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Trump casts shadow over clean energy ‘mega-package’
Trump's eventual victory should not lead to a complete setback in the energy policy of the United States, which has invested billions in clean energy. However, it can weaken the action.
After the energy sector gained prominence in the United States by benefiting from a 'mega package' of support granted by Joe Biden's government, clouds are approaching with the candidacy of Donald Trump, an outspoken opponent of these policies. However, analysts expect that, even with a Republican victory, which could weaken pro-climate policies, there will not be a complete reversal in energy policy.
EDP ??Renováveis ????is identified as one of the companies most exposed to the risks of these elections by Goldman Sachs, but the investment house remains optimistic about the potential of the electricity company and its peers in the sector.
In these elections, with regard to the energy sector, what is at stake is mainly the future of the Inflation Reduction Act (IRA), an incentive package launched in 2022 by the Democratic administration headed by Joe Biden, and which allocates 400 billion dollars investing in clean energy.
Also in May, the Republican presidential candidate, Donald Trump, announced that, if he came to power, he would end the application of the IRA: "I will cancel all funds that have not yet been spent under the misnamed Inflation Reduction Act”.
In opposition, the Democratic candidate, Kamala Harris, launched this same "green” package while still vice-president of Joe Biden. If Harris is elected, the expectation of analysts, according to S&P Global, is that not only will this package be defended from legal attacks, but also that measures will be finalized in relation to polluting emissions, such as the imposition of limits on emissions from power plants gas electric.
"A Republican swing could weaken support for the IRA, especially with regard to costs,” warn analysts at Goldman Sachs, in an October 29th analysis note. However, the same entity believes that it would be "challenging” to move forward with a "total rejection” of the IRA, given that around 80% of industrial investments associated with the green diploma are located in typically republican states. The same opinion is shared by the Dutch financial institution ING: "Regardless of who becomes president, the IRA is unlikely to be rejected,” says an article published on September 10.
Republicans "take” from clean energy and "give” to fossil producers
If the Republican party wins the presidency in the November 5 elections, Goldman Sachs analysts consider a reduction, or at least the implementation of a cap, in incentives attributed to technologies such as electric cars, green hydrogen and carbon capture to be "highly expected”. . "There is also the potential for less support for offshore wind energy, taking into account the premium costs” of this technology, add the same analysts.
ING also points out the risk of incentives for clean energy being reversed, but emphasizes that those aimed at hydrogen and carbon capture should be less impacted. Also the modernization of the electrical grid could be weakened if Trump is elected.
Under the purview of the Republicans, the expected beneficiaries are others: an administration less favorable to renewable energies could intensify support for the fossil fuel sector, with the granting of new contracts for oil and gas exploration, relief in environmental regulations and possible direct incentives for the oil and gas sector, indicates the senior economist at Banco Carregosa, Paulo Rosa.
In a recent report on post-American election scenarios, Fitch sees benefits for the oil and gas sector "at least in the short term”, given likely less pressure to reduce polluting emissions, which stimulates the search for these energy sources. Pressure from investors to diversify businesses may also ease.
In parallel, there is another risk that is repeatedly mentioned: high interest rates. Inflation in the United States could exceed expectations in the wake of a more aggressive fiscal policy, in conjunction with tariffs on imports, writes Goldman Sachs. In this scenario, one could see higher interest rates or slower cuts in interest rates from the Federal Reserve. "Since the utility industry is capital intensive, this could be negative,” highlights the investment house.
EDP ????Renováveis ????among the most exposed to the elections
"We see the outlook for energy demand in the region as a much more important factor for utilities in the medium term,” say Goldman Sachs analysts, as opposed to the US elections and subsequent politics. Despite this, this investment house recognizes that shares may in fact react to a possible perception of a change in policy direction, if the Republican party returns to the White House.
In a more refined analysis, the Portuguese EDP Renováveis ????is among the companies that Goldman Sachs considers to be most exposed in the context of the North American elections.
The clean energy subsidiary of the EDP group, in Goldman Sachs calculations, has around 55% of its EBITDA (real and forecast) for 2024 and 2025 exposed to the North American market, the highest percentage among the energy companies analyzed. In the markets, the company has recorded a drop of around 20% since mid-September, and has reached 30% since January.
"It appears that the stock is pricing in a potential decline in organic growth, the eventuality of the IRA being rejected, and higher interest rates,” write analysts at the investment bank. However, the decline in the stock market is considered by Goldman to be "excessive”, taking into account the company's improved return prospects, which are supported by stronger demand and less competition, as well as the resilience of electricity prices in Europe.
With the share trading below the value that Goldman considers appropriate, the investment house sees EDPR as an "increasingly attractive buying opportunity” for investors. The target price for this listing is 19 euros, currently trading at 12.53 euros.
The key risks that the Portuguese clean energy company faces, in Goldman Sachs' view, are potential delays in the electrification process in Europe and the United States, as well as below-expected growth in installed capacity, energy prices below expectations , higher interest rates and significant depreciation in the US dollar and Brazilian real.
In the view of Fitch analyst Manuel Meneses, who follows EDP, the risks of the elections for this company "are limited”. Portuguese electricity has a "significant focus” of investment in the United States, but the component purchasing strategy is largely based on this same territory, so that "the potential risk of tariffs would be largely covered”.
In July, in an interview with Jornal de Negócios, the CEO of EDP, Miguel Stilwell de Andrade, said he was "not too worried” about the elections in the United States and assured that "the political risks in the country are mitigated” in terms of wind projects and solar. In mid-September, at the conference organized by ECO "Energy 2024”, executive director Pedro Vasconcelos criticized: "[Donald] Trump is against the transition. Everything you say goes against the stability that investors need.” He added that he sees himself on the agenda of the Democratic party candidate, Kamala Harris. Pedro Vasconcelos also criticized the "very violent protectionism” on the part of the United States in relation to Chinese solar panels.
In addition to EDP Renováveis, Goldman analysts name the Danish Orsted among the most exposed, as "a government that is less supportive of offshore wind energy should have a negative impact on sentiment”, if the market assumes that there will be no growth for the company in the United States. United States, regarding this technology. In the case of both this company and Vestas, operations in other markets can offset possible unpleasantness in the North American market, says Goldman Sachs.
In the case of EDPR, drops in share value related to offshore projects would be "short-lived”, as the company has already fallen "abruptly” and has little risk according to fundamentals.
In parallel, there is another company profile, whose focus is on energy infrastructure rather than production, which is particularly sensitive to fluctuations in interest rates and these elections: this is the case of Iberdrola and National Grid, adds Goldman Sachs.
At the opposite extreme, companies with little exposure to the United States, such as EON, SSE and Enel, could benefit from greater turmoil in energy policy in the world's largest economy, in the aftermath of the presidential elections. Despite the fears mentioned, the purchase recommendation by Goldman Sachs is common to all the energy companies mentioned and also to Centrica, Engie and RWE.