Running from the Sun: Utility Bonds Downgraded

May 28, 2014


I know that one of these days I’ll be dropping my landline, and going just to cell. It’s really only through habit that I continue to have one.  It was a good system, and worked for most of a century. But now we really can do better.

If I was a utility manager, I’d be looking at my fossil fuel plants the way I look at my landline.


Barclays this week downgrades the entire electric sector of the U.S. 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. It’s a noteworthy downgrade since electric utilities which make up nearly 7.5% of Barclays’ U.S. Corporate Index by market value. From Barclays credit strategy team:

Electric utilities… are seen by many investors as a sturdy and defensive subset of the investment grade universe. Over the next few years, however, 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. 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.

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.


Barclays says bond risk premiums for the electricity sector indicate investors are ignoring these risks for now:

Valuations suggest credit investors are depending on the “regulatory compact,” (whereby the monopoly utility agrees to invest in assets to service customers in return for prices that are set to allow them a reasonable return) to give sufficient protection from industry changes. While the regulator/utility construct has usually resulted in low-risk returns to credit in the past, technological change creates precisely the environment where slower-moving incumbents and their regulators can fall behind the curve, risking credit volatility, or disrupt the regulatory compact, possibly leading to unexpected losses for bondholders. Investors may be also wary of optimism about solar power, given a recent history of losses in that industry. We believe that sector spreads should be wider to compensate for the potential risk of regulator missteps and/or a permanent change in the utility business model.

Whether because of biases or analytical complexity, the market (and its constituent prognosticators) has tended to be late in pricing technology-driven shifts, particularly in industries that have had stable operating models (such as telcos and airlines).

Barclays says it sees “a rare opportunity for investors to express views about a potential for a major change at low cost and with good liquidity,” and recommends investors who can do so should underweight the electric sector versus the broader U.S. Corporate index, and rotate out of bonds issued by utilities in areas “where solar + storage is closer to competitiveness” into bonds issued by companies “where solar + storage grid parity are more distant.”

Rocky Mountain Institute:

When many people think of power plants they think of large industrial facilities with heavy machinery—hot, loud, and dirty. While this is an accurate description of many existing power plants, including those that I once operated, the personal power plants of the future will be much different.

Quiet, clean, and contained, your solar-plus-battery home energy system will be nearly indistinguishable from the refrigerator, chest freezer, or furnace in your basement—an essentially silent “box” that does something for you and your home, except this one will be connected to solar panels on your roof. In fact, as property developers and energy service companies become more familiar with these systems, they will most likely become integrated with the other systems in your home, leveraging the waste heat produced by your battery to help heat your home and provide other services.

Still, many will argue that personal power plants won’t offer the same game-changing value that personal computers or other appliances have brought us; that the cost savings, reliability, and environmental benefits of a zero-carbon personal power plant just won’t be that attractive to many homeowners.

Sandy, Irene, and Katrina suggest otherwise. If you don’t think many people value reliability, just look at the recent financials for Generac, the leading American manufacturer of residential back up generators. The company has seen year-over-year net residential sales increases of 31.7% in 2011,43.7% in 2012, and 19.6% in 2013.




20 Responses to “Running from the Sun: Utility Bonds Downgraded”

  1. Alan Olson Says:

    Paradigm shift. Of the Planet. Groovy.

  2. Jim Housman Says:

    Ten, or maybe even five, years ago I would have been happily on this band wagon. As I slide through my 7th decade I wonder about having yet another piece of household hardware that needs a maintenance schedule, operating instructions and heaven only knows what else to remember and fuss with. It reminds one how simple a grid-based utility is for the end consumer: pay your bill, turn on the light, don’t think about the coal smoke. If a home solar system was as irritating as this computer is most people would avoid it like the plague.

    Having said that I continue to be astonished at the reliability of modern cars. I have a Toyota with 170,000 miles that I would drive across country with confidence. If the distributed solar industry can follow that business model it will be a winner. If it follows the path of the computer or cell phone industry it will simply be too much trouble for the non-technical among us, that is most of the population. The reliability standard of the current utility industry is not to be dismissed and I suspect that that standard will need to be demonstrated by the distributed energy industry before it achieves wide spread acceptance.

    • And trim your tree, keep everything away from power lines, and hope your neighbor does likewise. Other than the frequent brown outs, storm power outages, and transformer failures…..on the utility side. On the solar plus storage side…what maintenance? Do you do annual checks on house wiring? Your dryer? Other appliances? Probably should, but most don’t. One could probably hire a service for the twice yearly solar checks. For the most part, it’s rather rare maintenance, mostly checks.

  3. andrewfez Says:

    So what’s happening with the Bloom Boxes? I saw AT&T put one up a while back, but has anyone heard anything about residential units yet?

    • Andy Lee Robinson Says:

      Interesting, but still no free lunch even if they are efficient – they must still produce CO₂, though they could harness biogas.

    • I just read the Wikipedia page on the Bloom Box. Though we don’t have reliable hard data to judge (because the company is secretive), it seems that basically these are fuel cells powered by natural gas. The advantage over regular thermal natural gas power plants is (at least according to BB) that it is more efficient. To quote Wiki:

      “Bloom claims a conversion efficiency of around 50%. A modern combined cycle gas turbine power plant (CCGT) can reach 60% overall efficiency, using a multi-step process.”

      I’m a little bit skeptical that this is really a great solution, or that it can even be called “green energy.”

    • The color and form factor, plus the bit about “producing oxygen on Mars”, makes me certain that it’s a solid-oxide fuel cell (which can also be operated as an oxygen-ion pump to create oxygen from thermally-dissociated CO2).

      The SOFC may hit 50% efficiency or more, which I think is great.  However, it still ties us to gaseous fuels, which means mostly fossil fuels (gasified coal is going to be high on the list of prospects).

      I’m not sure about the cost and lifespan of such units.  That said, regular internal combustion engines can do the same job albeit at lower efficiency.  In the wake of the Vermont Yankee shutdown, I would not be surprised if the only way that area of New England can keep the lights on in future cold snaps is to use gas-fired cogenerating furnaces.  Whether they are fuel cells or piston engines affects the magnitude of the improvement, but not the direction.

  4. petersjazz Says:

    In Spain its illegal to store PV electricity and off grid is not permitted. State owned utility company dont like Pv development

  5. climatebob Says:

    The electric utilities should be attacking the transport market. The main fuel for transport is oil which is a diminishing resource with a volatile price. This is a long post but stick with it.

    • The electric utilities are in a poor position to enter the vehicle manufacturing business.  Their best contribution thus far has been the EPRI subdivision of AC Propulsion, which produced the AC-150 drivetrain.  The AC-150, after considerable improvement, is what currently powers the Tesla vehicles.

      The utilities are in a good position to support that market, though.  Some time ago, a white paper I read concluded that V2G services like regulation had enough market value that a substantial EV fleet could pay for its batteries by selling their services as short-term (on a scale of minutes) dispatchable loads and generation.  Even lead-acid batteries appeared to suffer no significant degradation in such service.

      Though the paper was published more than a decade ago, this didn’t happen.  Truly a squandered opportunity.

  6. Good article, Ray. It states that the utilities are just not acting fast enough. There is opportunity, but existing institutions rarely fare well during paradigm change.

  7. […] Running from the Sun: Utility Bonds Downgraded […]

Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: