While many renewable stocks fell after Donald Trump's victory in the US presidential election, UBS thinks growth of the sector is still likely to continue, though a repeal of the previous White House administration's inflation reduction act (IRA) is "a real possibility".
Despite the returning president having pledged to halt offshore wind projects if re-elected, the investment bank noted that solar installs were over 50% higher in Trump’s first term compared to the previous four years, and so growth is "likely to continue ... driven by state and corporate emission goals".
The key debate is likely to focus on the potential profitability of new renewables installs more than the volume, UBS analysts added.
With the potential repeal of Joe Biden's IRA in the 2025 budget, the analysts said the critical question for the clean energy industry is which of the specific provisions in the IRA are kept and "rebranded".
The UBS team think the investment tax credit (ITC) and production tax credit (PTC), as well as the US manufacturing incentives are "likely to prove durable", with expiry dates "more likely" to be pulled forward than eliminated.
Key points were noted that 70% of manufacturing jobs under the IRA are in Republican jurisdictions, with data showing the IRA drove significant US manufacturing investments in battery storage ($43bn) and solar ($16bn).
"Revoking the 45x and domestic content provisions in the IRA could impact the government’s credibility and thus its ability to incentivize future investment in any U.S. manufacturing, a key Republican long-term policy goal in our view."
"Why would private capital invest long-term in US manufacturing with the precedent that any incentive can/will be taken away in the next election?"
The UBS view is that there is a potential for a future budget under Trump that might "try to thread the needle" by honoring future tax credits for U. manufacturing capital investment made prior to some date, which would cap the total potential cost of the tax credits.
UBS's view is that this could be "significantly beneficial" for names such as First Solar Inc (NASDAQ:FSLR, ETR:F3A), NEXTracker Inc (BMV:NXT1) and Array Technologies Inc (NASDAQ:ARRY).