How do the midterm elections affect the US energy industry?

“The midterm elections will not fundamentally overturn the overall direction of the US energy transition, but will significantly impact the timelines of different technological paths. For long-term investors, this presents both risk and opportunity.”

With more than six months to go before the US midterm elections, the game between US politics and capital markets has already heated up. The two parties are fiercely contesting control of Congress, and this is having deep impacts on the outlook for multiple industries.

This week, Morgan Stanley released an analysis report stating that among all industries in the US, the energy sector's policy sensitivity is most affected by the midterm elections. However, regardless of which party ultimately prevails, the energy sector as a whole will see net benefits.

Renewable Energy: Democratic Victory Will Be Positive

Morgan Stanley points out that in the field of US renewable energy, Republican-dominated policies currently include: reducing tax credits for wind and solar, pausing construction permits for several offshore wind power projects on the East Coast, and tightening approval processes for renewable projects on federal land. These measures will directly affect the project timelines of leading companies in the renewable energy sector, such as Brookfield Renewable Energy.

If the Democrats win both houses of Congress in the midterm elections, these policies are likely to be quickly reversed. The Democratic Party has long supported the green tax incentives included in the Inflation Reduction Act and tends to restore or expand federal support for wind, solar, and energy storage projects.

Furthermore, although the federal permitting authority for renewable energy projects mainly resides in the executive branch, analysts believe that if the Democrats win, Congress may legalize the permitting and approval process for renewable energy through legislation. This would be a clear positive for companies such as NextEra Energy (NEE), AES Corporation, and Total Energies.

Nuclear Energy: Benefiting Regardless of the Victor

Compared to renewables, nuclear energy occupies a more unique political position, enjoying rare bipartisan support in the US. Republicans value its stable and reliable baseload power capability and its strategic value as it does not rely on foreign supply chains; Democrats see it as an important component of zero-carbon electricity.

Morgan Stanley analysts wrote in the report: “The nuclear energy sector continues to benefit from bipartisan support. The midterm elections may serve as a catalyst for a new wave of legislative incentives aimed at shortening the approval and construction cycle of new reactors and attracting more capital to the sector.”

In recent years, with the exponential growth in power demand from artificial intelligence data centers electricity usage, nuclear energy has regained the attention of major technology companies. Constellation Energy has signed long-term power purchase agreements with Meta and Microsoft to supply their data centers with power from existing nuclear power units. Meanwhile, GE Vernova, NuScale Power, and Oklo are actively developing small modular reactors, technologies seen as key for the future of distributed clean baseload energy.

Analysts believe that regardless of the midterm election results, the nuclear energy sector will receive policy support, with the difference lying only in the intensity and speed of implementation. If the Republicans win, there will be more aggressive relaxation of approvals and federal loan guarantees; if the Democrats win, nuclear energy may be included in a broader clean energy standards framework.

Fossil Fuels: Direct Beneficiary if Republicans Win

The fate of traditional fossil fuel companies is highly dependent on the performance of the Republican Party. ExxonMobil, Chevron, and other companies typically perform well during Republican-led periods of deregulation.

Morgan Stanley points out that if the Republicans maintain or expand control in Congress, it is foreseeable that the following policies will continue or intensify: accelerated permitting for federal land and offshore drilling, weakened enforcement of environmental protection regulations on methane emissions to reduce compliance costs, and federal intervention in state-level climate-related lawsuits to protect companies from high compensation risks.

In addition, Republican lawmakers have recently voiced strong support for so-called “self-generation” solutions, allowing artificial intelligence data centers to be equipped with dedicated natural gas generators instead of relying on the grid. This directly benefits GE Vernova (a natural gas turbine manufacturer) and EQT Corporation (one of America's largest natural gas producers).

It is worth noting that the financial markets have already started to price in different election outcomes. Prediction markets currently show a slight preference for Democrats to retake the House, but control of the Senate remains highly uncertain. Morgan Stanley advises investors to use hedged allocations among renewables, nuclear, and fossil fuels based on their own risk preferences.

As the analysts wrote at the end of the report: “The midterm elections will not fundamentally overturn the overall direction of the US energy transition, but will significantly impact the timelines of different technological paths. For long-term investors, this presents both risk and opportunity.”