US Electricity Sector Gets Downgrade From Barclays

Originally published on Rocky Mountain Institute by James Mandel

Barclays recently downgraded the U.S. electricity sector. That’s right, the whole sector. It’s now listed as “underweight,” meaning that if you were to hold a full portfolio of bonds for the U.S. economy, you might want to be a bit light on U.S. electric utilities, as they might not keep up with the broader economic growth trends.

Why? One answer is the disruptive threat of solar-plus-battery systems.

From the Barclays report:

Over the next few years… 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.

If that language sounds familiar, it’s because Barclays’ logic is very similar to that of our recent report, The Economics of Grid Defection, in which we forecasted the declining costs of solar plus storage and the time—coming soon—when those systems could reach parity with grid-sourced retail price electricity in a growing number of markets, including Hawaii, California, and New York.

In fact, the Barclays report cites RMI as a key source in several of its analyses that lead to this conclusion.

Barclays recently downgraded the entire U.S. electricity sector.
Barclays recently downgraded the entire U.S. electricity sector.

Barclays believes we’re entering a post-monopoly world in which distributed energy resources will take a place alongside large-scale central generation as a critical energy resource and a widely available and affordable customer option.

In a surprisingly strong prediction for analysts, Barclays views this transition as inevitable:

“Whatever roadblocks utilities try to toss up—and there’s already been plenty of tossing in the states most vulnerable to solar, further evidence of the pressures they’re facing—it’s already too late.”

If you’re a utility, or an investor who’s got money in utilities, that’s some ominous language. Admittedly, a downgrade suggests two possible outcomes in the near future: 1) analysts tend to move in herds, so expect more news on the U.S. electric sector soon, and 2) capital is likely to get a bit more expensive for utilities, as millions of dollars shift out of the sector.

It’s not all bad news. As we discussed recently in “Caveat Investor,” this should ultimately lead to a stronger, more resilient power sector with stronger overall valuations, but the transition is likely to be volatile. The Barclays report suggests we’re about to enter that volatile transition phase.

So, what are the major trends we can learn from this, and what does a utility downgrade mean for the future of distributed renewables?

1) Distributed energy is hitting the mainstream. Historically, it’s renewables’ creditworthiness that has been challenged (while utilities have been considered rock solid), but now this trend appears to be reversing. We’ve seen declining costs of capital in solar (as recent securitizations demonstrate), new financial instruments emerging for related technologies, and lower costs overall. Despite this progress, there is still a large gap between the market acceptance of renewables and the market acceptance of central, fossil-fueled generation. The recent downgrade suggests that people are starting to take distributed renewables seriously, and that utilities and renewables are entering a period of equal (or at least comparable) market strength.

2) Issuing new bonds for thermal fossil generation will become more expensive. While many people focus on the construction costs of new assets (central and distributed generation alike), it’s more often the cost of capital that determines project viability. Traditionally, utilities have almost always been the lowest-cost provider of new energy resources, and part of this advantage has rested on ready access to and favorable terms from the bond market. If that advantage is eroding, then expect new players to be able to compete for providing the nation’s energy, including providers of much smaller, distributed generation.

3) Distributed storage, when combined with already mature trends in generation and energy efficiency, compounds the disruptive threat of consumer-scale investments in energy. Many people have worried that declining demand (through energy efficiency) and distributed generation are putting enormous stress on the traditional business model for investments in central generation. That has not changed at all. So why does the emergence of storage, something that doesn’t reduce consumption or increase generation, suddenly give the markets concern? Simply put, the addition of storage gives customers the option to entirely disengage from their relationship with the utility. While most customers won’t choose to leave, and for good reasons, the threat of grid defection creates consumer leverage that will slow recent upward trends in utility rates out of competitive necessity.

4) These trends are likely to accelerate. As capital shifts from central to distributed generation, this just improves the economics of distributed resources even further, through scale benefits as well as lower cost of capital. Few people would say that we’ve even come close to market saturation for any customer segment for renewables and efficiency. As the traditional electric sector becomes a more challenging place to park capital (or even just a less certain place), more investors will start to notice that investments in distributed resources have similar risk-reward profiles, and this movement of capital will be self-reinforcing.

Barclays took a fairly surprising stance for an industry not traditionally known for looking years into the future. That’s a great sign for the markets, which need to start responding to global, long-term trends. And while the Barclays report isn’t likely to move markets in the next 6 or 12 months, it does signal an important shift under way—distributed generation is likely to be an affordable and accessible choice for more and more customers alongside traditional utility-provided electricity. More options means more competition and increased relevance of the customer. And that’s an upgrade for users of electricity everywhere.

Image Credit: pcruciatti / Shutterstock.com

This article, US Electricity Sector Gets Downgrade From Barclays, US Consumers Get Upgrade, is syndicated from Clean Technica and is posted here with permission.

