Going Green Could Dim Utility Sector ETF Outlook

Includes: IDU, TAN, XLU
by: Tom Lydon

The push into solar and alternative energy will help reduce our reliance on fossil fuels, but as we go green, the energy-efficiency programs could weigh on utility sector stocks and exchange traded funds.

According to Fitch Ratings analysts, alternative energy programs will cut into utility revenues and profit margins and discourage investments in to new transmission projects in five years, reports Christopher martin for Bloomberg.

Glen Grabelsky, Fitch's managing director of utilities, power & gas, singles out Midwest and Northeast utility markets that could face increased competition as businesses and homeowners install their own generators or upgrade to more efficient systems.

Moreover, favorable alternative energy subsidies is cutting into utilities' profits. For instance, regulators in 43 states require utilities to acquire surplus power produced from solar panels. Grabelsky believes that state regulators could eventually allow utilities to shift some of the burden onto customers who aren't using solar sources.

"You can only burden the other customers to a certain degree," Grabelsky said in the article. "For now it's fairly negligible but in five years it will become noticeable. Each year the disparity will grow."

Over the past year, power supplied by U.S. utilities decreased 3.4%, mostly due to energy efficient programs and solar generation. Grabelsky warns that if this continues, utilities won't be able to invest in new projects or upgrade transmission systems.

"It will have a negative impact on their ability to raise capital," Grabelsky added. "Regulators will ask, 'Do you really need all that new transmission when there's no demand growth?' There's the potential for stranding assets."

Solar ETFs have been among the best performing funds year-to-date. The Guggenheim Solar ETF (NYSEARCA:TAN) has gained over 60% so far this year.

The Utilities Select Sector SPDR (NYSEARCA:XLU), the largest utilities ETF by assets, sank 3.5% in the second quarter while the iShares U.S. Utilities ETF (NYSEARCA:IDU) dropped almost 2.4%. Utilities have been underperforming the broader markets as investors shifted over to riskier bets to join the broader equity rally.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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