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The surprising Trump victory has sparked heated debate over the future direction of US energy policy. We asked Thiemo Lang, PhD, for his thoughts on the short and long-term implications for the clean energy sector.
What, in your opinion, does the election of president-elect Trump mean for the energy sector in general and for sustainable energy in particular?
As Trump intends to support fossil fuels, the immediate impact on the US renewable energy sectors is likely to be negative. However, we believe over the long term low energy commodity prices and flat demand will remain an impediment to further fossil fuel exploration in the US. Moreover, it remains unclear whether Trump really intends to repeal tax credits for solar and wind, as these were only recently extended by the Republican led Congress. Given their strong support in Republican governed states and the significant length of time needed to repeal legislation, we deem a reversal of course to be very unlikely.
Another possible course of action would be to revoke the US Environment Protection Agency’s Clean Power Plan (CPP) which aims to reduce carbon dioxide emissions and green-house gases. The CPP was the central pillar of the US carbon reduction plan within the historic Paris climate change agreement (COP 21). It remains unclear whether Trump would renege on this first truly global climate accord but in any case, under the strict and binding exit terms of the agreement, withdrawal would not take effect until 2021—beyond the scope of this current presidential term. Until then, the US must comply with COP21 carbon reduction policies. Given the US is bound to comply with carbon reduction policies under COP21, we think that revocation of the CPP would be purely symbolic with limited real consequences in the short term.
So, what is the likely scenario then?
Overall, we think that Trump will soon have to face a reality check and that many of his proposed initiatives will not lead to positive changes in employment for states with a high proportion of jobs in the traditional energy sectors—rather it would induce the opposite.
It would therefore not be in the best interest for this new administration to introduce obstacles that discourage continued build out of clean energy solutions. Renewable energy production costs have dropped dramatically over the last 10 years and will continue to fall significantly over the next 3-5 years, making it the cheapest source of electricity generation in the US and around the world. At the same time, the complexity and scope of power installations make renewable power a very labor intensive industry. The solar and wind industries alone employ 300,000 Americans —a whopping 50% more than in oil and gas extraction. If Trump wants to maintain and create jobs in the energy sector, then increasing investments in clean energy is the only way to go.
“If Trump wants to maintain and create jobs in the energy sector, then increasing investments in clean energy is the only way to go”.
Furthermore, the combination of job growth, cheaper production costs, and reduced environmental damage are formidable advantages over traditional energy sources. These factors, in addition to the customization and flexibility offered by new smart energy solutions, render any opposition to further progress and expansion illogical not only from an environmental perspective but an economic as well.
Shares of solar and wind stocks have already come down strongly, is this a buying opportunity or will they sink further?
Already in June-July of this year, we saw fundamentals in the solar sector deteriorating and sold nearly all of our positions. We see no evidence of an improvement to the current oversupply in the solar sector, and so prefer to monitor the situation from the side lines for now. The outcome of the US election has certainly not improved the outlook for the sector. Wind turbine manufacturers are, however, an exception as they have demonstrated an ability to increase margins in a global market which will, most likely, show more modest growth into next year. Wind turbine manufacturers are currently weighted at 5% in the fund.
Which (sub)sector of energy (or specific shares) do you prefer at the moment for your fund and why?
The current focus in the fund remains on semiconductor power management companies (25% portfolio weight) as they are the key enablers for efficient electricity conversion. The applications are widespread and range from data centers, power supplies and power management circuits to the electric vehicles, charging stations, industrial automation, and the world of “IoT” (the internet of things). We also have significant exposure to companies helping to build out a smart electrical grid through distributed automation, smart metering and energy management. In all of these invested areas we see strong structural growth drivers which should prevail at least for the next 5-10 years.
Which (sub)sector or specific shares are most vulnerable if Trump does cut subsidies and environmental expenses?
Besides the aforementioned solar and wind energy suppliers or the renewable power producers, the elimination of the USD 7500 tax credit for electric vehicles would also temporarily weaken the electric car industry. Also, some areas in energy efficiency might be impacted. Overall, we are more convinced than ever that not only common sense but, increasingly, pure economics will be the most important driver for further deployment of clean energy solutions.
Although America’s clean energy sector may feel short term pain, we are optimistic that over the longer term, the new US administration will have a negligible impact in the growth and proliferation of the clean energy sectors, especially if they stick to their promises to let market forces work. An appropriate and succinct summary is captured in Sunrun CEO’s recent statement: “Rooftop Solar is the Anti-Establishment Energy Choice”.
“Overall, we are more convinced than ever that not only common sense but, increasingly, pure economics will be the most important driver for further deployment of clean energy solutions”.
Thiemo Lang, PhD
Senior Portfolio Manager RobecoSAM Smart Energy Strategy