As with any investment, your capital is at risk
Many column inches have been devoted to predictions of the US election. The relentless ebb and flow of updated forecasts from ongoing polls and debate performances will continue to dominate headlines until 5 November. But one crucial piece of legislation could come under scrutiny depending on the victor.
It is a key policy for decarbonisation goals and represents a significant shift in attitude towards clean energy infrastructure in the US, but it has proved a divisive feature of the campaign trail. Here we explore the future of the policy and specifically the implications for US utilities and renewable energy.
Inflation Reduction Act
Introduced by the Biden administration in August 2022, the Inflation Reduction Act (IRA) is a significant climate and industrial policy, and provides incentives in the form of tax credits, loans, and grants. This has stimulated investment in clean energy infrastructure, supporting the development of domestic supply chains in electric vehicles, hydrogen, wind, and solar technologies, among others.
The financial scale is gigantic. Projections by the Brookings Institutes and Goldman Sachs suggest fiscal costs could reach up to $1.2 trillion by 2032, alongside $3 trillion of private sector funds. The policy’s impact is expected to extend well beyond 2032, potentially galvanising trillions more in investments over the ensuing decades.
Up for debate
Investors fear the IRA may be targeted if Trump is re-elected. These concerns stem from opposition by Trump, his advisers, and some Republicans, alongside a policy paper from an influential conservative think tank advocating for its repeal. This is compounded by the US’s budget deficit of 6 per cent, as savings from the IRA may be seen as a potential source of funds for promised tax cuts or extending the 2017 tax cuts.
While a repeal might not halt the US energy transition, it will create policy uncertainty and divert capital from green energy projects. The result would be the US falling behind Europe and other regions in achieving climate goals.
Given its origins, we do know the IRA would be secure under a Harris administration. However, a full repeal under a Trump administration would not be simple. Remarkably, Republican states have overly benefited from the IRA, receiving 70 per cent of jobs and investments, and over 60 per cent of renewable projects.
Since Congress passed the policy in 2022, it has stimulated over $490bn in private investments, created over 100,000 jobs in manufacturing, and reshored supply chains. This has led to annual clean technologies investment surpassing spending on oil and gas production by 50 per cent.
Scenario analysis
In thinking about the future of the IRA and possible implications for US utilities and renewables, we have considered a number of scenarios. These draw on a detailed analysis of the potential impacts of a Trump or Harris presidency, as explored in our broader quarterly scenario analysis work which focuses on cross asset implications:
Scenario 1: Republicans win but with a divided government:
- Base case (if Republicans win): Certain aspects of the IRA may be at risk.
- Implications: This will depend on the specific tax credits that would be targeted, with potential tax savings, economic benefits and energy security being important considerations. It is possible that a partial repeal will keep existing tax credits but may cap the fiscal commitment.
Scenario 2: Democrats win:
- Benign case: Status quo
- Implications: Robust support for US renewable developers and regulated utilities, with additional measures to address grid bottlenecks.
Scenario 3: Republicans sweep:
- Worst case: Republicans win the Presidency, House and Senate. This is what is required to fully repeal the IRA. Yet, given the IRA’s benefits to Republican states, a full repeal may require a significant majority.
- Implications: Policy uncertainty drives reduced future investments in new renewable projects amid higher prices for power purchase agreements. Existing assets and construction projects will be grandfathered. It is likely that power prices will rise, benefiting operational assets.
In the table below, we show the risk levels of the various clean technologies and related investments. This assessment considers public comments by Trump and his advisers, actions from Trump’s first term, expert opinions, bipartisan-supported technologies and the IRA’s performance since its passage.
Most exposed: electric vehicles, offshore wind
Moderately exposed: solar, onshore wind
Relatively safe: power networks, clean domestic manufacturing, hydrogen, carbon capture and storage (CCS), and nuclear
Investment implications
Our multi-asset portfolios have several holdings benefiting from decarbonisation, including investments in high-voltage cable suppliers, grid operators, and renewable developers and operators.
In a repeal, we foresee a targeted approach with offshore wind facing the highest risk among renewable tax credits. Owing to the globally diversified nature of our infrastructure investments, the exposure to US offshore wind in the portfolio is low at around 1.2% of the infrastructure allocation.
A full repeal will also have minimal impact on long-term returns due to the safe harbour protections for operational assets and construction projects. Moreover, valuations of renewable developers currently don’t account for their future growth pipeline.
Other investments we hold, such as US utility companies, are largely unaffected by the IRA and benefit from the structural need to modernise outdated power networks as well as a rising need for higher investment in grid resiliency.
Moreover, a weakening of investment in clean energy could see power prices move higher. While this would be broadly inflationary, it would also benefit these US-regulated utility companies and currently operational renewable assets.
Election outcome
Enthusiasm for the infrastructure opportunities noted above predates the IRA. The allocation to this asset class is underpinned by a diversified mix of assets with strong fundamentals.
This diversification not only spans various sectors within clean energy and utilities but also geographically, reducing exposure to any single market's policy shifts, such as those potentially affecting the US under the IRA.
Our investments, ranging from high-voltage cable suppliers to renewable developers and operators, have been carefully selected to benefit from global decarbonisation, irrespective of the political landscape. The IRA's incentives have validated this strategic approach, accelerating investments in US clean energy manufacturing and renewables deployment.
Despite potential risks, such as policy reversals, our globally diversified infrastructure investments are well-positioned to navigate uncertainties. They benefit from structural needs like the modernisation of outdated power networks and the ongoing transition to a clean economy.
Our positive stance, informed by detailed scenario analysis and a focus on long-term returns, ensures that our investments are not only resilient but poised for growth. This reflects our commitment to harnessing the opportunities presented by the global shift towards sustainable energy, whatever the election outcome.
Risk factors
The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in October 2024 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
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