. 304. Extension and phaseout of credits with respect to qualified solar electric property and qualified solar water heating property
• Sec. 305. Treatment of transportation costs of independent refiners.

The provisions of greatest significance to energy investors are the repeal of the crude oil export ban and the extension of renewable power tax credits. So let’s look at each in turn.

Implications of Ending the Crude Export Ban

The provision addressing the export ban says that “to promote the efficient exploration, production, storage, supply, marketing, pricing, and regulation of energy resources, including fossil fuels, no official of the Federal Government shall impose or enforce any restriction on the export of crude oil.” The bill allows for exceptions to this rule in certain circumstances. The president can impose export licensing requirements for up to a year after declaring a national emergency, or if the secretary of commerce reports that crude oil exports are causing supply shortages or sustained premiums on domestic crude above global prices.

If you want to know who will benefit from legislation and who is likely to be harmed by it, just look at the lobbying lineups for and against. Refiners lobbied hard to preserve the export ban, while crude producers spent freely to get it repealed.

To review, the U.S. shale oil boom created a glut of crude in the U.S. Domestic refiners that had invested billions to process imported crudes that were becoming heavier and more sour year after year were suddenly awash in light, sweet crude oil from the shale oil plays.

Even though the U.S. was (and remains) a net importer of crude oil, the longtime WTI premium over internationally traded Brent crude vanished and WTI began trading at a discount, in large part because of the crude oil export ban dating back to 1975. U.S. crude oil producers had to sell their product to U.S. refiners, who were happy to refine the discounted crude and then export the finished fuel products at full price, in competition with foreign rivals facing significantly higher input costs.

U.S. refiners entered a golden age of fat margins expanded at the expense of their domestic crude suppliers. The refining industry lobbied to keep the crude oil export ban in place because the price of domestic crude will almost certainly increase relative to Brent as U.S. oil producers begin to sell into the higher-priced international markets.

The export ban’s repeal is a clear loss for domestic refiners and a gain for the U.S. oil producers. Refiners did win a small concession, in the form of a selective tax break on the cost of transporting oil for the next six years. Independent refiners will be able to exclude 75% of oil-transportation costs from their pre-tax net income when calculating an existing deduction for domestic manufacturing. The cost of this concession is projected at $191 million annually, amounting to less than 1% of estimated annual profits for the minority of eligible refiners.

The crude exports won’t hit all refiners equally. Those most reliant on imported heavy oil will see the least impact. Valero (NYSE: VLO) is in this category, and if you want a refiner in your portfolio it still represents the cream of the crop. Refiners with operations in the Midwest and Northeast that are processing shale oil are going to be under the biggest strain following the rule change. PBF Energy (NYSE: PBF) and HollyFrontier (NYSE: HFC) are two examples, and both lobbied hard against the new law.

But refiners will continue to benefit from cheap shale gas, since natural gas is another major input cost for refiners. They will just no longer have the same benefit from the disadvantaged crude oil. U.S. refiners are likely to remain among the lowest cost producers in the world, so expect them to be able to compete with anyone on the world markets.  

The list of winners from the export ban repeal is long — just about every shale oil producer in the country will be a long-term beneficiary provided it survives until prices recover. ConocoPhillips (NYSE: COP) and EOG Resources (NYSE: EOG) are among those expected to receive the largest long-term benefit. Logistics companies with storage and port facilities on the Gulf Coast will also profit. The ink was barely dry on the new law when Enterprise Products Partners (NYSE: EPD) announced it would load a 600,000 barrel cargo of domestic light crude for shipment overseas.

Interestingly, refiners initially rose following passage of the bill and crude oil producers fell. Don’t be fooled by these short-term fluctuations. The legislation is very good news for oil producers and moderately bad news for the refiners. And there is still time to roll some of the profits from your investments in refiners into some of the beaten-down oil producers.

A Windfall for Renewables

The other major provision of interest to energy investors was the extension of tax credits for wind and solar power.

Originally enacted in 1992, the Production Tax Credit (PTC) is a subsidy for electricity generated from renewable sources. The PTC provides a tax credit of 2.3 cents per kilowatt-hour (¢/kWh) for wind, geothermal, and closed-loop biomass systems, and 1.1¢/kWh for other eligible technologies, typically through the first 10 years of operation.  

