Alternative Energy Can Thrive Through Trump Era
The election of President Donald Trump in November created uncertainty for alternative energy investors due to his anti-environmental, pro-coal stance. His election puts the main alternative energy policies in the United States, such as the Investment Tax Credit (ITC) for solar installations, Production Tax Credit (PTC) for wind installations and the Clean Power Plan (CPP), at risk. Recently, his anti-environmental stance was put in to action with an executive order to dismantle environmental protections.
The ITC and PTC were extended in December 2015 through the Omnibus Spending Bill, which had bi-partisan support in Congress, and included a phase-out schedule to gradually decrease the tax credits until they are eliminated between 2019 and 2022. The bi-partisan support for these tax credits could make removing them from the spending bill challenging. A further challenge to the effectiveness of the ITC would be potential corporate tax cuts, which could reduce the amount of tax equity available for solar power companies in the US. Tax equity is when renewable energy developers whose net income is not high enough to claim tax credits sell their tax credits to corporations who use these against their tax bill. If the total corporate tax bill decreases, as would happen with a corporate tax cut, then less tax equity would become available. However, the tax reductions would have to be substantial to significantly impact the US solar market.
The CPP aims to cut carbon pollution from existing power plants and advance clean energy innovation over the long term, while creating a level playing field for each state’s energy needs. The plan, which is to be fully implemented by 2030, aims to achieve this by mandating levels of renewable energy generation on a state by state basis. A number of states have been challenging the plan legally and its overall effectiveness is not expected to be high. Furthermore, as unsubsidized renewable energy installations become increasingly cheaper than the fossil fuel alternatives in the U.S., there is a good chance that the CPP mandated levels of renewable energy generation will be exceeded anyway, making the policy redundant. In this context, should President Trump’s executive order for review of the CPP lead to a complete removal, there is likely to be low impact on the profitability of most alternative energy companies.
On a positive note, Mr. Trump has yet to present his $1 trillion infrastructure plan, giving states more time to propose alternative energy projects for inclusion. Many of them supply local jobs in construction and manufacturing—a cornerstone of the administration’s agenda.
It is worth noting that much of the negative rhetoric from President Trump on alternative energy was based on it being more expensive than fossil fuel power, which is no longer the case. There is speculation that the Trump administration may propose a leveling of the playing field by removing subsidies from both alternative energy and fossil fuels, and we believe this would favor alternative energy’s prospects.
As a global investor in alternative energy companies, we note that although many of them have U.S. listings, the U.S. only represents 17% of annual wind and solar energy installations globally. The alternative energy sector is growing worldwide and investment opportunities are global making the sector less dependent on individual country policies. We remain bullish on the future of alternative energy and believe that further installations in the U.S., and globally, are likely to exceed expectations over the next 10 years, notwithstanding Trump’s policies.
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