Even as the outlook for renewable energy utilities, in particular, remains uncertain, Shane Hurst, portfolio manager at ClearBridge Investments, believes that investors might not have as much to worry about as first feared.
“While we acknowledge elevated risk and volatility as Trump shifts clean energy policy, our view is that any changes to the Inflation Reduction Act (IRA) – which we expect to be less than the market anticipates – will ultimately have a muted impact on the short- and long-term renewables outlook,” Hurst said.
“As such, we remain comfortable with our existing contracted renewables exposure.”
Expounding on this, Hurst said that onshore wind and solar, for instance, are particularly leveraged to production tax credit (PTC) and investment tax credit (ITC) subsidies. Plus, the funding package under the IRA extends across multiple technologies and applications, with onshore wind and solar tax credits being only a portion of this.
“While there have been significant headlines about Trump rolling back subsidies, there has been no substantial commentary regarding the potential elimination of the PTCs and ITCs,” he said.
Instead, the President has maintained focus on cutting subsidies outside of PTCs and ITCs, such as electric vehicle tax credits, and reviewing loans from the Department of Energy. These, Hurst said, serve as important signals as to the priorities of the Trump administration.
Looking at contracted renewables, the portfolio manager conceded that offshore wind is the only area that ClearBridge considers to be at significant risk.
“This is a clear distinction from onshore wind and solar, as the administration has halted the issuance of any new offshore wind leases following Trump’s pre-election comments opposing it (which requires more extensive federal government involvement).”
Notably, Hurst believes that PTC and ITC credits could still be rolled back somewhat as the new administration looks for sources of funds to extend the Tax Cuts and Jobs Act of 2017, and other policy priorities.
“However, we think the cuts will be moderate and not impact the long-term outlook for key renewable players.”
According to Hurst, there is a situation where the duration of the PTC and ITC subsidies may be reduced from their current 10+ year duration, such as to five years. However, he highlighted that PTCs and ITCs existed prior to the IRA, and that a moderation towards older norms is a “reasonable assumption”.
“Onshore wind and solar projects (with the PTC and ITC framework) worked perfectly well under Trump in his first term, and we think it will be the same in his second term,” Hurst added.
Moreover, the removal of the PTC and ITC provisions would need to be approved by Congress, and, notably, many Republican members are key beneficiaries of these tax credits.
He added: “It is worth noting that NextEra Energy, among the largest renewable energy companies in the world, has expressed confidence in its ability to continue to meet development targets even under a more draconian scenario.”
And as the risks around the IRA repeal have been discussed extensively over the last year and a half, companies have been able to adjust accordingly.
All things aside, the portfolio manager believes that demand for renewable energy will continue to be strong regardless of policy outcomes.
“We believe the market overlooks the growing demand for electricity from renewable sources, much of which is being driven by the increasing electricity needs of the large language models driving AI adoption.
“Even in a scenario where 50 per cent of electricity demand is met through natural gas and nuclear power, renewables growth will need to accelerate meaningfully. By some estimates, we would see renewables’ compound annual growth rate almost doubling.”
