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.
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