By Matt Gamache, COO
Dozens of headlines and articles are circulating, as everyone tries to grapple with what the new administration will mean for the energy sector. These assessments contain varied opinions and outlooks, but one theme is clear: uncertainty. While President Trump and his team have made numerous statements about their plans for energy policy during the campaign and transition period, we are only just beginning to see how these plans might unfold. On day one, Trump signed a stack of Executive Orders, many of which focused on energy issues. While dissecting the specifics of these changes and the potential future priorities for the Trump administration could be the subject of a series of blog posts, this piece will focus on the current state of the energy market and identify key policy arenas that appear to be getting the most attention from the incoming administration.
Current Markets
On the commodity side, the Trump administration has come into power at an interesting time in the markets. Both oil and natural gas production in the U.S. have recently reached or are near all-time highs. Heading into this winter, prices remained fairly stable, amid these high production levels and an oversupplied market. Though the Biden administration paused permitting for new LNG export facilities, the U.S. has continued to export record amounts of liquified natural gas (LNG), primarily to meet new European demand as a replacement for Russian imports. Commodity prices have begun to show some volatility this winter, as the U.S. grapples with some of the coldest temperatures experienced in recent history. This has caused an uptick in near-term prices, but long-term prices have shown more modest changes. We will see how the remainder of the winter plays out and what that means for fuel inventories and commodity price outlooks.
In the electricity sector, the prevailing narrative is one of increasing demand driven by both electrification of buildings and transportation, and the expansion of datacenters to power the rise in artificial intelligence. For many regions, this rapid growth is a departure from recent trends of generally flat electricity demand. The Department of Energy recently published a report conducted by the Lawrence Berkeley National Laboratory that supports this anticipated jump in demand over the next few years, expecting that electricity consumed by datacenters could triple by 2028. Meeting this demand has spurred calls for investment in grid infrastructure, improvements to interconnection processes, and driven renewed interest in nuclear generation to meet this demand. Renewable generation has also continued to grow, though both wind and solar prices have increased recently due to supply chain disruption, tariffs, and higher interest rates. Until Trump took office, many expected the generous incentives for clean energy projects in the Inflation Reduction Act would help ease these prices in the medium-term.
Trump Administration Impact
Amidst this backdrop, the Trump administration has taken office with a number of Executive Orders aimed at expanding domestic oil and gas production and establishing a cabinet that has a generally pro-fossil fuel agenda. This includes declaring a “National Energy Emergency” and revoking President Biden’s Orders that restricted fossil fuel extraction in Alaska and offshore. While removing regulatory barriers and calling for emergency powers could enable expanded fossil fuel production, it is hard to see that happening to the point where production results in substantially lower prices. In most cases, fossil fuel companies have signaled a need for a stronger price incentive to support significant expansion of their drilling operations. Trump’s Orders have also ended Biden’s pause on permitting new LNG export facilities, which should result in increased export capacity and may raise domestic natural gas prices if production does not keep pace. The threat of trade tariffs has massive potential to complicate this commodity picture, along with Trump’s foreign policy in general. The energy world will be watching tariffs closely, along with the potential international response, to see exactly how this will impact commodity prices during Trump’s time in office.
For renewable energy, uncertainty looms over the future of the Inflation Reduction Act (IRA), especially as Trump’s Executive Orders included halting the distribution of IRA-related grants and loans. However, the most lucrative financial incentives in the IRA for a wide range of clean energy projects flow through federal tax credits, which extend into the early 2030s and would require Congressional action to repeal. A full repeal seems unlikely, given the flow of funds to Republican-represented regions. This has led some House Republicans to express support for these credits and with such a thin Republican majority in the House, any legislation will need unanimous support. There may be support for some selective reduction and alteration of the IRA’s incentives, such as a greater priority on domestic supply chains, as Republicans look at the Act’s provisions as part of their budget reconciliation process.
Trump’s initial Executive Orders and accompanying public statements have focused his negative attention on wind generation and electric vehicles, in particular. One of his Executive Orders on day one included a halt on any new leasing and permitting for offshore wind projects and directs the Secretary of the Interior to comprehensively review existing leases. This creates a strong headwind facing an offshore wind industry that was already struggling to establish itself in the US. Onshore wind projects will also contend with a pause on all federal leasing and permitting while a review can be conducted.
Trump also revoked Biden’s rules supporting electric vehicle adoption, instead directing federal agencies to pause distributing funds supporting EV infrastructure, in an effort to promote consumer choice. A similar “consumer choice” imperative was aimed at a variety of goods and appliances that had previously been subject to efficiency standards. In both cases, many companies have already pushed forward with changes in designs and supply chains to support electric vehicles and meet efficiency standards. It will be interesting to see how these directives are ultimately implemented by federal agencies, and how industry responds. This also sets the stage for a legal battle with state policy, where many states, including California, have established their own standards and future bans to phase out gasoline-power vehicles.
An Uncertain Future
As we have already begun to see, several of the Executive Orders that Trump issued in his first hours and days in office will be the subject of lawsuits, and it remains to be seen how some of these directives will hold up in a court challenge. For example, this is the first time a President has declared an “Energy Emergency” and there is some question as to what that means and what power that may or may not afford to federal agencies. Federal agencies will also need time to interpret these directives and go through rulemaking processes to re-write regulations. Those changes to energy policy that require Congressional action, such as repealing lucrative clean energy tax credits, are even more tenuous given the Republican margin in the House. States, environmental groups, and private companies, are all likely to challenge the administration’s energy agenda in a variety of ways. Markets are also in the process of responding, and time will tell whether Trump’s policies inspire the intended changes in the marketplace. Finally, Trump’s tariff threats and any resulting trade wars have significant potential to upend markets and global supply chains. This overarching instability and unpredictability has been a cornerstone of Trump’s approach to politics, and this early in the administration, it is hard to rule out any future scenarios.
Here at Competitive Energy Services, we will be watching these developments closely and working with our clients to adapt to future market changes and navigate this new administration’s policies, whatever direction they may lead.
Photo by Deep Blue for You