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We cannot deny that we were hoping for another outcome of the US presidential election. Although we are convinced that the energy transition will not stop with President Trump, we do believe his administration will hamper the fight against climate change by prioritizing burning of fossil fuels and equally important, giving other countries cover to delay their own climate goals.
President-elect Trump has called climate change a hoax and described President Biden’s climate agenda as a green scam. Moreover, he has promised to not only roll back environmental regulation and to promote fossil fuels, but he also wants to revoke the landmark Inflation Reduction Act (IRA). Since the Republicans won a red sweep, controlling both Houses of Congress and the presidency, the probabilities of delivering on campaign promises have increased. However, there are still some limitations to what he will and can do, we believe.
Revoking the IRA?
Revoking the IRA was an easy campaign promise, but as we have discussed in many monthly reports, it is unlikely to be repealed—even in a red sweep. First, about 80% of the IRA funding has gone to red states, and 7 of the 10 fastest growing states in terms of clean energy jobs are represented by Republican Senators. Additionally, prior to the election, 18 Republican House members opposed revoking the IRA and 14 of those were re-elected. The slim Republican majority will likely make a repeal very challenging.
Second, while Republicans and Democrats disagree on many issues, they both prioritize domestic manufacturing and reducing reliance on China. Repealing the IRA would hinder US-made equipment production, cut American jobs, and benefit China -outcomes neither party supports.
Third, power demand is set to grow significantly in the coming years due to AI data centers, onshoring of manufacturing, and increased electrification. Reducing energy supply by limiting wind and solar development would be counterproductive, especially when Trump has promised to halve energy costs. Power prices are already rising, and disincentivizing clean energy would only increase them further. Notably, although Trump is an outspoken critic of windmills, more onshore wind was installed during Trump’s term than under Biden.
Finally, it is unclear how much funding could realistically be saved by revoking the IRA. The US has historically grandfathered private investments triggered partly or fully by US government incentives. Withdrawing these subsidises on existing assets would sow financial chaos since many are tied up in complex tax equity agreements. Even projects under development have historically been safe harboured as long as a relatively small amount (~5%) of total cost has been spent.
Still, the republicans need to find about USD 4 trillion of savings in order to extend the TCJA, the tax cuts from Trump’s first period, and even more if he is going to honor his many campaign promises of lower taxes. Although we do not believe in a full IRA repeal, certain provisions will likely be rolled back.
Changing the IRA?
What is on the chopping block? There is general agreement that direct credits like the EV subsidy of USD 7,500 per car is an easy target. Elon Musk, for one, is against this credit, probably because it benefits his competitors more than him. Another low-hanging-fruit for the Republicans is to set a firm phase out date for all of the IRA tax credits. Currently, some tax credits are phased out ‘the later of 2032 or when emission targets are met’, referring to a 75% carbon emission reduction from a 2022 baseline. This target might not be achieved until the late 2040s, leading to potentially high and uncertain costs. The Republicans will likely push to curtail the IRA even earlier than 2032, which, as we have seen before, could ironically spur a rush from renewable developers to lock in incentives. This could counterintuitively have a positive effect on share prices within the renewable energy space.
What is likely not on the chopping block? This is by no means an exhaustive list and based on our best judgement. The most secure elements are manufacturing tax credits, which have created too many jobs to risk cutting. Domestic content adders also have bipartisan support for boosting US production and are likely to survive in some form. Investment and production tax credits for solar and wind are likely to continue, though with possible duration cuts, as described above. These credits have expired and been reinstated multiple times over recent decades, including during President Trump’s first term. This would be positive, at least in relation to the doomsday scenario the market has priced in. However, uncertainty will remain for some time.
Another safe bet is that the Republican Congress will try to stop China from benefitting from any IRA tax credits. There is already a bipartisan legislation, the foreign entity of concern (FEOC) limiting companies from certain countries, including China, to participate in the EV industry. This legislation may be extended to supply chains for solar, wind, critical minerals, and batteries. While this would solidify manufacturing credits for domestic producers, it risks leaving them short on components, especially in battery production, where U.S. supply chains are underdeveloped. We suspect ‘efficiency czar’ Elon Musk might not be totally supportive if this would make it difficult to produce Tesla batteries in the US. One winner though would be solar panel producer First Solar (FSLR), which sources most components domestically and importantly, nothing from China.