The separate solar Investment Tax Credit (ITC), is a 30% federal tax credit for the capital cost of solar systems on residential and commercial properties. It had been due to expire a the end of 2016.

These tax credits have been allowed to expire only to be reinstated numerous times. For an energy producer, the inconsistency in tax policy is very frustrating, because many projects take many years to pay off. Each time the tax credit would expire, the project pipeline would dip. Analysts were already projecting a slowdown in 2017 following the expiration of the ITC.

These tax credits have been targeted for elimination by Republicans critical of their cost. Democrats, on the other hand, were staunch supporters on environmental grounds and the notion that fossil fuel producers enjoy offsetting subsidies. So Republicans traded an end of the crude oil export ban for a long-term extension and then a phaseout of these tax credits.

This is an approach I have favored, because it allows energy producers to plan long-term. They know they will have the credit in place for several more years, but they also know that they have to become competitive as it disappears.  

The new law calls for the PTC for wind energy to remain in effect through 2016, but then gradually phases it out in 2017, 2018 and 2019 before expiration in January 2020. The ITC for solar will continue at the current 30% level for both commercial and residential systems through 2018, then it begins to phase out and settles at 10% in 2022.

The Solar Energy Industries Association projected that extension of the ITC will lead to more than $125 billion in new private investment in solar projects. The consulting firm IHS called the extension “one of the most significant stimulus policies for the renewable sector in the past 10 years.” Just two weeks ago IHS had forecast that allowing the ITC to expire would lead to a 10% decline in global installations in 2017.

Following passage of the bill IHS now expects global solar installations to grow from about 59 GW this year to 66-68 GW in 2016 and 70-73 GW in 2017. The additional incentives will likely slow the expected decline in solar photovoltaic (PV) pricing over the next few years, IHS notes.

These subsidies are now due to sunset just before the first set of state compliance deadlines for the EPA’s Clean Power Plan (CPP) come into effect in 2022. The CPP will require a 32% cut in utility-sector carbon emissions from 2005 levels by 2030. Utilities will likely begin investing significantly in wind and solar power to meet these mandates.

The new legislation’s impact on the renewable power sector will be broad and swift (unlike the repeal of the crude export ban, which will take some time to play out.) Beleaguered Aggressive Portfolio recommendation Sunedison (NYSE:SUNE), reinstated on Dec. 14, has risen more than 40% since. First Solar (NASDAQ: FSLR), which has been a much better performer for subscribers, has rallied more than 20% over the same two-week span and has returned more than 80% since we first recommended it two years ago. While SUNE has already risen above our Buy target, it’s hard to imagine that business won’t be very good for the company in the years ahead.

Investors searching for additional solar PV investments can find them among the top 10 solar PV manufacturers in 2014. These were Trina Solar (NYSE: TSL) in China, rival Chinese producer Yingli Green Energy Holding (NYSE: YGE), Canadian Solar (NASDAQ: CSIQ), Aggressive Portfolio recommendation Jinko Solar (NYSE: JKS; China), JA Solar (NASDAQ: JASO; China), Sharp Solar, a subsidiary of Japan’s Sharp (Tokyo: 6753, OTC: SHCAY), ReneSola (NYSE: SOL; China), the above-mentioned and U.S.-based First Solar, Hanwha SolarOne (NASDAQ: HSOL; China), SunPower of the U.S., and Kyocera (NYSE: KYO, Tokyo: 6971; Japan).

The most obvious beneficiaries from the extension of the PTC are Danish company Vestas Wind Systems (Copenhagen: VWS, OTC: VWDRY), which was the world’s largest manufacturer of wind turbines with 11.6% of the global market in 2014, the German company Siemens (Frankfurt: SIE, OTC: SIEGY), China’s Xinjiang Goldwind Science and Technology (OTC: XJNGF) and, to a much lesser extent given its size, General Electric (NYSE: GE).

Conclusions

This has been a painful year across the energy sector, but the recently adopted legislation improves the landscape for years to come. Look for the renewable power sector to benefit immediately, the shale drillers to benefit strongly as oil prices recover, and for refiners to take a hit as their costs increase relative to those of foreign rivals.

In closing, I want to thank subscribers for hanging in there. I am quite certain that the upside potential at this point is much greater than the downside risk. Here is hoping we all regain significant ground in 2016 as oil prices begin to recover.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)