By 2026, America’s Largest Grid Could Reach 30% Renewable Energy

by Silvio Marcacci

A new study reveals America’s largest grid operator could exponentially increase the amount of solar and wind electricity on its system, while lowering consumer costs and emissions, without negative effects on reliability.

JBS News Renewable Energy. PJM Interconnection footprint image via CleanTechnica
PJM Interconnection footprint image via CleanTechnica

The PJM Renewable Integration Study, prepared for PJM Interconnection by General Electric Energy Consulting, concludes renewables could provide up to 30% of the electricity across PJM’s 13-state footprint by 2026.

While PJM’s report is great news for the rapid power section decarbonization needed to slow climate change and could outline a path forward for other grids, it’s not without any negative outlook — in every modeled scenario, revenue for conventional generation sources like coal, natural gas, nuclear, or hydropower falls.

30% Renewable Energy With No Reliability Concerns

PJM commissioned the study in 2011 to better understand how the grid would be affected if the renewable energy targets of the states within its footprint were achieved or exceeded. Since PJM’s main concern is maintaining reliable and adequate power supplies and all but two of its member states have some form of renewable targets, it’s a valid concern.

GE Energy and a team of other industry experts modeled ten scenarios, ranging from maintaining the current 2% renewables penetration all the way up to obtaining 30% electricity from wind and solar. The study examined expected power demand growth, wind and solar output, required transmission upgrades, emissions, the value of wind and solar versus conventional baseload, and operational costs, among other factors.

JBS News Renewable Energy. Renewables addition potential in PJM. Image via PJM Interconnection
Renewables addition potential in PJM. Image via PJM Interconnection

And the results? In every scenario, PJM’s geographic footprint could accommodate a larger percentage of electricity supply from wind and solar without significant reliability issues, so long as adequate transmission expansion (up to $13.7 billion) happens across the system.

Wider Geographic Area, More Clean Energy

Once again, GE’s analysis shows the benefits of integrating renewables over a large geographic area. “Given the large PJM footprint…the impacts of short-term variability in wind and solar production is greatly reduced by aggregation and geographic diversity.” Put another way, if the sun stops shining or the wind stops blowing in one location, other renewables from across the system can fill the gap.

JBS News Renewable Energy. Renewable energy curtailment in PJM image via PJM Interconnection
Renewable energy curtailment in PJM. Image via PJM Interconnection

In fact, as more and more renewables were added to the PJM system in various modeling scenarios, their efficiency increased while peak demand fell. Curtailment of renewable generators (“turning off” a power system when it could run) was minimal and resulted from localized congestion instead of overall system constraints. Higher renewable generation also shifted consumer demand, with solar “significantly” reducing net demand during peak demand hours.

Fewer Fossil Fuels, Lower Costs, Less Emissions

As additional renewables come online, dirtier forms of energy were replaced. On average, 36% of added renewables displaced coal and 39% displaced natural gas, mainly on a cost basis. In fact, lower coal and natural gas generation occurs under every scenario, as “wind and solar resources are effectively price-takers and therefore replace more expensive generation resources.”

But perhaps most promising of all, every scenario created lower consumer costs across the system while cutting emissions. GE’s analysis found PJM fuel costs, variable operations and maintenance costs, and lower locational marginal prices all decline as the amount of renewables increase, with an average production cost savings of around $63 per megawatt-hour.

JBS News Renewable Energy. Renewables cost savings in PJM image via PJM Interconnection
Renewables cost savings in PJM. Image via PJM Interconnection

At the same time, carbon dioxide emissions fall drastically in every modeled scenario, ranging from a low of 12% all the way up to a high of 41% compared to a business-as-usual scenario where PJM maintains the current 2% renewables mix. The report also notes that a $40 per ton carbon tax, if instituted, would push coal generation down even further than modeled in any scenario.

JBS News Renewable Energy. CO2 emission reductions in PJM. Image via PJM Interconnection
CO2 emissions reductions in PJM. Image via PJM Interconnection

So Is The Future This Bright?

As with any long-term outlook, GE’s analysis is not without potential pitfalls. For instance, many of the PJM scenarios assume offshore wind development in Mid-Atlantic states like Maryland and Virginia along with improvements in renewable forecasting accuracy and growth in energy storage capacity.

But even considering all these challenges, the PJM renewables outlook shows that the transition to a clean energy system isn’t only possible, but it is likely to come with economic and environmental benefits.

This article, America’s Largest Grid System Could Reach 30% Renewable Energy By 2026, is syndicated from Clean Technica and is posted here with permission.

About the Author

JBS News Renewable Energy. Silvio MarcacciSilvio Marcacci is Principal at Marcacci Communications, a full-service clean energy and climate-focused public relations company based in Washington, D.C.