September 3, 2024

By Eric Scheriff, Capstone’s Global Energy Policy head

*As we reach the year’s midpoint, Capstone is revisiting our 2024 sector predictions and looking ahead to the second half of the year.

As Capstone predicted, 2024 has been a pivotal and unprecedented year for the energy & industrial policy landscape following the passage of the Inflation Reduction Act (IRA). We also believe greater clarity of the incentives included in the IRA and the flow of federal money to states will continue to embolden state policymakers to pursue more ambitious climate policies and regulations, creating tailwinds for renewable energy, electric vehicles, and clean fuels.

Although the energy transition wave will be hard to stop, it doesn’t come without risks and policymaker-driven volatility, and we expect the drama about the details to continue into the second half of the year. And, of course, the looming election will inject an additional layer of intrigue into the unfolding policy narrative both for companies and investors.

In a recent Q&A, Eric Scheriff, Capstone’s Global Energy Policy head, provides updates on underappreciated trends, what the rest of 2024 holds for energy & industrials policy, and how the November election will impact the energy landscape for companies and investors.

What are some of the emerging trends you think are not fully appreciated?

State-level policies will continue to play a bigger role. It can be easy to get caught in the national headlines. Still, we think an underappreciated element on the energy front is the role states will play in the energy industry and its implications for investors and companies alike. State policymakers will continue to advance legislation that will impact a huge portion of the country even though the broader public dialogue will be focused on the elections and the outlook for federal policy. We expect state policymakers will continue to plug away with policies that ripple across the industry.

Are there notable examples of notable state regulatory impacts?

You can clearly see the impact of state action in states such as California and their scoping plan for its Low Carbon Fuel Standard (LCFS) and cap-and-trade plans. Also, New York’s initiative to institute a cap-and-invest program will set an annual cap on the amount of greenhouse gas emissions that are allowed, with emission limits for emitters in various sectors of the economy and caps reduced each year as the state moves closer to its emission reduction goal. The mounting state-level action demonstrates the importance of state policy in driving investment into the clean energy economy, regardless of action at the federal level. These are large initiatives with implications that impact large swathes of the energy sector. And we don’t expect states to let up.  Of course, not all state-level policies have the same impact. We spend a lot of time with clients unpacking the nitty-gritty details and how they will play out across several industries and company balance sheets.

Are there other interesting, underappreciated dynamics playing out?

There has been a broader recognition that electrification policies and data center growth will significantly increase electricity demand growth as environmental policies lead to more retirements of older fossil fuel power plants, all with the backdrop of power interconnection delays slowing the pace of renewable energy growth. This convergence of forces, which we have written on extensively, is leading to tighter conditions in US electricity markets—something we’ve long expected. That is finally starting to be absorbed by the broader investor community—something seen in the most recent PJM auction, which resulted in sharply higher prices than last year. This tight supply/demand backdrop is likely to intensify in the next few years and is already attracting the interest of policymakers, proposing a host of responses, including proposals to subsidize new power generation or even re-regulate the wholesale power markets.  These are significant potential changes that would create shockwaves across the energy investment landscape

What do you think about the upcoming election and its impact on the energy landscape?

The outcome of the 2024 election will be pivotal in determining the fate of key provisions of the IRA that are underpinning the energy transition, as well as the durability of federal emissions regulations. However, we believe the forces driving the energy transition will prove resilient, no matter who is in the White House. However, there are material risks to certain parts of the transition under either a Harris or a Trump administration. There are notable dueling visions and priorities for the energy transition under each administration. There will be winners and losers. The devil really is in the details, and it’s something Capstone has been working with clients to help them understand.

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