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 U.S. 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.
“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’ U.S. Corporate Index by market value.”
It’s not like the industry hasn’t had earlier warnings. A year ago, the U.S. 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.
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 in an interview appearing in our latest issue. “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.”
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.
“This is not a problem at all for the economy, as they will be replaced with new companies and new industries, which will create new jobs, new wealth and new innovations,” wrote Gilding.
“But it is a major problem for the incumbents who will cease to exist and for their owners who will lose their money. Unless we have that conversation honestly and openly, we are setting ourselves up for pain and suffering we can easily avoid or at least minimize by thinking through the consequences and being better prepared for their departure.”
