All the standard caveats of crystal balls apply here, but let us start with a prospective regulatory outlook and which market segments may see more change and potentially challenges. Offshore wind is likely to be one easy target for the incoming administration as the President-elect has already openly indicated he will seek to stifle development.1 Federal control over offshore leasing and permitting could be readily wielded to slow an industry that has adequate challenges already. While growing power demand is expected to amplify pressure on the grid and consumers, offshore wind was not expected to be a material contributor and serves as an easy target. Some early stage cleantech funding could be slowed or stopped depending on how grantmaking evolves at the U.S. Department of Energy. Such a change would likely serve to elongate timelines and could serve as a major obstacle for more capital-intensive early-stage companies. One wild card is the outlook for electric vehicle (“EV”) policy. Up until a couple of months ago, there was a general expectation that Federal EV policy was likely to see significant tightening under a Republican administration. The late breaking and full-throated involvement of Elon Musk in the campaign and his apparent go-forward involvement with the administration muddles that view. It now seems likely that changes to EV policy will be more muted or mixed. Rather than indiscriminate policy attacks on EVs, there is some belief that the incoming administration may instead target EPA rulemaking on emissions from conventional vehicles.2 Such a change comes at a time where the industry grapples with a market expectations problem.
There will be a raft of other changes to be sure, but there is reason to expect durability in some regulation. The Inflation Reduction Act ("IRA") is one such piece of legislation. A frequent question over coffee or cocktails is “will the IRA be repealed?” Growing industry consensus and some political evidence suggests it is likely to survive in some form or fashion—potentially with select elements on the margin rolled back and/or spending caps initiated.3 Job creation from the IRA is heavily concentrated in politically “Red” portions of the country, which may make elements of the bill harder to repeal or even reduce due to likely Republican opposition to such measures.4 Domestic advanced manufacturing credits play to theme of re-shoring, job creation and resource security—while nothing is ever certain, those would seem to have firmer footing politically. Other elements—particularly those for more nascent industry that are both more reliant on the support and less advanced in terms of project or job creation—could be easier to eliminate to make good on political promises. Hydrogen economy credits could be one target, though some of those might be favored by the traditional energy lobby which could fight to preserve them (and some think as a result those may prove sticky). The 45V credits for hydrogen producers (those that use renewables, carbon capture or other methods to manage their emissions profile) is believed by industry groups to see some dilution.5 Rather than eliminate support for the industry, the path to qualification for some form of subsidy may be loosened to better serve traditional energy suppliers. Carbon capture might also appear vulnerable—but here again there could be support from traditional energy interests that might tamp down change. A full roll back of the IRA appears unlikely, but selective reductions and tightening qualification standards seems like a more probable potential outcome.
At this point, it also bears mentioning that while federal policy is of great import in the US, it is not the sole market shaping force. The patchwork of federal, state, and local policies that comprise the regulatory framework for all business in the United States inherently provides some diversification and buffer. This is not to say significant shifts in federal policy cannot upend a market—some examples of where that might happen are enumerated above—but there are some industries that will be well served by the inherently diversified nature of that regulatory framework. For renewables broadly, state policy has always played a significant role—and this should be expected to continue.
Setting these mitigating factors aside, it is important to remember that underlying unit economics will also still matter. The levelized cost of energy (“LCOE”) for some renewables (utility scale solar and wind, for instance) mean these assets compete and win on fundamentals. At a time where the story has inflected to one of electricity demand growth, supported by the rise of generative artificial intelligence (“AI”) and its thirst for electrons, regulators and policymakers are likely to avoid actively dampening the provision of new supply to the grid for fear of stoking inflationary pressure. With electricity demand expected to grow over the next 5-10 years, the market will continue to require a range of solutions. In the United States, this is expected to include both traditional thermal power (particularly natural gas fired power generation) and renewables. Existing nuclear assets will see benefits here as well.
Of course, this is not only an energy and electricity story. The outlook for tariffs creates a mixed message—it could drive a need for support for some industries with agriculture and critical minerals. In the last Trump administration, trade wars with China resulted in $27 billion in export losses from 2018-2019.6 A renewed tariff regime targeting Chinese agricultural commodities could renew pressure on these markets. The desire to enhance the United States involvement in the critical minerals ecosystem has been a source of rare bipartisan agreement over the last several years. The Trump Administration is expected to further strengthen this support, potentially through a combination of reduced permitting burdens for mineral extraction and tariffs designed to support domestic processing.7
Traditional energy and related infrastructure stands to be a likely beneficiary of more favorable treatment and reduced regulatory scrutiny. One area poised for support is the U.S. Gulf Coast’s hydrocarbon export system. The pipelines, refineries, and export terminals—particularly for liquefied natural gas (“LNG”)—are likely to see significant support and reduced hurdles. On LNG, this could potentially serve to support the upstream market by placing upward pressure on natural gas demand and potentially pricing. In the short term, this could be offset by the potential for downward pricing on LNG globally should the incoming administration seek to drive a cease fire in Ukraine and offer a path to market for more Russian LNG.8
While U.S. policy matters, it is also important to remember these markets are fundamentally global. While regulation could evolve and the tone from the White House will certainly be more supportive, the global investment context will remain—as will shareholder pressure to balance production, cash generation and responsible operation. The energy majors and large independent energy companies increasingly dominate the upstream landscape in the U.S. as the market has continued to consolidate. As public companies, they will not be insulated from a broader global push for energy to be more efficient and sustainable—even upstream resources. The upshot? Focus and improvement on emissions management will likely remain a priority for most management teams. These companies will be held accountable by investors with a continued expectation that they balance those factors. For private companies hoping to be acquired by a public company, they will need the right balance of characteristics (cash generation, production, and operational efficiency) to be attractive targets.
Prognosticating policy is inherently complex and frequently inaccurate. So how can investors navigate the changing landscape? Our default to manage these risks combines an embrace of diversification with a risk management approach centered on policy as an accelerant versus fulcrum. On the former, it can be difficult even in steady policy moments to take rifleshot, concentrated exposures in some subsectors without the ability to build out a comprehensive and diversified portfolio. Diversification by vertical, strategy, stage, and geography all can be helpful mitigants of policy risk. With respect to the latter, policy as a fulcrum exposes investments to “stroke of the pen” risk which is exacerbated at moments like this one. Businesses and models that are durable, where incremental support is helpful not essential, can and should be an important part of the underwriting process. The next 12 months is likely to tell a meaningful part of the story on evolving regulation and legislative support (or opposition) across an array of resource, real asset, and sustainably themed investment verticals. Diversification and diligence will serve investors well through that period and beyond.