Rewiring the Energy Sector: Opportunities and Risks in the Trump Era

As the U.S. leadership transitions, the implications for the country’s energy policy, both domestically and globally, are profound. With President elect Trump’s renewed emphasis on traditional energy sources and the call to potential rollback green policies, stakeholders across the energy and power sector are weighing the anticipated impact on investments, technological advancements, and international relations. Yet, despite political shifts, clean energy momentum may persist, bolstered by market forces, state-led initiatives, and embedded federal policies from previous legislation such as the Inflation Reduction Act (IRA).

1. A New Direction in Energy Policy

The new administration visibly aims at having a stance of prioritizing the national interest over global cooperation, and this could mean that the United States once again steps out of the Paris Climate Agreement. This could weaken global climate action by reducing international momentum and financial support, especially for vulnerable regions dependent on climate aid, like Africa and parts of Asia. Unfortunately, it could also start a snowballing global effect of other nations who might follow suit or reduce their climate commitments, undermining collective progress toward emissions reductions and the 1.5°C target.

The incoming administration’s energy policy hints at a pivot back to fossil fuels, advocating for the expansion of domestic oil, gas, and coal production. With proposed regulatory rollbacks, increased pipeline permitting, and fewer restrictions on liquefied natural gas (LNG) exports, traditional energy sectors are likely to experience a boost. However, the policy shift is expected to extend beyond fossil fuels, affecting sectors like renewable energy, where existing Inflation Reduction Act incentives for wind, solar, and battery storage could face challenges. The Inflation Reduction Act has already propelled investments in clean energy manufacturing, especially in states with diverse political representation, which may resist cutbacks due to local economic gains.

2. Tariff Policies and Economic Ripple Effects

One of the new administration’s most discussed economic proposals is the reintroduction and expansion of tariffs, particularly on Chinese imports. These tariffs could carry significant economic consequences across sectors:

• Renewable Energy Sector Impacts: The renewable sector, heavily reliant on imported components from China, particularly for solar panels and battery storage technology, would feel the immediate pressure of new tariffs. The additional cost burden would impact utilities, private developers, and local governments trying to meet climate and energy goals, making clean energy less competitive relative to fossil fuels.
• Broader Economic and Supply Chain Impacts: Higher tariffs on imports could affect the tech industry as well, where reliance on Chinese and Taiwanese semiconductor manufacturers is substantial. Trump has proposed a tariff on imported semiconductors, which would likely increase production costs for American tech companies. As the U.S. also imports critical energy storage and transmission equipment, these costs could be passed on to infrastructure and utility companies, hindering T&D modernization efforts and ultimately affecting end-users through higher energy prices.

3. Impacts on the U.S. Energy Sector

Fossil Fuels and Oil Policy
With a focus on energy independence, the administration’s approach includes expanding drilling on federal lands, increasing LNG export permits, and lifting restrictions on the oil and gas industry. Notably, Trump's support of the oil sector may include easing environmental regulations on carbon-intensive projects, such as pipelines and drilling operations, potentially enhancing U.S. exports and stimulating local economies. However, the effects on foreign relations remain complex, particularly concerning rival oil-producing nations. While the administration might relax sanctions on Russian energy, they are expected to maintain or intensify sanctions on Iranian oil, potentially leading to shifts in global oil prices.

Renewables and Clean Technology
While new tariffs could slow renewable project development due to increased material costs, the renewables sector has solidified considerable private backing and state-led policies. Major corporations and investment funds are expected to continue advancing renewable projects as part of long-term carbon-reduction strategies and economic opportunities in green industries. Notably, U.S. battery energy storage projects, an essential component for renewable grid integration, may continue to grow, though more slowly due to potential tariff-related cost increases.

Nuclear Energy
With a bipartisan appeal, nuclear energy might experience sustained federal support, particularly given the administration's stated aim to strengthen U.S. energy security. Nuclear’s status as a reliable and low-carbon source makes it appealing in the face of fluctuating fossil fuel prices and geopolitical concerns. Small modular reactors (SMRs) are likely to see growth under government incentives designed to build resilient energy infrastructure, minimizing carbon emissions without dependency on intermittent renewables.

4. Global Trade and Foreign Relations

Economic Impact

Following Donald Trump's election victory, the stock market experienced significant movements. The Dow Jones, S&P 500, and Nasdaq each gained over 1% on election night, reflecting investor optimism about potential economic policies under a Trump administration. In the power and energy sector, companies like Tesla saw stock prices soar by as much as 14%, driven by expectations of deregulation and favorable trade policies, which could enhance their market positions.

On the contrary, Trump's pledge to halt renewable energy projects on his first day in office has sent shockwaves through the industry, causing renewable energy stocks to fall sharply. As a result, shares of major players like Orsted, the world’s largest offshore wind developer, plunged by almost 14%, while wind turbine makers Vestas and Nordex saw declines of 11% and 7.5%, respectively.

