In a fitting end to an already tumultuous year, the 2020 election cycle has (nearly) ended with President-elect Joe Biden announcing members of his cabinet and further refining his platform. One key tenet of his preelection policy agenda was an infrastructure bill with a focus on the renewable sector, but the prospect of a divided government will meaningfully change the size and scope of any legislation passed.
As it stands, there will be 50 Republican senators and 48 Democratic senators, with two seats remaining to be decided in the Georgia runoffs this January. The best historical precedents for these races are the 1992 and 2008 Georgia Senate runoffs, both in presidential election years, which saw a decline in turnout from the general election and the Democrats losing more support than Republicans.
Given the aggregate Republican lead in both races on Election Day, it will be a steep hill for the Democratic Party to climb. Even in a narrowly controlled Democratic Congress, we predict it will be difficult to set pollution limits on greenhouse gases given the producer and consumer states from which certain senators hail. In the face of a divided government, Biden will have to pull on different levers to pursue an infrastructure and clean energy agenda. Following the last two presidents, I expect a healthy amount of regulatory and executive action to be used for achieving policy goals.
A narrow margin in Congress means a less aggressive Clean Energy Standard than Biden campaigned on and may require the inclusion of somewhat forgotten energy industries like nuclear and hydropower. A technology-agnostic clean-energy standard for utilities and the grid would likely include the continued use of natural gas power plants with carbon-capture technology because renewable energy remains intermittent.
From where we stand, improved battery technology can take two paths: First, batteries at the grid level could decrease natural gas dependence by solving the intermittence issues of renewable energy, and second, batteries at the electric vehicle (EV) and home level could increase the dependance on natural gas for the grid as residential consumers consume more electricity. This is all to say that prospects for traditional energy sources are not as bleak as one might think and that the accelerating adoption of EVs might accelerate demand for natural gas in the short to medium term and impact commodity prices.
The government also has massive buying power. We expect the Department of the Interior to be far more active in its pursuit and purchasing of alternative energy sources. Offshore wind and solar are proven technologies with decreasing costs that can be looked to by the administration to “green-ify” the grid without the need for massive fiscal stimulus simply by using the existing government balance sheet.
Some analysts believe that even with a Republican-led Senate, the multibillion-dollar planned spending on the electric grid from President-elect Biden’s “Build Back Better” plan could pass as part of a broader bipartisan stimulus bill focused on jobs and infrastructure next year. Said grid spending could encompass and support energy efficiency and weatherization technology. Grid innovation, in large part, is a necessary complement to the aggressive adoption of EVs while energy efficiency and weatherization legislation will impact builders, owners and retrofitters of both commercial and residential real estate.
In our experience, investors cleanly (forgive the pun) put environmentally innovative energy investments into two buckets: new technologies and process innovation. I believe that the forthcoming Biden innovation will use a mix of executive action and legislation to participate in both buckets, with a divided government forcing a greater emphasis on legacy process innovation than a democratic sweep would have otherwise pursued.
Three of the largest segments we expect the government to invest in are electric vehicles, electric vehicle infrastructure and hydrogen power. Having already discussed the first two, we will focus on hydrogen power: a possible substitute from electric generation in natural gas power plants. New York, Virginia and Ohio recently paid more than $3 billion for three power plants that will initially run on natural gas but be outfitted for using green hydrogen, produced by wind and solar, as collection ramps up. We expect hydrogen storage to be an ever-increasing pillar of the energy complex and look to companies in the space to offer value in the coming decade.
In conclusion, a divided government sets the stage for a smaller, albeit interesting, infrastructure and clean energy agenda that will impact both new inventions and legacy energy tech. We’re interested to watch how the incoming administration navigates all-too-familiar D.C. gridlock, a global pandemic and a recovering economy. A few other industries worth watching are renewable diesel and natural gas, energy efficiency as a service, and energy efficiency in oil fields and digital infrastructure.
Article also submitted to Forbes