Tags: electric | utility | solar | energy

Sunset Coming for Utility Stocks?

By Wednesday, 04 June 2014 07:50 AM Current | Bio | Archive

Generations of American investors grew up thinking of utilities as relatively safe, income-producing investments. Their government-protected monopolies made them boring but dependable.

If you own electric utilities, you might need to change your thinking. The cozy, profitable business model could fall apart soon. President Obama's new EPA carbon regulations won't help, but the industry's real problem is the rapidly falling cost of home solar equipment.

I mentioned this threat briefly a few weeks ago (see Vladimir Putin's Clean Energy Box). I said solar energy is already cost-effective in some tropical zones. One such zone is Hawaii, where the price of rooftop cells and battery storage for a typical house is competitive with the local grid — even without any special tax incentives.

Hawaii is arguably a special case: plenty of sun and total dependence on expensive imported fossil fuels. Nevertheless, the credit analysis team at Barclay's sees the trend accelerating. They said in a note last month that solar parity could reach California, Arizona and even New York by 2018.

Even if you aren't a tree-hugger, you know a good deal when you see one. If installing some boxes on your roof is cheaper than buying juice from your local utility company is, you will make the rational choice.

People in Hawaii are making this choice right now. Texas and Florida aren't far behind.

Wall Street is starting to see the problem. Conventional utilities make a profit only because no one else can compete with their price. They've never faced competition like this before.

Barclays takes the threat seriously enough to downgrade the entire electric sector's corporate bonds to "underweight" status. Here's part of their research note:

"We believe that solar + storage could reconfigure the organization and regulation of the electric power business over the coming decade. We see near-term risks to credit from regulators and utilities falling behind the solar + storage adoption curve and long-term risks from a comprehensive re-imagining of the role utilities play in providing electric power."

This "comprehensive re-imagining" will be a very unpleasant experience for utility executives, but there is no way to avoid it. If the technology exists (which it does), and it is significantly less expensive than the old way is (which it will be), people will make the switch.

The threat will vary by company. Solar energy's relative cost effectiveness depends on the local economy, regional climate and other factors. Electric utilities in some places are already calling in political favors to protect their profit margins. It might buy them some time, but they will eventually lose the fight.

Anyone who owns utility stocks or bonds should be very careful. We've already seen how quickly the world can change. The utility sector may just have to ride off into the sunset.

Happy trails.

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PatrickWatson
Generations of American investors grew up thinking of utilities as relatively safe, income-producing investments. Their government-protected monopolies made them boring but dependable.
electric, utility, solar, energy
463
2014-50-04
Wednesday, 04 June 2014 07:50 AM
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