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Barclays Just Threw Gasoline on the Fire that is the Battle Between Utilities and the Solar Industry

solar and utilities fight

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.

The post was originally published as part of the Banking Energy column for Energy Trends Insider.

Photo Credit: Barclays, Solar and Utilities/shutterstock

Elias Hinckley's picture

Thank Elias for the Post!

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Bob Meinetz's picture
Bob Meinetz on Jun 17, 2014

Elias, this single article in Barron’s has elicited thousands of responses on Twitter and been linked to by hundreds of Church of Renewables disciples, in a rapturous response that might suggest glossolalia, quaking, and whatnot are close at hand. David Jackson of Seeking Alpha, the largest public-sourced investing website, offers a slightly more-reasoned, less-Pavlovian response:

For a vast majority of utilities, there will be a considerable amount of time before the utility needs to phase out the excess energy-producing assets. A planned, well thought-out retirement of energy-producing assets may not be detrimental to either shareholder or bondholder needs.

And, even in the scenario that the loss of revenues is significant, utilities have many tools at their disposal to restructure their rates and fees to minimize the impact. The utilities also have extended amount of time to restructure their operations and repurpose them to the evolving grid architecture, with renewables as the center piece. In essence, we are talking about incremental adjustments to the utility model over many years, with potential opportunity to add value in an emerging renewable-based grid. Whichever way one looks at this problem, the Barclays report is an overblown simplistic hyperbole, and needlessly alarmist.

And finally, once you consider that virtually none of the solar being deployed today includes a storage component, it is clear that the problem of solar + battery is far from imminent, but almost non-existent. On top of that, if one were to consider the terawatt hours of storage necessary to meaningfully alter utility dynamics, and the limitations and availability of necessary Lithium battery to enable this transformation, the absurdity of Barclays’ thesis becomes evident.

Why Barclays’ Call On Utility Bond Pricing Is Misguided

Seven months ago, Moody’s noted most regulated utilties in the U.S. were entitled to an upgrade:

Our placement of these issuers on review considers improving regulatory trends in the US, including better cost recovery provisions, reduced regulatory lag, and generally fair and open relationships between utilities and regulators, ” said Moody’s Managing Director Larry Hess. We believe that many US regulatory jurisdictions have become more credit supportive of utilities over time and that our assessment of the regulatory environment that has been incorporated into ratings may now be overly conservative.

The US utility sector’s low number of defaults, high recovery levels, and generally strong financial metrics from a global perspective provide additional corroboration for our view that ratings should generally be higher.

Elias Hinckley's picture
Elias Hinckley on Jun 19, 2014

Lot of effort put into a comment to which you won’t attach your own name/profile.  

Bob Meinetz's picture
Bob Meinetz on Jun 19, 2014

Todd, thanks to a nifty little utility in my word processor I was able to quickly determine that the word will appears 7 times in your post, out of 230 words, for an incidence of 3.0%. In this screed describing the Second Coming of Jesus, will occurs 6 times in as many total words, for an incidence of 2.6%.

Take from that what you, er, will (I don’t begrudge anyone faith, we all believe in what we need to to get us through the night). Nonetheless, when prediction far outstrips justification, a tinny noise should be sounding in the ears of anyone who values solid reasoning when evaluating policy on a matter as important as global warming.

I’m sorry you feel like you’re being treated like a naughty child, but utilities exist not to intimidate nor coddle their customers but to provide reliable electricity. At this they’ve been remarkably successful, and if you feel you can do a better job yourself – go for it. Be sure to monitor the emissions of that “small gasoline or diesel generator”, though, and find a way to keep any extra in your own private atmosphere. If – just if – you’re mistaken in your faith, would it not be unfair to share it with the rest of us?

Elias Hinckley's picture
Elias Hinckley on Jun 19, 2014

Lot of lost dollars by people who refused to believe change was possible (e.g., buggy makers, investors in rotary phones, typewriters, vcrs, etc).  

Also, technical innovation, moving beyond what was thought possible, and finding a better more effecient and democratic solution is what built America. 

Bob Meinetz's picture
Bob Meinetz on Jun 19, 2014

Elias, I’m sure you’re aware that for every successful technology or invention thousands are deemed infeasible, with corresponding dollars lost. That doesn’t mean inventors will, or ever should, stop trying. Yet it emphasizes the importance of an honest evaulation of physical limits, and I’m convinced that most renewables advocates have insufficient background to make this assessment.

Average solar irradiation the world over is 250w/m^2. Multiply that by .28 efficiency. Capacity factor makes it unusable during a majority of hours of the day, for a majority of the planet. Bottom line: there are simply not enough resources to work with given the exploding energy requirements for the world – transporation, heating, cooking, commerce, manufacturing. I don’t invest in solar personally because to me it’s quite evident, in the long term, it’s going nowhere. I wouldn’t care if others lost their money if they  weren’t losing my money too, through $hundreds of millions in tax credits, or that it’s postponing/delaying solutions which could truly be effective in mitigating climate change.

But indeed, why take my word, when people with  impeccable scientific credentials like James Hansen make the case so much more knowledgeably and eloquently?

