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.

The Home Battery System. Are we ready for this?

by John Brian Shannon John Brian Shannon

Ever since lower priced solar panels have hit the market, it has become obvious that home battery systems are the next logical step for our modern, but still evolving, energy grid.

Installing solar panels on your rooftop has never been easier, as panel prices have fallen in price by 80% over the past two years and installation rebate programs are generous in many jurisdictions. But getting all that free daytime energy from the Sun won’t do you much good unless you can store it for later use.

Having a home battery system allows you to store the energy that your solar panels collect every day.

Without a home battery system, solar power can make economic sense in many locations — but solar with a battery system will rock your world! OK, maybe not rock your world, but it makes a lot of sense if the battery system can be had for a reasonable price.

Without a home battery, you can still sell your excess solar generated electricity to the grid if your utility has a net-metering programme. But much of your profit is eaten up when you buy back some of that electricity after the Sun sets, at a higher price. Yes, every day of the year.

For homeowners, having battery storage means you could save a lot of money over ten or twenty years if a battery system is cost-effective to begin with — and a battery system IS a wonderful thing to have during utility company power outages.

Home Battery Systems can make sense, even without solar panels

If you live in a jurisdiction where you can buy electricity from your utility company at a very low rate during certain hours of the day or night and store that energy with your home battery system for later use, that can work for you — regardless if you have solar panels or not. Peak rates can be $0.38 per kWh in some parts of North America (or higher), while off-peak rates can be $0.08 per kWh (or lower) making the peak rate about five times more expensive in this example, than the off-peak rate.

Prognosticating ten or twenty years out, who’s to say what electricity rates may be? There always seems to be a reason to hike the rates.

JBS News Renewable Energy. Ontario, Canada rates presently run between $0.07 Off-peak, $0.11 Mid-peak and $0.13 On-peak per kWh. All rates are approximate and subject to change. This chart for illustrative purposes only. Image credit: Ontario hydro one.
JBS News Renewable Energy. Current electricity rates in Ontario, Canada, run between $0.07 Off-peak, $0.11 Mid-peak and $0.13 On-peak, per kWh. All rates are approximate and subject to change. This chart for illustrative purposes only. Image credit: Ontario hydro one.

Your home or business can run on the power from your home battery system during high electricity rate periods, and past midnight, your battery system can be scheduled to automatically connect to the grid and recharge itself at the lowest rate.

At present, we are about 10 years away from economically priced home battery systems for the majority of consumers. That’s not to say that you can’t go out and buy one of these systems today, because you can. It’s just that they cost more than the average consumer is willing to spend at this point.

Apart from collecting solar energy for you all day or saving money due to rate fluctuations (or both), home battery systems can protect you from utility company power interruptions, especially for those in rural areas or other areas where power outages are common.

However, for homeowners in rural areas and subject to frequent power service interruptions, having a battery backup can make sense.

Take the case of a dairy farmer who suddenly has no electricity at 7:00am on a cold winter morning; How is he going to milk 2500 cows in one hour, and in the dark, without backup power? Of course, the old standby has always been an expensive-to-fuel diesel generator and the noxious fumes that go along with it.

Or we can look at a veterinary clinic, or other examples where uninterrupted electrical power is important.

With battery backup, electrical power returns within one minute and the vet can proceed with the days operations on her four-footed patients and the farmer can milk his cows without missing a beat.

Emergency service providers, schools, and other important government buildings and businesses could also benefit from such in-situ battery systems.

It’s interesting to note that Tesla is working with Solar City to offer home batteries, using their Electric Vehicle (EV) battery technology. A fascinating development and one that holds tremendous promise.

Recycled Electric Vehicle batteries still have 70% life, after removal

GM wants to use old Chevy Volt batteries and give them a second life as an home battery. GM says that even after ten years of powering your daily commute, an EV battery still has at least 70% of the power it had when it was assembled.

In many cases, when an EV battery has reached the end of its life in an automotive application, only 30 percent or less of its life has been used.

This leaves a tremendous amount of life that can be applied to other applications like powering a structure before the battery is recycled. — Pablo Valencia, GM senior manager of battery lifecycle management

Innovations like new and recycled EV batteries will pave the way forward to a viable and affordable distributed energy future and can be a way to get very efficient second use from recycled EV batteries.

EV batteries store a huge amount of power, enough to power a home for two or three days in the case of a service interruption — and in the case of storing energy for everyday use during peak rate periods, would be well within EV battery capabilities.

Stay tuned, because this story is just beginning.