By Lydia DePillis
Money is the vital lifeblood of politics, yet the results of elections dictate the direction of its flow — and last month’s vote holds particular significance for the energy sector.
Investment in clean energy — which encompasses renewable sources alongside the production of electric vehicles, batteries, and solar systems — has surged following the 2022 Inflation Reduction Act, endorsed by President Joe Biden. By the third quarter of 2024, it had reached an unprecedented $71 billion, as per a monitor managed by the Rhodium Group, a research entity focused on energy, and the Massachusetts Institute of Technology.
The pressing question now challenging Wall Street: Will President-elect Donald Trump, who labeled Biden’s initiatives a “green new scam” during his campaign, adequately retract those subsidies and regulations to significantly alter the economics of investing in decarbonization?
Market responses immediately following the election appeared definitive. Clean energy stocks experienced a sharp decline, whereas oil company shares recovered, signaling differing expectations for the performance of the two sectors in the coming years.
At the forefront of Trump’s agenda for next year is the continuation of his 2017 tax cuts. He will likely need to curtail spending elsewhere to accomplish this. Clean energy tax incentives — estimated at approximately $350 billion over merely the next three years, according to the Congressional Joint Committee on Taxation — might be an appealing target. The more those incentives are reduced, the more projects risk becoming financially unviable.
Since the election, advocates for renewable energy have found some optimism in recognizing that funding spurred by the 2022 legislation has largely been directed towards Republican states, potentially insulating it from cuts. Demand for energy has also started to rise for the first time in a generation, driven by the proliferation of electric vehicles, heat pumps, new factories, and artificial intelligence, strengthening the justification for a comprehensive approach to energy sources. Moreover, solar energy has now become one of the most affordable power options available.
“Renewable energy enjoys a certain level of bipartisan endorsement,” stated Nils Rode, the chief investment officer of Schroders Capital, a Swiss firm managing $97 billion, including wind energy projects in the U.S. “Although there might be risks, we don’t believe it will result in substantial changes.”
Subsidies are not the sole policy capable of influencing the flow of investment, however. Trump and his administration have clearly expressed their intention to facilitate fossil fuel initiatives in ways that could render them more appealing to investors.
His nominee for interior secretary, Doug Burgum, has pledged to expand oil and gas drilling on federal lands. Chris Wright, the CEO of a fracking company whom Trump appointed to head the Energy Department, may redirect the agency’s extensive research focus and loan programs away from low-carbon energy. Moreover, at the Environmental Protection Agency, the president-elect plans to nominate Lee Zeldin, who has addressed the need to roll back regulations on power plant emissions, potentially undermining incentives for utilities to transition to cleaner energy sources.
Each of these moves could enhance the profitability of fossil fuel investments compared to renewables.
“The primary change will be in the economics,” explained Ben King, an associate director of the climate and energy practice at the Rhodium Group, which has recorded $435 billion in announced but not yet initiated renewable energy projects. “Currently, wind, solar, and batteries are contending with natural gas at the margins. A deceleration in the deployment of those technologies merely opens up more space for gas on the grid.”
Furthermore, Trump’s commitment to implement significant new tariffs would impact the components required for constructing solar fields, wind energy sites, car batteries, and long-duration energy storage systems. Additionally, a reduction in the corporate tax rate could weaken the market for tradable tax credits that renewable energy developers utilize to capitalize on many subsidies provided by the Inflation Reduction Act, which must be offset against taxable income.
The anticipation of such alterations has prompted some banks and investors to pause new renewable energy ventures until the political landscape in Washington becomes clearer. Financial institutions are ensuring that new contracts include clauses that safeguard them against policy shifts that could diminish their returns.
“They will hesitate to invest when the project’s economics are uncertain, unless you’ve adjusted the pricing for the worst-case scenario and the deal remains viable,” stated Keith Martin, a lawyer with Norton Rose Fulbright, who has extensive experience handling complex financing for banks involved in renewable energy initiatives.
However, some of Trump’s initiatives and thoughts could have conflicting and unforeseen implications. For instance, supporting the export of natural gas might increase its domestic price, making new U.S. gas power plants less attractive to investors, according to Bloomberg New Energy Finance. Accelerating the permitting process for new electricity transmission could benefit certain renewable energy projects as well. Additionally, mining for minerals essential for battery production could become more straightforward.
Moreover, the repeal of some of Biden’s climate regulations may not substantially impact the situation. The recent rule from the Securities and Exchange Commission that mandates public companies to report specific carbon emissions is currently tied up in litigation, and the incoming administration may simply withdraw it — however, many firms are already required to comply with similar reporting under European Union regulations. Additionally, Europe is gradually introducing a “border adjustment mechanism,” akin to a tariff for goods produced with considerable carbon emissions.
“They won’t be able to evade it if they wish to continue operating in Europe,” noted Jason Britton, president of Reflection Asset Management, a socially responsible investment consultancy.
Ultimately, broader economic factors may prove to be more significant than policy changes. Oil and gas companies will not increase production unless global prices are sufficiently high to warrant such actions. Furthermore, investment in renewable energy even rose during the previous Trump administration, primarily because low interest rates enabled investors to profit without substantial subsidies.
Consequently, the recent news that the Federal Reserve does not anticipate reducing interest rates as much as previously planned in 2025 is discouraging for the sector. If capital costs remain elevated, new tariffs will escalate construction expenses. Should the energy law be entirely rescinded, the outlook for clean energy investment would be significantly bleak.
“That, I believe, presents a difficult scenario,” stated Quinn Pasloske, a principal at Greenbacker, a fund management firm focused on clean energy infrastructure. “If any one of those three pillars falters, you’re in a decent position because the fundamentals remain intact.”