Can renewable energies provide all of society’s energy needs in the foreseeable future? It is conceivable in a few places, such as New Zealand and Norway. But suggesting that renewables will let us phase rapidly off fossil fuels in the United States, China, India, or the world as a whole is almost the equivalent of believing in the Easter Bunny and Tooth Fairy.

How do you respond to this?

Nathan Wilson's picture
Nathan Wilson on Jun 20, 2014

Acutally, by “going solar”, you make the total cost to society of electricity higher for everyone.

If you look at the EIA’s cost tables,  it shows that solar energy costs around 13¢/kWh (and in the US, residential solar cost double compared to this utility solar price).  In contrast, the variable cost of power from combined cycle natural gas plants is 4.9 ¢/kWh (the fossil fuel backup plant is still needed for the evening demand peak, so it the variable cost is used instead of the levelized cost for gas).

Replacing  4.9 ¢/kWh elecricity from gas with 26 ¢/kWh solar electricty raises the cost to society.  If your utility offers a rate plan such as net-metering which makes this look attractive, it must be the case that someone else is bearing the cost.

That is the reason for the friction between utilities and solar system owners.  As shown by the SEIA data, the utility could make solar power for half the cost of residential solar.  And the EIA shows that in many areas, utility wind power is even cheaper.  In all areas of the US, nuclear power is cheaper than residential solar (even before energy storage is added).

The result of this friction will likely be that solar system owners will have a different billing plan, which reflects the low value of electricity from rooftop solar.

Elias Hinckley's picture
Elias Hinckley on Jun 23, 2014

Looks like un-referenced assertions.  Provide clear and concise references and maybe you have a case (though not really, this is meant to be a professional forum and identifying yourself seems a base-line courtesy). 

Lewis Perelman's picture
Lewis Perelman on Jun 24, 2014

Kudos to Bob Meinetz and Nathan Wilson for exposing what are truly “absurd” arguments by Hinckley and friends.

In his rebuttal, Hinckley criticizes the pseudonymous Claven making “un-referenced assertions.” 


Pause to consider a bit of history about Barclays, the source of Hinckley’s iconoclastic “intelligence,” and in particular its role in the recent LIBOR scandal:

In June 2012, multiple criminal settlements by Barclays Bank revealed significant fraud and collusion by member banks connected to the rate submissions, leading to the scandal.

More broadly, there is this in Barclays’ pedigree:

The company has become embroiled in a number of controversial subjects such as aggressive investment trading, tax avoidance schemes and close relationships with large investors in the Middle East.

The shadows over Barclays’ past don’t necessarily invalidate the judgment of a single Barclays analyst, T.C. Koh. But they don’t inspire blank-check confidence either.

Here’s what the Wall Street Journal’s Marketwatch had to say about Koh’s call:

Does the building momentum for solar mean regulated electric utilities will be destroyed? In short: no way.

Even Koh made clear that his analysis of the sector was “too early,” and this trend can take a long time to hurt electric utilities. Many customers won’t be able to spend thousands of dollars up front to install a solar-generation system. It will take more than just matching or dipping slightly below the cost for electricity from a utility to get people to switch to solar.

Along the line of Wilson’s assessment here, solar without storage still costs much more than cost-effective central generation, especially using increasingly abundant natural gas, and needed storage adds even more to the cost. Subsidies and other government market manipulations may make the prices of solar or other ‘renewable’ options seem lower than they really are. But the costs of those distortions eventually have to be paid by consumers-cum-taxpayers.

So solar may indeed pose a threat to the stability of the electric utility sector. But even when and where it does, it’s naive to believe that utilities — and notably their customers and hence voters — won’t fight back.

In fact, they already are starting to, in Europe and the US. As consumers and voters increasingly come to understand the costs that will befall them from undermining the grid system, they will likely become more inclined to support efforts to push back — to counter or reverse the negative impacts of solar subsidies. In Arizona, as noted elsewhere in this venue, a movement is afoot in the state legislature to force solar adopters to pay the costs they impose by effectively freeloading on the grid to provide backup when needed. 

On a parallel track, there is a growing movement in several states to impose extra taxes on owners of hybrid or electric vehicles to help pay for roads they use but don’t pay for through traditional fuel taxes.

Either the costs of systemic disruption get internalized, to be paid by those who cause the disruption, or the disruption will proceed toward socially very unhappy, even disastrous results. The California electricity crisis of 2000-2001, which started the state on a long downward spiral to prolonged bankruptcy, is a model of what can happen.

Nathan Wilson's picture
Nathan Wilson on Jun 25, 2014

Here is a relevent article about batteries, from 2012.  It estimates a battery cost amortization of $0.34/kWh best-case for lead-acid and $0.40/kWh for lithium-ion, not including the cost of energy to charge the batteries.

This price also assumes a utility application in which the battery is exactly sized to meet demand.  For residential use, the battery must be oversized to supply a worst-case day (depending on how much backup generator use is desired).

Nathan Wilson's picture
Nathan Wilson on Jun 26, 2014

Great reference, thanks.

Basically, DOE says none of the battery options with 5 hours of storage cost less per Watt than a nuclear plant.  So even if battery costs fall 3x in the future, 15 hours of storage (for solar at night) will still remain out of reach.

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