Wired for change: how new legislation and an expanding grid are shaping the clean energy landscape

Maheep Mandloi
Maheep Mandloi Senior Clean Energy Equity Research Analyst
February 15, 2024

The clean energy industry is facing a period of steep headwinds and rapid change. Persistent inflation, slowing economic growth, continuing supply chain challenges, and rising trade barriers have placed added pressure on clean energy firms and other domestic renewables manufacturers. While this challenging operating environment has added an element of uncertainty to the industry’s future, 2024 is set to be a pivotal and clarifying year for the space.

Despite a slow rollout, the Inflation Reduction Act (IRA) will continue to gain steam in the new year as lawmakers and constituents learn to navigate its complexities and take advantage of the massive benefits it offers for renewable adoption. The US energy grid will also see rapid expansion, with more installations being added in remote locations. Additionally, a pivotal US presidential election is scheduled in November, one whose outcomes will have far-reaching implications for current and future renewable energy policy in the US.

While the industry may not feel the full impact of these events immediately, they raise key questions for analysts and investors going forward: how much renewable energy does the US need? How can we achieve net zero goals by 2040, 2050, or later? What impact will the presidential election have on the industry? And as the size of renewables grows in the US, do we have enough interconnection capacity to connect these remote locations to the existing grid?

How Will the US Meet Transmission Targets?

As the single biggest climate policy in history, the IRA was passed in August 2022 with expectations that its $370 billion in tax credits would rapidly accelerate America’s clean energy transition. While we believe the legislation is crucial to the long-term health of the industry, it’s clear the IRA has faced obstacles and has experienced a slower than expected domestic rollout. 

Much of this delayed rollout can be attributed to the speed with which the actual policy came together, which gave policymakers – as well as the industry at large - little time to think about how it would be distributed or enacted. As a result, a backlogged Treasury was tasked with decodifying a legislative driven new law which contained many new provisions without precedents.

As the government adjusts to this new policy, the IRA’s true impact will begin to be felt in 2024 – creating a boon to the industry. Going forward, the IRA will not only incentivize homeowners to adopt solar or energy efficient home improvements, but will support renewable economics by extending tax credits for renewable power generation, energy storage, renewable equipment manufacturing, carbon capture, green hydrogen production, and many subsectors for the next decade. 

The IRA will also be critical to helping the US achieve its clean energy goals, which include net-zero greenhouse gas emissions by no later than 2050, and a carbon pollution-free power sector by 2035. While the IRA incentivizes the domestic manufacturing needed to meet these targets, we expect US domestic polysilicon, wafer, and solar cell components be undersupplied through 2026 at least.

This raises another important question: will the industry have access to enough solar modules, batteries, and other components from other countries to support the IRA and reach net zero targets? Although current US policy is in flux, it’s likely that US module prices will remain elevated as US import restrictions require the use of non-China polysilicon and wafer, which is in limited supply in the US. As a result, companies such as First Solar – the only large, non-Chinese solar manufacturer in the world – should see benefits from administration change and a stricter stance on imports.

Upcoming Presidential Election

Since 2020, the Biden administration has worked to accelerate America’s clean energy transition across key sectors, such as transportation, manufacturing, and housing. However, a presidential election in November could result in a new administration that may seek to undo many Biden initiatives. This has led to increased concern on the part of investors as to how a Republican administration – one increasingly likely to be led by Donald Trump – would change key policies surrounding the clean energy transition, namely the IRA.

While a repeal of the IRA is not out of the question, legislators seeking to rescind an existing law must overcome a variety of obstacles that make this process extremely challenging. Due to the concentration of investments made in Republican states after the law's passing, the need for a majority of votes from both houses of Congress, and a 60-person super¬ majority in the senate to overcome a filibuster, we believe it’s unlikely a Republican administration would make substantial changes to the IRA.

When looking to past laws that have been altered by incoming administrations, many in the industry have pointed to Obamacare. While this law was not repealed, it was made much less effective by new presidential appointments filling key positions. It’s likely that a Trump administration could inflict the most damage on the IRA through the control of government agencies that oversee renewables in the US, or agencies whose policies can be influenced by a presidential order or executive order.

Additionally, a Trump administration could also likely change the way funds are distributed or the way the rules are set. For example, a Republican administration could slow down the regulatory approval process for transmission lines – like past administrations with oil and gas lines – or they could prioritize fossil fuels over renewable projects. 

Although administration change would likely lead the whole space to trade down from an investment sentiment, we believe the utility scale industry will see a greater impact. Ultimately, this sector is more reliant on federal agencies for approvals and policy, in contrast to rooftop and residential solar, which are more affected by state level polices.

The Challenges of an Expanding Grid

While the IRA may be less effective under Trump, it’s likely that the policy will move forward, regardless of the administration in charge. This will not only lead to an increasing demand for solar power and batteries to satisfy the wave of EV chargers, electric vehicles, and power plants, but to an accelerated expansion of America’s energy grid.

As the energy grid grows, new installations will reach remote areas of the US – testing the industry’s ability to provide interconnection to these areas, approve these new projects, or connect them physically to the grid, which may cause bottlenecks.

How will energy providers be able to solve this problem? While there are different solutions, it’s likely that batteries will play an outsized role in helping consumers store energy during periods when it’s needed.

New innovations such as non-wire alternatives – which improve existing transmission lines by discharging batteries at both ends – can be used to store energy for periods of low supply, much as in the way we use oil and gas reserves. This collective energy could then be sold back to the grid in wholesale power markets.

We believe non-wire alternatives have the potential to turn on a new stream of revenue for small homeowners, who have batteries that are not being used. This allows them to participate in this broader electric market, which has historically been reserved for only a few large companies.

California’s recent net metering changes will only accelerate this trend. Once the most attractive market for residential solar in the US, California’s decision to reduce compensation for exported electricity by roughly 80% has lowered incentives for adopting solar power and made batteries increasingly attractive to homeowners. 

While this period of rapid transition may see interconnection and permitting approval delays, short-term interest rate hikes, and a new administration less friendly to the industry, long-term prospects are promising. The next administration will be unlikely to repeal the IRA, and other key decisions – such as the Fed’s policy on interest rates and US Treasury clarifying the next phase of IRA rules – can serve as positive catalysts for the industry.

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