Trump's Executive Power Over the IRA
In the short term, Trump’s executive power could do more harm to the IRA than Congress. He can and probably will delay and limit the implementation of certain provisions and implement stricter eligibility requirements for e.g. domestic content adders. Additionally, any IRA guidelines not finalized before election night - and rushed through before inauguration - could be subject to Congressional review. This includes guidelines for green hydrogen and clean fuels. We do however believe there is bipartisan support for the clean fuel credits, and we own a few stocks in this space. On the other hand, as we have discussed many times before, we are very skeptical to the broad application of green hydrogen across the economy and the fund would benefit from more realistic hydrogen incentives.
Trump and regulation – not all doom and gloom
Trump has pledged to roll back major EPA regulations, including the EPA Power Plant Rules requiring coal plants to cut emissions by 90% by 2032. This would likely stall or delay the phase-out of coal power in the US. It would also reduce the demand for renewables, although hyperscalers with strict carbon goals will likely continue investing in clean energy to offset fossil fuel use. For reference, in the U.S. over the past five years, four companies (Microsoft, Meta, Amazon and Google) accounted for about 70% of the Corporate PPA market and ~40% of all U.S. utility-scale solar demand, according to UBS.
By the same token, Trump wants to scrap the electric vehicle mandate, which will delay the transition to electric vehicles in the US. Both changes will face significant legal challenges, but with control of Congress it is likely just a matter of time before he will win through. Perhaps his best buddy Musk might persuade him that phasing out coal and promoting EVs would be better for the U.S.
It is not all doom and gloom though. The two largest bottlenecks for renewable energy developments in the US today is permitting and grid connection, not demand. While bipartisan attempts at permitting and interconnection reform have been ongoing for the past two years, a Republican majority might pass a more streamlined bill, albeit fossil-fuel-leaning. Such a bill could be even more effective in removing red tape and reducing interconnection queues. Trump and the Republicans are committed to a strong economy with abundant, affordable energy, making it likely they will prioritize efforts to “make the grid great again.” Since the expansion of the grid is where we have our largest exposure currently, this would be a positive development.
Universal tariffs, targeted tariffs or both?
One of Trump’s campaign promises that has concerned economists the most is the threat of universal tariffs of 10-20% on all import to the US and targeted tariffs like 60% on China or 200% on Mexican produced cars. Most economists agree that tariffs typically result in higher inflation and slower economic growth, affecting not only the exporting countries but also the US. For example, Morgan Stanley estimates that a 10% universal tariff could lower US GDP growth by 1.4% and increase inflation by 0.9% - and that is before factoring in potential retaliatory tariffs from China, Europe, and other partners.
However, it is uncertain which of Trump’s statements are campaign rhetoric, negotiation starting points, or firm policy goals. In his first term, Trump aimed to reduce the trade deficit, often escalating tariffs if trading partners did not meet his demands. Many expect trading partners may be more accommodating this time around to avoid mutual damage. Yet, Trump's objectives now also include using tariff revenues to finance an extension of the TCJA.
It remains unclear whether Trump can introduce universal tariffs without Congress’ consent. In 2017, he was blocked by a Republican-controlled Senate, and many of those Senators fronting the clash with the president still remain in office. They might continue to be unwilling to risk disrupting the global economic order, which most believe, or at least used to believe, have served the US well. The fact that the Republican senators chose their leader in a secret ballot and avoided to pick the most die-hard Trump supporter signals that there might still be some ‘adults in the room’.
Although difficult to predict how hard Trump will push for universal tariffs, it is safe to assume that further charges will be targeted at Chinese companies. Since the solar industry is totally dominated by Chinese equipment companies, although little is sold directly from China to the US, higher tariffs will likely result in price inflation and lower demand for solar in the US.
