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The future is coming ... and for electric utilities, it'll hurt. Photo: Mike Lewinski via Flickr.
The future is coming ... and for electric utilities, it'll hurt. Photo: Mike Lewinski via Flickr.
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Barclays: solar power threatens US utilities

Tyler Hamilton

13th June 2014

As renewables grow in scale, and fall in price, the threat to electric utilities becomes ever more clear, writes Tyler Hamilton. The last thing they needed was Barclays downgrading their corporate bonds ...

The telecom industry went from very old-fashioned stuff in 1983 to things that my parents never heard of. Advancements in clean energy are poised to do the same.

The writing has been on the wall for a while now. What's changed is that the words are getting thicker and more people are beginning to read them. Banking titan Barclays is the latest.

The London-based investment bank revealed this week that it had downgraded the high-grade corporate bonds of the entire US electric utility sector, citing "a confluence of declining cost trends in distributed solar PV power generation and residential-scale power storage."

Barclays warned that solar and storage combined is "likely to disrupt the status quo." It already has in Hawaii, and it expects California, New York, and Arizona to closely follow before spreading to the rest of the United States.

Both near and long term risks from solar

"In the 100-plus year history of the electric utility industry, there has never before been a truly cost-competitive substitute available for grid power", the bank said.

"We believe that solar plus 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 plus storage option curve and long-term risks from a comprehensive re-imaging of the role utilities play in providing electric power."

As Barron's reported, "It's a noteworthy downgrade." Electric utilities, it added, "make up nearly 7.5 per cent of Barclays' US Corporate Index by market value."

It's not like the industry hasn't had earlier warnings. A year ago, the US utility industry's own trade group, the Edison Electric Institute, released a landmark report warning of a transformation in the sector not unlike that which disrupted the telephone sector and airlines.

"The financial risks created by disruptive challenges include declining utility revenues, increasing costs, and lower profitability potential, particularly over the long-term", wrote Peter Kind, the report's author.

A death spiral for utilities

Journalist Stephen Lacey, who wrote about this growing disruption to the utility sector in the fall 2013 issue of Corporate Knights, referred to it as the "utility death spiral".

Since then, there have been many reports citing how the dramatically falling cost of solar and other renewables and big-scale energy efficiency efforts are impacting the traditional fossil-fuel business model. McKinsey's Jeremy Oppenheim is whistling a similar tune, as Corporate Knights recently reported.

The change beginning to take place was bound to happen, billionaire and anti-Keystone activist Tom Steyer told Corporate Knights.

"If you look at the energy generation and distribution business in the United States, Thomas Edison would feel quite at home since it is the system he set up. Is there any other business in the world that is still the same after 100 years?"

It won't and can't last, he added. "The telecom industry went from very old-fashioned stuff in 1983 to things that my parents never heard of. Advancements in clean energy are poised to do the same."

The problem for fossil fuels is ... the market is working

As Paul Gilding wrote today in his excellent commentary on RenewEconomy, "The market is working ... and fossil fuels are losing."

Gilding drew attention to the massive value being destroyed, particularly at European utilities, which have seen major coal projects cancelled as expected growth in China and India shrinks.

But coal is just the first on the firing line, said Gilding, who points out that schemes like carbon capture and storage - i.e. clean coal - are "either delusion or at best an expensive PR campaign." After coal, oil will be walked to the firing line. Then gas.

 


 

Tyler Hamilton is Editor-in-Chief of Corporate Knights Magazine, having previously been a regular contributor to the publication. Prior to joining the magazine, Hamilton spent 10 years as a business columnist at the Toronto Star, Canada's largest daily newspaper.

This article was originally published by Corporate Knights.

 

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