The imposition of high tariffs is likely to dampen the U.S. GDP growth. Economists predict that such tariffs could lead to a reduction in the long-term GDP by approximately 0.2% due to decreased trade activity and increased costs for consumers and businesses. Tariffs generally raise the prices of imported goods, which could lead to an overall increase in inflation.

Moreover, a trade war could lead to volatility in foreign exchange markets as countries adjust their currencies in response to changing trade dynamics, potentially affecting the U.S. dollar's strength. In response to inflationary pressures, the Federal Reserve may be compelled to adjust interest rates, which could further impact borrowing costs and economic growth.

Sectoral Disruptions

A renewed emphasis on tariffs under a potential Trump administration could heighten U.S.-China tensions, solidifying their economic rivalry and prompting nations to reassess their trading partnerships. Proposed tariffs on Mexican goods might strain USMCA relations, risking retaliatory actions that could disrupt trade flows between the U.S. and Mexico. Additionally, these tariffs could significantly impact the U.S. energy sector by pushing China to diversify its suppliers, affecting global supply chains for critical minerals essential for electric vehicle batteries and renewable technologies, thereby complicating the U.S.'s transition to renewable energy.

Geopolitical Impact

Upcoming policies imposed by the Trump administration might result in a recalibration of global alliances as countries choose sides or seek new trading partners.

China: Trump's re-election is likely to reignite trade tensions, particularly through increased tariffs on Chinese goods. This could lead to China diversifying its energy imports and suppliers, potentially impacting its demand for U.S. liquefied natural gas (LNG) and critical minerals essential for clean energy technologies. China's recent stimulus package of $1.4 trillion aims to alleviate local government debt but lacks measures to boost domestic consumption, which could further complicate its economic recovery amid a trade war with the U.S. Additionally, the return of Robert Lighthizer as trade chief signals a continuation of aggressive trade policies against China, which may hinder its clean energy ambitions and push it towards more self-reliance in critical mineral production.

India: The Trump administration's focus on reducing reliance on China may benefit India as companies look to diversify supply chains. Think-tanks predict that heightened U.S.-China tensions could lead to increased investment flows into India, particularly in sectors like renewable energy and technology. However, India's own energy transition may face challenges if U.S. policies favor fossil fuel production over clean energy initiatives.

South Korea and Taiwan: Both countries could see mixed impacts; while they might benefit from reduced competition from Chinese manufacturers in the clean energy sector, they also risk facing higher tariffs on exports to the U.S. if Trump follows through on protectionist policies. This could slow down their respective transitions to renewable energy sources.

Israel: Trump's support for Israel is expected to continue, potentially leading to stronger ties in energy cooperation, especially regarding natural gas exports. However, any shifts in U.S. foreign policy towards Iran could complicate regional energy dynamics.

Iran: A Trump presidency may exacerbate sanctions and isolation for Iran, limiting its ability to engage in global energy markets. This could lead to increased tensions in the region as Iran seeks alternative partnerships with countries like Russia or China.

Russia: Trump's policies might favor increased U.S. LNG exports to Europe as a counterbalance to Russian gas dominance. However, any escalation in tariffs or trade conflicts could disrupt existing supply chains and affect European energy security strategies.

Ukraine: Continued support from the U.S. under Trump may bolster Ukraine's energy independence from Russia through enhanced military aid and investment in alternative energy sources. However, the geopolitical landscape remains precarious as tensions with Russia persist.

Mexico: Proposed tariffs on Mexican goods could strain relations under existing trade agreements like USMCA, leading to potential retaliatory measures that disrupt trade flows between these nations. This situation could impact Mexico's energy sector, particularly regarding investments in renewable projects that rely on U.S. financing.

Africa region: Under a renewed Trump administration, U.S.-Africa energy relations could see some strategic shifts, especially if the administration takes a more protectionist stance on trade. The Trump administration’s goal to decrease reliance on China for critical minerals needed in green technology (like cobalt, and Nickel) aligns with African mining interest and a focus on African mining projects may emerge as a key diplomatic avenue, with potential U.S. investments in mining operations, possibly through subsidies or tariffs to incentivize the import of African-sourced critical minerals for industries like electric vehicle (EV) battery production and renewable technology. With Elon Musk playing an influential role to the administration’s policies, Tesla and SpaceX, with their heavy reliance on critical minerals, could be the catalytic driver for the new emerging trade relationships between the African countries and the United States.

Conclusion

The transition in U.S. leadership signals a period of adjustment for the energy sector. From heightened tariffs affecting renewable costs to expanded fossil fuel projects, the anticipated policies underscore a shift toward energy independence through traditional sources, while the IRA and state-led initiatives continue to promote clean energy growth. The complex interplay of tariffs, regulatory rollbacks, and market dynamics suggests that while the administration’s policies may initially favor fossil fuels, the entrenched momentum of clean energy remains resilient. How the U.S. navigates this landscape will shape not only its domestic energy market but also its standing on the global stage.