How a second Trump administration might risk the investment case for green energy
For years, China ramped up green energy production capacity, becoming the global leader in renewable energy manufacturing, from solar to wind to battery. But former President Donald Trump has pledged to raise U.S. tariffs on Chinese exports and roll back subsidies and tax breaks for alternative energy companies in a second term — which many analysts assume would hurt a sector that depends on cheap supply chains from China. In a second Trump administration, prices for imports from China are likely to surge for green energy producers. That’s because Trump has called for higher duties on imported goods — threatening to impose tariffs of 60% or more on Chinese products and throwing up a roadblock to increased use of renewable energy in the U.S. China controls 90% of the world’s battery storage manufacturing, critical for lithium-ion batteries used in vehicles. The country produces more than three-quarters of the world’s solar panels, dominating upstream production in the solar value chain, according to S & P Global Commodity Insights. More than 50% of the world’s wind turbine suppliers are based in China. By contrast, solar module production in North America comprised just 3% of global production capacity as of the first quarter of 2024. While the Biden administration has enacted limited tariffs aimed at strengthening domestic green energy suppliers, analysts believe Trump’s proposal to widen tariffs could damage a sector that’s always highly sensitive to government policies. ‘Downside volatility’ The chance that former President Trump wins the November election, “has created downside volatility in much of our list” of green energy stocks, Baird analyst Ben Kallo wrote in a note this month. Green energy’s long term dependence on peaceful geopolitics and reliable government policies has turned away many investors, whose portfolios are typically oriented toward a shorter time frame, according to Carol Schleif, chief investment officer at BMO Family Office. “The renewables sector — well, it’s a political football in the short run,” Schleif said. While she believes the sector has a place for investors who take an intermediate- and longer-term view, she acknowledges it can be difficult to wait out the volatility. “It’s tough for investors because the long term is made up of an awful lot of short terms, and investors have to live in the short run,” Schleif added. “Getting them through market volatility, like what we’ve seen in the last couple of weeks or the last couple of years, can be tough.” Trump effect on renewables The U.S. has already enacted several protectionist measures, including tariffs under both the Trump administration and the current Biden White House, to bolster domestic renewables production. President Joe Biden in May announced more tariffs on Chinese imports, targeting solar panels and lithium ion batteries. The Inflation Reduction Act (IRA) included incentives for domestic manufacturing with subsidies and other benefits tied to using U.S.-made solar panels. “We’ve seen that President Trump, during his administration, put a decent round of tariffs in place for various goods, and the Biden administration obviously upped the ante with the tariffs that they just placed recently,” said Andy Poreda, an analyst at Sage Advisory. “In general, there’s some bipartisan support with the imbalance of how much influence China has in the key industries for the clean energy transition, and one would likely see that Trump plans to go even more extreme on those measures.” Trump has called to roll back the IRA if he wins another term. But a complete repeal is seen as unlikely unless the Republican party manages to win control of both the House and Senate as well as the White House, according to Wolfe Research. The research firm also noted that, although “Trump has promised a reorientation of policy away from clean energy and toward traditional energy, the actual policy outlook is much less clear than the rhetoric,” analyst Tobin Marcus wrote in a recent note. Nonetheless, given a focus at the Republican National Convention on ending the “Green New Scam,” Wolfe Research believes Trump is serious about ending investment and production tax credits that benefit solar projects under the IRA. Recent declines in renewable energy stocks caused by some investors pricing in the possibility of a “Republican sweep create a buying opportunity,” the Baird analysts wrote. “Nonetheless, headline risk will make our sector volatile until the election.” Sector views Sustainable energy stocks came under particular pressure following the presidential debate between Biden and Trump in late June, as opinion polls pointed to a higher likelihood of a Trump victory. TAN 1M mountain Invesco Solar ETF in July Analysts are divided on the extent to which higher tariffs and a rollback of the IRA would affect the solar sector. JPMorgan believes that the impact is “likely limited” because the U.S. accounts for less than 7% of the global addressable market. The Wall Street bank noted, however, that “geopolitical tensions may hurt investor sentiment toward export-oriented solar names while such tensions persist.” Meanwhile, some firms see First Solar potentially benefiting from a Republican administration in spite of it benefiting from the IRA. The view is that First Solar will benefit the most within the U.S. solar sector from greater trade restrictions, according to Baird. Others agree. “We think a potential Trump administration may more likely represent a positive than [a] negative outcome for FSLR,” Morgan Stanley said in a late July note. “We see fairly limited downside (5%) to where FSLR is currently trading even in what we view as an unlikely IRA repeal scenario. Furthermore, we believe the market is ignoring the arguably positive impacts that a potential Republican administration could have on FSLR’s position in the U.S. market, as we would expect further protectionist measures to be put in place to protect domestic manufacturing,” Morgan Stanley continued. On the other hand, electric vehicle and battery subsidies could be revoked in spite of Elon Musk’s endorsement of Trump — which would threaten the entire web of EV companies, Baird said. The investment bank highlighted electric vehicle manufacturers and suppliers as most at risk, specifically Tesla , Rivian , Albemarle, Lucid and MP Materials Corp. A longer-term look While tariffs and other protectionist measures are meant to strengthen domestic green energy companies catch up with China, it will be challenging for the U.S. to overcome today’s yawning gap. “From a price perspective, it’s going to be really hard to ever get to the place where China is right now. They created their own sort of monster with how influential they are in the industry,” said Sage Advisory’s Poreda. Only extreme measures can help companies compete with Chinese manufacturers — but they would result in high upstream costs, Poreda noted. Higher input costs from tariffs will also dent profit margins, especially difficult to bear for public companies that have to report results to investors. “That is structurally where China has an advantage, in that their government tends to think very long-term, [many manufacturers] don’t have to report quarterly to shareholders; they can go ahead with investments,” said Schleif. Ultimately, that may curtail the number of green energy startups and private companies that want to go public, Schleif said. From the companies’ perspective, facing the dual pressure of high input costs curbing margins and reporting quarterly to shareholders could lower their willingness to make long-term investments that face high upfront costs. “They may not necessarily want to have to be held to a shorter-term mindframe that public investors hold them to,” Schleif said. So far, tariffs have had only a limited effect on the broader goal of the U.S. strengthing its renewables industry. Chinese manufacturers have managed to bypass some of the current tariffs and other barriers in place. Chinese solar panel manufacturers, for example, are investing in factories in the U.S. to obtain IRA benefits, and now account for a fifth of solar factories announced since the rollout of the IRA. Although it has brought Chinese investment to the U.S., questions regarding domestic job creation have made it “limited in success,” Poreda said. “It takes a whole supply chain to be able to fully realize the successes at the domestic level. In the end, just being a final assembly plant is not really as big of a victory,” Poreda said. “It’s been really hard to compete with Chinese companies in any way, shape or form.” This post has been syndicated from a third-party source. View the original article here.
