Renewable Energy – Policy Risk at the Forefront

We covered the consequences of a Trump presidential win in our monthly report in December 2023: Will and can Trump kill the inflation reduction act (IRA)?  Our conclusion was that it is unlikely, even in a red sweep scenario where the Republicans win both the presidency and both Houses of Congress. However, we warned that a Trump presidency, with or without Congressional majority, could reinterpret guidelines for the IRA, making it more strident to qualify for tax credits. We also warned that poll advantages for Trump would likely cause renewable energy stocks to sell off, and vice versa, they would surge if Biden should gain a poll advantage.

Following the disastrous performance from President Biden in the first presidential debate, Trump has taken a significant lead in the polls and the volatility we predicted came earlier than expected. However, the Republicans are not leading in the polls for control of the House, which is required to revoke the IRA. Accordingly, as explained in detail in our December report, even in a red sweep scenario, we still believe a full repeal of the IRA is unlikely.

Interestingly, most comments about Republicans revoking the IRA are made by Democrats rather than high-level Republicans. This could be a tactical move as repealing the IRA may not appeal to independent voters. Therefore, this issue will likely remain a concern for renewable energy equities until after the election in November.

Unfortunately, even if the Democrats retain the White House, the fight against climate change suffered another setback last week as the Trump-appointed U.S. Supreme Court majority overturned the Chevron doctrine. This legal framework allowed federal agencies to interpret and implement ambiguously written laws issued by Congress. With this ruling, it will be easier for federal judges to second-guess regulatory actions, empowering challengers across federal agencies.

The power sector, one of the most regulated in the US, has relied heavily on the Environmental Protection Agency (EPA) to combat climate change. Fortunately, the EPA began to reduce its reliance on the Chevron doctrine in many, but not all, rulemakings several years ago. Nevertheless, the overturning of Chevron has curtailed EPA’s authority and will likely lead to a significant increase in legal challenges and delays in policy implementation. This will take years to play out but will likely lead to more emissions and hazardous waste from power generators and industry.

Moreover, the overturn of the Chevron doctrine might result in legal challenges to the IRA guidelines. The IRA was rushed through Congress in the summer of 2022, and it was always intended that scientific experts in the agencies would nail down the details. It is difficult to have a strong view if plausible legal challenges will be successful, but easy to see that they will cause delay and increase uncertainty for renewable energy companies.

Sadly, the political risk also increased on the other side of the Atlantic. In France, President Macron announced a surprise election in early June, and the right-wing party Rassemblement National (RN) or National Rally performed better than expected in the first round of the parliamentary elections. NR is a climate-change sceptic party that has campaigned on not only ending construction of onshore wind but has also claimed it will remove already installed wind farms. Although this was unlikely to ensue even if RN should win a majority in the new parliament, renewable energy stocks and particularly wind OEMs like Vestas and Nordex did poorly in June.

However, at the time of writing, it appears that an alliance between the two other political blocs has not only prevented NR from achieving an absolute majority in the second round of the election, but it has even relegated NR to third place among the three major factions. This means that NR will be far from power, at least for now, and its climate-change sceptic policies will not be implemented. This should be positive news for renewable energy equities. However, it will take time to form a new French government and this uncertainty combined with the fact that the far-left might gain significant power is likely to hamper French stocks over the next weeks.

Despite NR being kept far from power in France, climate-change sceptic parties have gained ground around the world, intensifying the political and regulatory risk for companies involved in the energy transition. Nevertheless, much of this political risk is likely already priced into stocks, the sentiment is negative and can hardly become worse.

We will not attempt to predict the outcome of the US election in November, but with four months to go, and as the French election has shown, nothing should be taken for granted. Also, the US is highly polarized with strong bases on each side, and it is hard to see Trump increasing its lead significantly from the current national poll results. His lead in swing states has increased but it is not insurmountable. The election has become Trump’s to lose. We expect volatility in the polls and in renewable energy equities over the next four months.

While we continue to position long in infrastructure companies essential for the electrification of society and with broad support independent of view of climate-change risk, we are conscious of the tailwind the sector would receive if the Democrats should win the White House and the very next day the FED would cut rates for the first or even second time in this cycle. The strong rally we saw in November and December of last year might pale in comparison.