The outcome of the US presidential election could well increase uncertainty and market volatility in the short term, but is unlikely to have a broad, long-lasting impact on smart energy-related sectors in our opinion. This might surprise some investors, given Donald Trump’s positive stance on fossil fuels and how closely Democrat Kamala Harris is tied to the clean energy-promoting Inflation Reduction Act (IRA), passed under the current Biden administration in 2022. The IRA was designed to promote clean energy solutions, while boosting local manufacturing to improve the security of supply.
Trimming back the IRA?
While both candidates’ spending plans have increased, creating concerns about sharp rises in the US national debt, the election of Trump would likely have economic and fiscal implications well beyond clean energy; not least, his stated policies would increase US government debt to levels that are widely considered to be unsustainable. It is unclear whether his policy of substantially increasing import tariffs would meaningfully cover his spending plans. However, it will have a considerable impact on many supply chains and very likely drive up US inflation. Increased expectations of a Trump win have been a factor in the increase in US bond yields over the past few weeks. The potential impact of the appointment of Elon Musk to the planned government efficiency commission is also unclear.
There has also been speculation about a Republican government repealing part(s) of the IRA, partly to offset the budgetary impact of the announced tax cuts. A total repeal would need support from both the House and Senate, requiring a so-called ‘red sweep’ with the Republicans taking both chambers. Interestingly, the impact of the IRA has so far been mostly beneficial to Republican rather than Democrat-controlled states. This includes new permits of investment and production tax credits for wind and solar (ITCs and PTCs) and the buildup of battery manufacturing facilities. Bloomberg estimates that c80% of CleanTech manufacturing investment has gone to red (i.e. majority Republican) states1. As a consequence of the IRA, the CleanTech-related workforce has increased rapidly and now numbers close to 3.5 million – an electoral segment that it would be politically risky to alienate2.
Interestingly, the impact of the Inflation Reduction Act has so far been mostly beneficial to Republican rather than Democrat-controlled states.
The main growth drivers of electricity demand in the US are the new power-hungry AI data centres of the four big hyperscalers (Amazon*, Alphabet (Google)*, Meta Platforms (Facebook)* and Microsoft*). The ‘big four’ all have commitments to cover their electricity needs by carbon-neutral energy only and these are essentially covered through clean power purchase agreements (PPAs).
Over the past five years, the big four alone were responsible for c40% of the total additional demand for the US utility-scale solar market3. Given their ambitious expansion plans and wish to significantly increase their carbon-free electricity supply, these companies have recently announced meaningful new supply deals, including nuclear energy capacity starting in the 2030s. Some of these involve new SMR (small modular reactor) technologies, many of which have not yet been approved and/or still need to demonstrate economic and technical viability. We are sceptical about whether these announcements will come to fruition given the vast regulatory, economic and technical hurdles. On the other hand, we see the buildout of renewable power generation in combination with battery storage continuing unabated. Given the important time-to-market constraints as well as greater potential for cost reduction, we remain very constructive on further solar deployments.
Besides the potential repeal of the $7,500 subsidies for buying electric vehicles, we expect the overall protectionist approach adopted by the Biden administration not to be seriously changed under a new Republican administration. Being in fact a ‘buy America’ programme, we would instead expect some aspects of the IRA to become even more accentuated under a second Trump presidency. This would apply particularly to the onshoring of production and the protection of critical minerals for manufacturing batteries and electric motors.
Tariff wars
Many of the IRA's measures target a lower supply dependency on China now it has become a dominant supplier of clean energy solutions, be it for solar power, batteries or electric vehicles. Reshoring and the application of tariffs to Chinese imports are policies shared by both parties. This might become even more pronounced under a Trump government, as indicated by his announced policy to introduce up to 60% import tariffs on goods from China.
The choice of JD Vance by Trump as his vice-presidential running mate reinforces our view. The senator has mostly focused on opposing China and promoting US domestic manufacturing. He seems to oppose the electric vehicle subsidies. In our opinion, this would be a symbolic but limited IRA ‘repeal’ to undo the Democrats' work without affecting clean energy drastically, while still being down the list of key issues for Trump and Vance.
In fact, the IRA is far from the minds of most American voters, who are instead focusing on immigration, the economy, tax cuts and reproductive rights. We would therefore mostly expect a Trump administration to use its political goodwill to push through tax cuts and stricter immigration laws if elected.
Portfolio context
While the upcoming election has had an impact on certain subsets of the clean energy sector, with investors preferring to take a ‘wait and see’ approach, we see few long-term impacts on any of our portfolio holdings. This is also because we favour companies where we see strong bipartisan support, and/or do not need any further protective measures in order to thrive. This is particularly true for those companies driving the global energy sector towards electrification and grid optimisation, with the new demand growth drivers of data centres, electric vehicles and heat pumps. Our portfolio holdings tend to show a wide technical moat, reflected by high R&D spending and intellectual property, and represent interesting subsegments of structural growth, addressing global end markets.
* not held
2. https://e2.org/reports/clean-jobs-america-2024/
3. UBS Global Research, “100% Renewable Powered AI Data Centers”, 21 May 2024