That said, the impact may not be as severe as expected given the current bottlenecks in permitting and interconnection, as well as ongoing anti-dumping and anti-circumvention investigations into imports from Southeast Asia. Still, growth expectations in the solar industry may need further adjustment until a U.S.-based supply chain can meet demand - a goal dependent on manufacturing tax credits.
Intrest rates – higher for longer?
Most economists agree that potential tariffs and unfunded tax cuts could drive higher inflation and increase government deficits, likely compelling the Fed to hold off on rate cuts and pushing up long-term yields. This trend has already begun since Trump’s significant lead in the betting markets in mid-September. Since then, the bond market has priced out four of the six anticipated Fed rate cuts for next year, while the 10-year Treasury yield has jumped over 80bps in just two months.
Higher rates are a clear headwind for the renewable energy sector, which is capital-intensive, often heavily leveraged, and may not see positive cash flows for years. Valuations will likely need to adjust, as we have seen in recent weeks. However, the market does adapt, and renewable developers’ returns have actually risen over the last three years of high or increasing rates. This has helped not only to offset higher interest costs but also to increase returns, compensating for the higher cost of equity.
Will Trump Push for Peace in the Ukraine?
Trump has pledged to broker peace in Ukraine on day one, an unlikely feat, yet his influence as the US's top defense donor could help end or freeze the conflict, allowing Ukraine’s reconstruction to begin. Although it will not be the outcome Ukrainians wanted, Trump's leverage might enable a face-saving compromise they otherwise could not accept. We may even see some concessions from Putin, although we are not holding our breath.
For energy markets, a peace deal could come with the requirement that Europe allows an increase of Russian gas imports. This will likely be one of Putin’s demands. Although Europeans will likely pretend to resist, the fact is that Russia is still a large exporter of gas to Europe. Even though import through pipelines is about to end, Europe is still buying significant volumes of the more expensive LNG from Russia. While Europe may never be as dependent on Russian gas as before, we believe cheap Russian gas could flow to Europe soon after peace is agreed.
This influx could depress European gas prices around 2026-2028 as it would coincide with a major increase in global LNG supply from Qatar and the US. While Asia may absorb much of this LNG through coal-to-gas switching, it would mean lower global gas prices and since European power prices are still gas-linked about 60-70% of the time, this could have severe impact on European power prices. Note that power prices are still twice as high as pre-Ukraine war.
As we already had a bearish medium-term view of European power prices and are short a few of the, in our view, expensive power producing companies, this outcome might be beneficial. It will at least offer good trading opportunities.
What happens next?
As was generally expected, the renewable energy space sold off hard on the Trump win and the red sweep. Equity valuations reset quickly, and a lot of potentially negative factors are now priced into the stocks. Industrial companies focused on building out the grid, however, generally did well.
Over the next two months until the inauguration, the market will be in a limbo trading whatever signal Trump and the Republicans send on tariffs, IRA repeal and tax cuts. Post-inauguration, much will depend on the Republican Congress. While they can legislate without much input from the Democrats, high voter expectations following the red sweep means the Republicans now bear full responsibility. If tariffs do not cover tax cuts, or if inflation and high rates slow the economy, they will not have obstructionism from their opponents to blame. We expect Republicans the next months will likely scale back ambitious promises, tone down the worst rhetoric, and focus on realistic goals.
Unfortunately, clarity on IRA changes through budget reconciliation, the only way to change the IRA as the Republicans do not have super majority in the Senate, may not come until late April or even late summer, just before the September debt ceiling deadline. With worst-case scenarios nearly priced in, this period offers trading opportunities as volatility is likely to stay elevated.
In the longer term, a Trump presidency may not favor the climate, but it could benefit renewable stocks. History shows renewable equities performed exceptionally well during Trump’s first term (up 250-500%) compared to Biden’s term (down 60-70% and counting). As we have long argued, government-driven capacity increases can often hurt incumbents by creating more competition and driving down prices and returns - a note of caution to oil and gas investors celebrating Trump’s “drill-baby-drill” agenda.