Last month Barclays downgraded the high-grade bond market for the entire electric utility sector because “we believe that a confluence of declining cost trends in distributed solar photovoltaic (PV) power generation and residential-scale power storage is likely to disrupt the status quo.” While this is not the first statement about vulnerability of electric utilities to competition from new technology it is the most important to date.
Electric Utilities vs. Solar
There has been growing tension between the electric utility industry and the solar industry – specifically the part of solar industry that is focused on distributed, or point of use, solar installations. This friction has really been a proxy for what is developing as a larger challenge to the utilities. New technologies are making generating, storing and managing electricity at the point of use much easier and much more economical. This technical evolution is occurring at the same time that overall electric demand growth has been stagnant for several years and rising infrastructure requirements are putting upward pressure on the price of delivered electricity. Those factors together mean that electric utilities are struggling with eroding demand and eroding profitability, and the best available option is to increase the price per unit of electricity, which only accelerates the economic competitiveness of the competing technology – and thus starting the “spiral”.
This dynamic is extremely complex and opinions range from the view that point of use technology can never threaten utilities to the utility industry must begin a slow transition to the utility industry is plunging into a death spiral.
Barclays Sees Technology Winning – Soon
The rationale for the downgrade is stark with Barclays expecting more than 20% of U.S. electric consumers to live in states where solar combined with electric storage will be as cheap or cheaper than utilities can deliver power to those same consumers within 4 years. Conceptually the idea that new technology would change the way we generate and source electricity has always been part of (if only on the periphery) the energy conversation. This is different. Barclays has articulated a very real and present risk – new technology will replace the 100 year old model in which fuel is burned in a central location, converted to electricity and sent across wires to the various points of use. It is not a risk the utilities are reacting to fast enough.
Downgrading Utility Bonds is Really Really Big Deal
Utilities are incredibly stable investments. Costs and profits are supported by regulation. In exchange for providing reliable universal service utilities are able to collect enough money through rates changed to consumers to pay costs, recoup capital for infrastructure, and collect adequate profits to pay investors. When the collections fall short, provided the utility can show it has acted prudently, it can (usually) increase rates to collect the necessary amount to cover the shortfall. This rate-based backstop makes utility income extremely stable and makes the utilities ability to service debt virtually certain (as a result utilities have very low borrowing costs).
Barclays bond downgrade suggests it has concerns not just about shareholders’ portion of income, but that the exposure to the changing technology landscape is so severe that the risk runs past the shareholders and all the down to debt service. This is essentially Barclays re-pricing bankruptcy risk for the entire electric utility sector. This a sophisticated bank not just acknowledging coming changes to the utility model, but pointing to the risks that have given rise to the idea of the utility death spiral and determining them to be a clear and present danger.
What Happens Next?
A little over a year ago the Edison Electric Institute (which represents all investor owned utilities) put out a report detailing challenges to the industry and the need to adapt. The result has been some strategic advancement by some utilities and a more unified opposition to policy that supports distributed energy, particularly solar. The rhetoric around that fight has ebbed and flowed over the past year, and there had even been instances of groups from both sides looking for common ground. While the EEI acknowledgement of risks was important it pales in comparison to the Barclays’ downgrade. The downgrade is external capital looking at the utility business model, and seeing not just a small threat, but a serious, industry wide threat. Catalyzing what many utilities already saw as a threat will only add fuel to what was still at least a simmering discord. The direct impact of the threat of solar on utility borrowing costs makes the threat real, dangerous and costly. Expect to see renewed efforts by some utilities to frame solar and other point of use energy solutions as destabilizing and dangerous to the electric system.
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