In early November, after Donald Trump's victory in the U.S. presidential election, renewable energy stocks fell broadly. Driving this change, was the sentiment of many investors about the risk that the green energy incentives introduced during the Biden administration, through the Inflation Reduction Act (IRA), may be changed or withdrawn.
The election results and their consequences for the sector
By mid-November, it also became clear that the Republican Party had secured a majority in both the U.S. House of Representatives and the U.S. Senate. Thus, from January, Trump and the republicans will have full control over both legislative and executive power in the U.S. government, a commanding position that gives them the opportunity to implement their declared political agenda in this sector.
The impact of the election has been widely discussed, from tax policy to foreign affairs. For the Storebrand Renewable Energy fund, we focus on how the election outcome could affect the renewable energy sector and specifically the U.S. Inflation Reduction Act (IRA) introduced into law in 2022 under the Democratic Party's Biden administration. The IRA has played a crucial role in promoting green investments in the country, and its future could significantly impact the renewable energy landscape.
The role of the IRA in green investments
The Inflation Reduction Act is a cornerstone for driving green investments in the United States. If Harris had won the election, the IRA's implementation would have proceeded as planned. Trump's victory, however, has created uncertainty about the future of the law. We believe that a complete abolition of the IRA is unlikely, even with Republican control of the US Congress and presidency. However, it is possible that changes will be introduced, such as limiting tax benefits and loan guarantees, and that tariffs will be imposed on components for wind, solar and energy storage technologies. At the same time, measures can be introduced that strengthen the fossil fuel industry.
We see two main reasons why a complete abolition of the IRA is unlikely. First, many IRA-related investments have already been made in Republican states, where they have created jobs and relocated important parts of the renewable value chain. Second, 18 Republicans have warned that total abolition would mean significant losses of taxpayer funds without a corresponding return. With a narrow majority in Congress, we therefore believe that changes will be more selective. It is also important to remember that in just two years time, mid-year congressional and senatorial elections will be held, in which the relevant legislators will not want to risk being rejected by voters in their constituencies. Tax incentives for electric cars and offshore wind power, for example, may be more vulnerable.
The future of climate investments
Despite the uncertainty, there are several long-term trends that speak in favour of renewable energy. Technologies such as solar and wind power are becoming increasingly competitive, energy storage solutions are becoming more efficient and cheaper, and the need for energy – especially renewable – continues to increase. Regardless of the election results, it is clear that both the United States and the rest of the world need to invest more in renewable energy sources to reach the goals of net-zero emissions.
The election results are likely to create turmoil for the sector in the short term, with news flows surrounding potential policy measures. At the same time, it is too early to say what the measures will be and what we will see in terms of actual net impact on the sector. It's also worth noting that the last time Trump was president was one of the best periods for green funds. The situation is thus not as black-and-white as the initial market reaction suggests.