Stockholm (HedgeNordic) – Renewable energy stocks have encountered a challenging landscape since their peak in August 2022 as a result of significant cost increases tied to raw material prices and, more critically, higher interest rates. 2024 is looking a lot more promising for the sector, with supply chain issues in the rearview mirror, valuations sharply lower, and anticipated rate cuts during the year. Despite the promising backdrop for the renewable energy space, the U.S. presidential elections in 2024 cast a cloud of uncertainty over the sector.
The U.S. Inflation Reduction Act (IRA), which is the largest climate spending bill in U.S. history, faces potential upheaval with the prospect of its repeal by Donald Trump and Republicans. The IRA, designed to encourage investment in clean energy through various tax incentives, has faced criticism from Republicans, notably from Senate Republican Leader Mitch McConnell, who labeled it a “reckless taxing and spending spree” with “no meaningful impact on the world’s climate.” The possible repeal of the bill raises uncertainties about the prospects of the renewable energy sector.
Joel Etzler and Vidar Kalvoy from Coeli, who manage a long-biased long/short equity fund exclusively focused on renewables since the beginning of 2023, express skepticism about the possibility of a full repeal of the IRA. Even if Republicans secure both Houses of Congress and the presidency, they doubt there is an appetite for such a repeal. “Will and can Trump kill the Inflation Reduction Act? Our short answer to both questions is that we doubt it,” says Etzler. “However, there might be adjustments to the law and this risk will constitute significant noise for US renewable energy equities until the election,” he argues. “This noise will only intensify the better the Republicans do in the polls.”
“Will and can Trump kill the Inflation Reduction Act? Our short answer to both questions is that we doubt it.”
The IRA, passed through a partisan vote by Democrats under budget reconciliation, can be repealed or altered by a simple majority of Republican senators. A red sweep, involving winning the presidency and a majority in both the House and the Senate, would be required for IRA repeal, a scenario that former President Donald Trump is campaigning for. “Former president Donald Trump, who is a strong favorite to win the Republican Party’s primaries, is campaigning on gutting much of the Inflation Reduction Act (IRA) and to dismantle President Biden’s climate change policies,” says Kalvoy.
Bearing the potential consequences in mind, BNP Paribas estimates that $700 billion to $1.1 trillion of capital expenditures over the next 5 to 7 years rely on the IRA. This represents about 5-7 percent of all U.S. corporate capital expenditures during that period, with substantial implications for economic growth. The IRA’s impact on job creation, particularly in red or purple states (i.e. Republican-dominated or swing states that could go both ways in the election), adds complexity, with a repeal potentially jeopardizing a substantial number of jobs and bolstering Chinese dominance in the renewable energy industry.
Republican Perspective and Potential Modifications
Addressing the reasons behind a potential IRA repeal, Kalvoy points out that for climate change skeptics, “the IRA is simply a waste of money.” However, he underscores the bill’s broader objectives, including energy and supply chain security, and job creation. “This is a fact we believe will be hard for the Republicans to ignore,” notes Kalvoy. He emphasizes that a full repeal seems unlikely, drawing parallels with the last time Republicans controlled both Houses and the presidency. “Trump did not manage to keep his campaign promise of revoking the much-hated Affordable Care or ‘Obama care’ act,” says Kalvoy. “We believe the IRA has significantly more bipartisan support than Obama care.”
“Trump did not manage to keep his campaign promise of revoking the much-hated Affordable Care or ‘Obama care’ act. We believe the IRA has significantly more bipartisan support than Obama care.”
While a full repeal appears unlikely, Etzler and Kalvoy fear that a red sweep might lead to modifications in certain aspects of the IRA. “The Republicans have shown limited enthusiasm for direct consumer subsidies, suggesting that the USD 7,500 electric vehicle tax credit could be at risk,” argues Etzler. “Similarly, direct support for residential solar might face reductions,” he continues. “On the other hand, it is hard to envision the Republicans withdrawing support for nuclear energy or significantly altering manufacturing tax credits, given the clear negative impact such moves would have on their own constituencies.”
A bigger fear for the duo is that a Republican president, with or without a Congressional majority, may reinterpret the guidelines for the IRA. “The executive branch cannot eliminate a tax credit, but it can make access to the credit much more strident,” explains Kalvoy.
“We are not making any prediction on electoral outcomes, but this uncertainty will create volatility throughout the year.”
Despite doubts about a complete IRA repeal, the presence of a Democrat in the White House is considered more favorable for the renewable energy universe. “We are not making any prediction on electoral outcomes, but this uncertainty will create volatility throughout the year,” concludes Etzler. The discussions surrounding Trump’s campaign to repeal the IRA have been widely debated, with both sell-side and buy-side likely having factored in the risk. “Any indication that the Democrats are in the lead would therefore be a significant positive catalyst,” says Kalvoy. “We will follow the developments closely and believe the fund should benefit from the opportunities on both the long and the short side during the year.”
