As Donald Trump prepares to enter the White House, one of the first things he's expected to do is dismantle the environmental policies put in place by the Obama administration. The Clean Power Plan, Paris climate deal, and regulations on carbon dioxide are expected to be demolished within weeks of Trump's inauguration.
On the surface, that's bad for alternative-energy stocks, but the future of alternative-energy stocks may be based more on their fundamentals than on what President-elect Trump may or may not do from the Oval Office.
Wind and solar lose their tailwind
There's no question that policies for wind and solar will be less favorable in a Trump administration than they were under President Obama. But it's unclear exactly what the impact will be.
Energy policies that drive wind and solar adoption are largely done at the state level. And tax incentives for wind and solar at the federal level are now locked in place, with expiration dates on the horizon. For wind and solar to be greatly affected at the federal level, it would take Congressional action to lower the investment and production tax credits that help wind and solar. And that seems unlikely, given how popular wind and solar are with a vast majority of Americans.
Where both energy sources could be affected is in developments on federal lands. Wind is prevalent on federal land in the western half of the country and offshore, while solar could benefit from open federal lands in the desert Southwest. And the Bureau of Land Management just opened up rules that could lead to more solar development. A Trump administration could end the use of federal land and water for wind and solar.
At the end of the day, both energy sources are still cost competitive with fossil fuels, and that will drive investment decisions more than any administration's policies. I don't think there will be a big impact on wind and solar for now.
Alternative fuels are a big question mark
One segment in alternative energy that's less competitive in the market is alternative fuels. Everything from ethanol and other biofuels to hydrogen has benefited from subsidies both direct and indirect, and that could come to an end. And unlike wind and solar, there isn't the same national support or policy set in place for years to come. Many subsidies end after this year and are regularly renewed on an annual basis.
Two companies to watch in alternative fuels are Pacific Ethanol (NASDAQ:PEIX), which has struggled to make money even in a friendly policy environment. And Plug Power (NASDAQ:PLUG) could see federal subsidies for hydrogen fuel being eliminated without much fanfare. Hydrogen is a fuel source that's in the early stages of development and needs strong policy to become economical, so an unfavorable administration could hurt development.
Biofuels and hydrogen are both extremely reliant on subsidies to make financial sense today, and they're so small that subsidies could be cut without public outrage that may stop it. That could be the biggest weakness in alternative energy right now.
Other alternatives could be in question
As for energy sources like geothermal, tidal energy, and other cutting-edge technology the future looks bleak. It's likely the Department of Energy's budget will be cut and R&D will be less of a focus for federal spending. And energy sources that aren't mature today and can't compete on their own will struggle to break through in the near future.
How to invest in alternative energy today
The key question investors need to ask themselves about alternative energy in a Trump administration is: How competitive would this energy source be without any federal subsidies?
If the answer is that the energy source is reliant on subsidies and would be in trouble without them, then it's probably not a very good investment in a Trump administration. But if the energy source is competitive with fossil fuels today and will get more competitive in the future because of core cost reductions, then the future is still bright.
Alternative energy may have some roadblocks ahead, but where the fundamentals work in their advantage, there's little that can be done to stop a transition away from fossil fuel. And that should be comforting no matter who is in the White House.