Policy pivots create energy tradeoffs

Implications for renewables as mega forces drive demand

Proposed revisions to the U.S. Inflation Reduction Act are the latest in a wave of global policy changes as governments balance energy security, reliability, and affordability with environmental objectives. That task is now trickier as mega forces – like power-hungry AI and geopolitical fragmentation – and electrification in some markets drive up energy demand. We see recent policy pivots causing volatility and unlocking regional opportunities, requiring investors to stay nimble.

In the U.S., policymakers want to amp up domestic energy production to power AI and promote national security, but are also looking for sources of tax revenue to fund tax extensions elsewhere. We see clean energy caught in the crosshairs of that balancing act. The latest revision of the House bill, now sent to the Senate, phases out clean energy tax credits in the Inflation Reduction Act sooner. Yet the U.S. likely needs more of all kinds of energy to meet AI’s needs. Industry projections see U.S. data center electricity consumption rising between 50% and 200% by 2030 – a big jump after 15 years of flat national power demand.

Where does this leave clean energy stocks? They had been slumping ever since a 2021 surge (see left-hand chart below). But since April, they have been eclipsing traditional energy on hopes of limited legislative changes (see right-hand chart below). Should investors dip their toe back in now?

In the near term, we think energy and trade policy volatility presents opportunities for stock pickers, and we’re watching for fresh policy revisions as the legislation heads to the Senate. Longer term, we see clean energy stocks positioned for strong growth. Renewables are quick to build and valuations are attractive: The factors that contributed to their slump – like high rates and tariffs – are now priced in, we think. AI and national security goals are likely to keep driving demand for all types of power, including nuclear. Two weeks ago, President Trump signed executive orders aimed at expediting nuclear power reactor deployment, and the most recent revisions to the House bill preserved the existing tax credits allotted to nuclear project developers. But given how long it takes to build nuclear power plants, we see natural gas and renewables benefiting sooner.

Eyeing shifts in other regions

Nuclear was the topic of another recent about-face in public policy elsewhere. Last week, Germany ended its longstanding aversion to nuclear power, affirming it as a low-carbon source promoting EU energy independence and affordability. Most EU nations are now supportive – a potential boon for its competitiveness, long hampered by higher energy prices. We see opportunities in the electrical equipment chain, grid infrastructure, and nuclear power generation. Yet we watch for hurdles. Europe lacks recent experience in nuclear projects – and the few that have happened overran budgets and deadlines.

Policy shifts are also afoot in traditional energy. OPEC+ – a group of petroleum-producing countries – has historically sought higher oil prices to fund government projects. Yet even as prices have fallen, hitting a four-year low in April, OPEC+ has kept boosting supply. Prices jumped last week on reports that Israel might strike Iran’s nuclear facilities. But if prices stay low – and OPEC+ keeps upping production – this would mark yet another sea change. It may signal OPEC+’s efforts to reclaim market share from U.S. shale oil producers. It could slow adoption of electric vehicles, as lower oil prices make clean tech less attractive. It could also confront the U.S. with another balancing act: Cheap oil means consumers pay less at the pump, but too-low prices jeopardize U.S. oil. We monitor the June 1 OPEC+ meeting for signs the change will persist.

Our bottom line

Growing power demand has policymakers rethinking the tradeoffs between energy sustainability, affordability, and security. We see opportunities in nuclear, U.S. natural gas and renewables (especially solar and batteries).

Wei Li, Managing Director, is the Global Chief Investment Strategist at BlackRock Investment Institute at BlackRock Inc.

Jean Boivin is Managing Director, Head of the BlackRock Investment Institute at BlackRock Inc.

Christopher Kaminker, Head of Sustainable Research and Analytics – BlackRock Investment Institute, Chris Weber, Head of Climate Research – BlackRock Investment Institute, and Hugo Liebaert, Sustainable Research and Analytics – BlackRock Investment Institute, contributed to this article

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