How the presidential election could impact renewable energy investing

Asset managers and consultants are closely watching how the U.S. presidential election could impact renewable energy investing.

Those with a focus on the sector are trying to discern whether politics around, and specific economic incentives borne out of, the Inflation Reduction Act and its myriad tax credits for clean energy will change after the November election.

“I think anybody that is going to sit there and wait until December to adjust their portfolio could really face some adverse outcomes because elections can change policy, and policy can change economics, and that can really change valuations and so forth for renewables,” said Tyler Rosenlicht, a senior vice president and portfolio manager for global listed infrastructure who also serves as head of natural resource equities at Cohen & Steers.

Rosenlicht said he and his colleagues are very focused on what could happen after the election between President Joe Biden and former President Donald J. Trump, who have vastly different views on renewable energy.

Cohen & Steers is positioning itself to ensure it comes out ahead after the election, Rosenlicht said, adding that is “why we come to work every day.”

“There are situations where if the IRA gets rolled back it’s a dramatically, dramatically negative outcome for the existing stock. There are situations where if the IRA gets rolled back it’s not a big deal or really good. So our day to day is spent trying to understand that range of outcomes and where the mispricings are."

Cohen & Steers manages an $8.4 billion infrastructure portfolio.

Democrats in 2022 passed the Inflation Reduction Act, or IRA, which included tens of billions of dollars for loans and grants related to emissions reductions and climate resiliency, and a host of new and expanded tax credits for renewable energy projects, such as wind and solar farms, electric vehicles and carbon capture initiatives.

On the campaign trail in recent months, Trump has criticized the IRA and said he would roll it back if given the opportunity. Specifically, Trump questioned the effectiveness of electric vehicles and last year released a plan that he will “work to stop the flow of American tax dollars that are subsidizing Chinese electric vehicle battery companies through Joe Biden’s so-called Inflation Reduction Act.”

Though Republicans would need to control the White House, Senate and House simultaneously to try and repeal the IRA, a second Trump administration could use executive action and regulatory guidance to curtail the law.

On the other side, a Biden win in November would further ingrain the IRA and the federal government’s commitment to renewable energies.

Of note, in March the Biden administration issued a rule concerning tailpipe emissions to effectively ensure that a majority of passenger vehicles sold in the U.S. by 2032 are EVs.

Treasa Ní Chonghaile, senior portfolio manager within KBI Global Investors’ environmental strategies team, said the Biden administration’s vehicle emissions policy will lead to more investment in the space, which is good for the active equity manager and its investors.

“Any emissions standards that increase the needs and efficiency standards required is absolutely beneficial to our companies because typically these require more technologies and more spend and they’re exactly the companies that we invest in,” she said.

But when it comes to a potential rollback of such policy, Ní Chonghaile said it’s part of overall risk KBI monitors for its $9.1 billion sustainable and natural resource portfolio.

Orhan Sarayli, head of North America for Barings' global infrastructure group, which manages an $11.6 billion infrastructure debt portfolio, said his team is avoiding deals that could have negative consequences if there’s a change in administration.

“The clean energy industry has been dealing with uncertainty around tax credit renewals for a long time, but there has been such a drastic change in how the tax credits are dealt with the IRA, that it is a potential concern about how that could change in a different administration,” he said.

“But right now, that’s where being a debt lender might be a little more comforting because we’re going to go where we think the cash is coming regardless of political regimes," Sarayli added. "We’re going to stick to traditional infra bellwethers — contracts, sticky customers, an essential service — so we’re venturing very carefully in the clean energy space where those boxes are checked.”

Regardless of what happens in November, managers and consultants who focus on renewables and infrastructure broadly said they are bullish on its future.

While a Trump win would be a shift for energy sector, “infrastructure as a whole has had a lot of bipartisan support, so I would be surprised if there weren’t good opportunities in infra going forward, and it’s hard to deny that no matter who’s in power,” said Larissa Davy, senior investment director of real assets at NEPC.

Her colleague Matt Ritter, partner and head of real assets Investments at NEPC, said the potential political and regulatory risk is something the firm is taking into account in its underwriting.

“The strategies that we’re recommending and looking at we believe are viable even if there were to be political or regulatory change,” Ritter said. “That’s not to say necessarily that every asset out there is in the same position, but we’re very focused on strategies that are not reliant on those subsidies or those sorts of programs to be viable.”

Even if the IRA tax credits were rolled back under a second Trump administration or Republican Congress, there are still viable investments in the renewable space, according to Davy.

“A fund investing today in renewable power is not going to suddenly not be profitable if Trump was to win this year going forward,” she said. “Over the long term that could change, but certainly that would have to be a consistent repeal of some of these types of policy agreements, like the IRA, over a 10-year term.”

Since the IRA’s enactment, portfolio managers have been incorporating IRA tax credits as add-on benefits, not as the driving force behind a given investment, said JingLin Huang, a director in Segal Marco Advisors’ alpha investment research group.

“They wouldn’t rely on the tax credits to get to their base case target return, but it’s excess returns on what they would typically underwrite as their target,” she said.

Areas with increased interest due to the IRA’s tax credits include nuclear generation, energy storage, wind and solar plants, EVs and digital infrastructure, sources said.

These days, the challenge is to sift through all the opportunities in the renewables space and pick the winners.

“Just yesterday, we had a call where we went over four different opportunities in the renewable developer side, so we’re very busy,” Sarayli said. “It’s an exciting time, but the amount of deal flow and the amount of information we need to process to decide how to deliver that best portfolio to our investors is as challenging as we’ve seen in a long time.”