New entrants to the renewable energy marketplace in the USA and Canada are rightly scratching their heads about the possible impact of the new US government on a potential decision to invest in solar power for their business.
Canadian investors are likewise wondering what an anticipated change in government might mean for them. The Trudeau government has been very pro-renewable energy. Will a future Conservative government suddenly reverse this policy?
Donald Trump has declared his intent to impose new tariffs on Chinese and on Canadian exports to the USA – 10% in the case of China, and 25% in the case of Canada.
The new US government is very vocal about making America an ‘energy powerhouse’ and removing regulations on fossil fuel development. Finally, the new government is also vocal about its denial of climate change and opposition to environmental sustainability policies.
Should this worry potential solar investors? Is there a new level of ‘political risk’ in the market? We don’t think that political risk has elevated significantly, despite all the noise, for the following reasons:
- Solar panels entering the US from abroad have not been manufactured in China for some time. They are assembled in Malaysia, Taiwan, Thailand, Vietnam. Cells are manufactured in China, and this is not going to change for the foreseeable future.
A 10% tariff on these solar panels will equal a 2 cent per watt price increase, which will impact end user prices by 1%. It’s noise, not signal.
- Investment in solar power in the USA and Canada has been driven by tax incentives, a 30% Investment Tax Credit which allows investors in commercial scale solar projects to receive a credit on their taxes payable equal to 30% of the capital costs. Canada matched the US tax regime in 2023.
We don’t think the new US government, or a future Conservative Canadian government is likely to revoke these tax credits. In both countries, changes to tax law require extensive legislative amendments. Further, there are additional incentives in the USA for using US content. Eliminating a substantial tax cut which benefits investors, and some of the supporters of the new government, would make no political sense.
We note that the new US government froze some elements of the Inflation Reduction Act, which provide tax credits for renewable energy and efficiency, but only those aspects concerning electric vehicles.
A briefing note from the Hogan Lovells law firm outlines the market consensus view – Trump will not repeal the IRA.
- Some of the biggest backers of the new government such as Elon Musk for example, make solar panels and batteries.
- Investment in solar projects is highest in many so-called ‘Red States’ that voted for the new President. It would be politically unwise to harm the investment climate that’s creating the American jobs which the new administration promotes as one of its key objectives.
- Massive new investments in high technology, such as the $500 billion ‘Stargate’ project to build the new data centers which power Artificial Intelligence will also require massive investments in solar energy.
In US electricity markets which feature these data centers, the grid is already over-capacity, and AI uptake is driving solar uptake. Solar is cheaper at this scale than coal or natural gas. - In Ontario, Canada, the IESO predicts that electricity use will double by 2050. This is why the Conservative Ontario government has just introduced an incentive of up to $860,000 for new solar projects which do not export power to the grid.
Ontario faces the re-tooling of its existing nuclear power plants, and the requirement to build new ones. This will push power prices up, because these upgrades will be paid for by the ratepayers.
In other words, although the political winds are blowing strongly, they’re not going to blow the solar house down. Our foundation is solid, and we’re not going anywhere.
