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Could Solar Power Ultimately Turn Off Electric Utilities' Lights?

20 June 2014 in Trading Ideas

For many investors, the idea of any serious inroads by solar power into the power-consumption universe is still seen as a long-term prospect, unlikely to upset the current provider dynamic anytime soon.

However, there is increasing evidence that those assumptions may be starting to change.

One of the latest developments is the interesting tidbit that a few weeks ago Barclays downgraded the entire electric sector of the US high-grade corporate bond market to underweight, saying it sees long-term challenges to electric utilities from solar energy – and that the electric sector of the bond market isn’t pricing in these challenges right now.1

 

For investors who don’t follow the corporate bond market closely, Barron’s suggested that this is a particularly noteworthy downgrade because electric utilities make up nearly 7.5% of Barclays’ US Corporate Index by market value.

According to Barron’s, Barclays’ credit strategy team said that electric utilities are seen by many investors as a sturdy and defensive subset of the investment grade universe.

“Over the next few years, however,” said the Barclays report, “we believe that a confluence of declining cost trends in distributed solar photovoltaic power generation and residential-scale power storage is likely to disrupt the status quo.

“Based on our analysis, the cost of solar + storage for residential consumers of electricity is already competitive with the price of utility grid power in Hawaii. Of the other major markets, California could follow in 2017, New York and Arizona in 2018, and many other states soon after.”

Barclays report continued: “In the 100+ year history of the electric utility industry, there has never before been a truly cost-competitive substitute available for grid power. 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.”

It’s certainly worth reiterating that the Barclays report is looking specifically at the corporate bond market and is not making any expectations related to solar power-related equities.

However, one could also make the case that the rally in solar stocks dovetails nicely with the idea that confidence in solar power’s potential is building.

The Cleantech Everywhere motif, which has a 32% weighting in solar stocks, has gained 13.9% in the past month, and is up 40.2% in the past 12 months. The motif’s solar segment has increased 117% in the past 12 months.

During those same respective time periods, the S&P 500 has risen 4% and 21%.

1Michael Aneiro, “Barclays Downgrades Electric Utility Bonds, Sees Viable Solar Competition,” barrons.com, May 23, 2014.

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