Could the US Election Reshape the Energy Sector?

Our expert panel explains whether the US election will impact energy policy, including how the Inflation Reduction Act’s possible fate and increased tariffs could transform the sector. ----- Transcript ----- Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. David Arcaro: I'm Dave Arcaro, Morgan Stanley's US Power and Utilities Analyst. Andrew Percoco: And I'm Andrew Percoco, the North American Clean Tech Analyst here at Morgan Stanley. Michael Zezas: And today we're discussing another key election related topic that generates a lot of political and market debate: Energy policy. It's Thursday, October 17th at 10am in New York. The outcome of the 2024 election will likely determine the direction of U.S. climate policy for years to come. David, what are the key focus areas for investors as they evaluate the various election outcomes on the utilities and clean energy industries? David Arcaro: Yeah, Mike, investors are highly focused on the Inflation Reduction Act, the IRA, especially as it pertains to the election and the clean energy space. This was a law that was passed in 2022, and it really has supportive policies across the entire clean energy spectrum. It's got tax credits and incentives for solar, wind, offshore wind, green, hydrogen, nuclear, you name it. Battery storage. And some of those tax credits go all the way to 2032 and beyond in some cases. So, it's a very supportive policy when it comes to the clean energy industry and the growth outlook. So, the big question is what's going to happen to the Inflation Reduction Act – depending on which administration is in place following the election. Our core view is that the IRA stays in place; that the core wind, solar storage and nuclear tax credits all remain, regardless of the outcome of the election. And then separately, investors are focused on tariff policy as it pertains to clean energy. It is a global industry. A lot of the equipment and materials are imported around the world. And so, any changes to the tariff approach could have an impact on the space as well. Michael Zezas: Got it. And so how does the outlook for renewables change under different election outcomes? David Arcaro: Yeah, really, the outlook for renewables growth is not very different in our view, regardless of the outcome of the election. We think it's a strong growth outlook either way. And part of that is because we've got policies that we expect to stay in place that will be supportive regardless of the outcome, as I mentioned with the Inflation Reduction Act. And then we've also got demand. It's a very strong demand backdrop for the renewable space – and that's because in the electric industry, we're seeing an inflection in electricity usage across the US. It's been stagnant for years and years, but now with data center growth, with industrial production accelerating, and manufacturing and onshoring, we're seeing a big change in the growth outlook for electricity usage. And that means we need more power plants. We need more to be built, and renewables are going to be the predominant new resource for producing electricity in the US. Some of these companies like data centers, they want renewables to power their operations. And most utilities, electric companies that are building power plants, they're going to be using renewables more than anything else. There are impediments to building fossil plants, it's challenging to permit and there's supply chain delays and issues. So, we think there's a very strong growth outlook for renewables based on that demand and the policy support going forward, regardless of the outcome. Michael Zezas: And Andrew, how about corporate tax policy, including renewable energy tax credits? Andrew Percoco: I mean, as Dave mentioned, we think IRA repeal risk is very low, and I think the only scenario where IRA repeal is a relevant conversation is in a Republican sweep scenario. But even under this scenario, we would expect any repeal measures to be targeted in nature and not a wholesale repeal of the bill. So, the question then becomes, you know, what is safe and what's at risk of getting cut. So, to start off with what's safe; maybe three items that I'll highlight. One would be domestic manufacturing tax credits. There's been a lot of bipartisan support for the onshoring of manufacturing. So, the clean energy manufacturing tax credits within the IRA look like they are on solid footing, regardless of the election outcome. Now, why do domestic manufacturing tax credits have bipartisan support? One, there's a general view that we need to reduce our reliance on China for our energy infrastructure and, two, the job creation angle. The IRA has created over 150, 000 new jobs, and a lot of those jobs are in states where there is a large representation of Republican voters. So, the local pushback would be pretty severe if IRA was repealed in full. Number two, area of IRA that we think is safe would be nuclear tax credits. There's a general understanding across both sides of the aisle that nuclear is an important and reliable form of clean energy, and that we need to support the existing fleet of assets. And then third again, as Dave mentioned, solar storage and wind investment tax credits. These have been around for a while, well before the IRA was in place and they've had bipartisan support. They've been extended multiple times, even under past Republican administrations. So, we would not expect any changes to those core tax credits in a Republican sweep. On the flip side, you know what's potentially at risk in a Republican sweep? Number one would be consumer facing tax credits like the EV tax credits. This is something that the Republicans have definitely taken aim at on the campaign trail. Number two would be offshore wind. Former President Trump has definitely had [a] very candid view of offshore wind, and the issues that it poses on local communities. So, this could be another area where, they look for some targeted repeal. And then the third would just be delayed implementation of any unfinalized rules, by the time they take office. Michael Zezas: Makes sense. And finally, what other key election implications should investors focus on at this point when it comes to clean energy? Andrew Percoco: Yeah, I think the biggest would be around tariffs. It's frankly the hardest to predict but could have some pretty meaningful near-term implications for clean energy. Just to zoom out for a second, the clean energy supply chain is global with a heavy concentration in China and Southeast Asia. So, if there is higher tariffs put in place against these regions, it could create some disruption in supply chains and impact the pace at which we deploy renewables in the US. But frankly, at the same time, it should just accelerate a trend that we're already seeing in the US, which is the onshoring of manufacturing, thanks in part due to the IRA. So ultimately could create some near-term disruption but doesn't change the secular growth for the renewable space since developers in the US have already started to make the shift towards domestic supply. Michael Zezas: Yeah, that makes sense, Andrew. And obviously tariffs have been top of mind for investors as we've talked about here. Well, David, Andrew, thanks for taking the time to talk. And as a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen and share Thoughts on the Market with a friend or colleague today.