A new presidential administration naturally raises questions about future economic stability and investment strategies. Investors must weigh the potential impact of political changes on market conditions. Despite some proactive planning by government agencies, emerging signs of an expanding industry, and a growing focus on sustainability, uncertainty surrounding clean technology may stall investment during an otherwise optimistic period of outlook for capital deployment.
Inflation Reduction Act
The Inflation Reduction Act (IRA), signed by President Biden in 2022, represents the largest investment in climate and energy infrastructure in U.S. history. A key piece of the IRA is the Energy Infrastructure Reinvestment Clean Energy Financing Program (EIR). This program finances projects which “retool, repower, repurpose, or replace” energy infrastructures that have ceased operation. Nationally, private companies have announced $900 billion in clean energy and manufacturing investments since the IRA’s enactment. In addition to retooling infrastructure, the program supports efforts to reduce, capture, or mitigate air pollutants and greenhouse gas emissions. California, for example, has received over $500 million from the program for such targeted initiatives. Collectively, the White House has stated, over 300,000 new jobs have been generated from the program and anticipates more in the coming decade.
However, high interest rates have likely diminished the IRA and EIR’s effectiveness by increasing the costs of clean tech projects compared to other less capital-intensive industries. Generally, higher rates increase borrowing costs, tighten access to credit, and lead to declines in investment across sectors. One recent study found that an increase of two percentage points raised project costs by as much as 20% for renewables, compared to only 11% for a gas turbine plant. Since new infrastructure requires significant capital upfront, clean tech was especially sensitive to the high interest rates. Where borrowing was necessary, such capital intensive projects were inherently less appealing and less likely to receive productive funding.
The Inflation Reduction Act Going Forward
For his part, President-elect Trump has promised to pull back the IRA’s “unspent dollars.” In addition, and although none have succeeded, there have been consistent efforts to repeal much of the Act since it took effect. The aversion has kept some VCs in wait and see mode with their cash. Some renewable energy companies—swayed by their high capital expenses—have turned to foreign markets, while others have reduced domestic operations, in response. Still, there has been renewed optimism. To start, the Federal Reserve lowered its target rate for the first time in four years, marking a significant shift in monetary policy. It was the first reduction since the COVID-19 pandemic, with the Fed indicating that further cuts should follow. Second, it at least seems possible that the IRA will remain in place regardless of the threat to have its funding pulled. Since the IRA was passed, up to 85% of the more than $200 billion in clean energy investments have been directed to infrastructure in Republican districts. By incentivizing development, the IRA has created jobs and stimulated production for those local economies. Because the Act also directs investment to states where land and labor are affordable, it has fostered economic growth in regions that traditionally may not attract substantial investment. The result has been increased bipartisan support. Such bipartisan interest in clean energy initiatives underscores a desire for continued investment, bolsters further confidence among investors, and promotes stable expectations. Although plenty is uncertain, the momentum for continued investment in clean tech remains.
Nuclear Fusion Development
The development of nuclear fusion is one type of renewable energy initiative that is currently being explored. With the rapid growth of AI technologies and its accompanying energy demands, the current power grid is becoming strained, leading to increased reliance on fossil fuels to power new data centers. In response, tech leaders are looking into robust clean energy projects like nuclear fusion. Although such technology is still being developed, the sector has attracted significant venture funding, particularly after Russia’s invasion of Ukraine disrupted the global energy supply. Last year, the Biden-Harris administration awarded a handful of companies $46 million in public funding to stimulate nuclear fusion efforts. The funding, authorized under the Energy Act of 2020, lasts for five years, with a future $415 million being contingent upon benchmarks and approval. Two years ago, the administration spent nearly $1 billion (including $280 million from the IRA) on similar fusion initiatives. However, with China spending an estimated $1.5 billion annually on its own fusion development, we can expect the domestic competition to continue heating up.
Conclusion
Despite natural uncertainties following the election, a continuing optimism for investment in clean energy indicates confidence in stable economic growth and innovation. Both private and public commitments to renewable energy, and infrastructure improvements, attract interest and suggest that stakeholders remain invested. As such, current policies have positioned clean technology for continued growth, ultimately supporting development and job creation in that sector for at least the short and medium term.
*The views expressed in this article do not represent the views of Santa Clara University.
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