Are The Lights Going Out For Electric Utilities?

Includes: KWT, TAN
by: Bruce Vanderveen

Death by a thousand cuts. That is what is could be coming soon to an electric utility near you (or perhaps one you invest in). While "death" may be too strong a term, things do not bode well for the public monopolistic utilities.

There is a little-known revolution going on. You can see evidence of this revolution on rooftops and in the lighting section of any home improvement store. Solar panels, solar lights, and those weird looking light bulbs with funny names such as CFLs or LEDs are some of the clues. It's a revolution that has utilities in a quiet panic.

Don't laugh. Solar panels, CFLs, and LEDs are no longer just toys for gadget freaks or back-to-the-land types. Wal-Mart (NYSE:WMT) has a goal of getting 100% of its energy from renewable sources - primarily solar. Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Walgreen (WAG), IKEA, and others are also rapidly expanding into on-site power generation. In Ohio, a cloudy state, solar business installations are proliferating.

In the residential sector, U.S. solar installations are surging. Overseas, Germany on a sunny day, can produce as much solar power as 20 nuclear power plants.

All over the world the need for centralized power generation is falling with solar, wind, LED lighting, rechargeable batteries are leading the charge. Smart devices, with both near and long distance two-way communication are making device control easy.

Solar Energy

Solar is clean, abundant, renewable, and works anywhere the sun shines - from the Sahara to Antarctica. Solar is fast becoming the energy source of choice for low to medium power needs both off (and increasingly on) grid.

Last August I was fishing in a remote lake in northern Ontario. Initially I was surprised that all our cabin's lighting was solar. It makes sense, however. No electric service, long days, low-energy consuming CFL bulbs all make solar a no brainer.

Solar panels convert sunlight into electricity. The solar process, called photovoltaics, generates direct current (DC) electricity. If desired, an inverter can convert the DC to alternating current (AC). The power can be used either on grid with net metering or off grid with batteries.

Net metering is when green energy, usually solar or wind, is fed back into the grid, spinning your electric meter backwards (Sounds good doesn't it?). Net metering, now with 300,000 participants in 43 states, is still in its infancy but it has already touched off a storm of controversy. Utilities, especially in California and Arizona, claim solar panels are not fair to non-solar customers.

The cost of solar panels has fallen 75% in the last 3 years thanks to technological improvements and Chinese manufacturing. If these trends continue as seems likely we can expect to reach grid parity; the point at which alternate energy costs equal grid costs.

CFL and LED Lighting

Thomas Edison developed the incandescent light bulb in 1879 and fluorescent bulbs showed up in the 1930's and 1940's. Yet, little has changed in how lights work until recently. Now, a tidal wave of change is occurring.

CFLs and LEDs use 65-90% less electricity than incandescent bulbs. The major problem with CFLs is they contain toxic mercury. LEDs, with costs falling, are the future of lighting as they are mercury free, and last over 40 times longer than incandescents (CFLs last 8 times longer). Here is a chart which compares bulb types.

Recently I was in Home Depot and bought, on sale, a 4-pack package of 60 watt equivalent CFLs for $1.95. The package claims $200 a year in electric savings. If true, the cost of the bulbs is recouped in under a week! Even on the LED front - where bulbs usually cost $10 or more - you can get 100% of your money back in a little over a year. For the remaining 24-39 years of the bulb's expected life you keep all the savings.

Rechargeable Battery Technology

If not connected to the grid rechargeable batteries are essential for storing energy from sun, wind, and other variable power generating source. Electronic devices including cameras, cell phones, tablets, computers all use rechargeables. On a larger scale solar panels and wind generators use rechargeables to provide off-grid power to businesses and residences.

Rechargeable battery technology is continually improving. NiMH batteries used in cameras and other devices and lithium-ion batteries used in smartphones and tablets have both improved dramatically in recent years.

The future looks even brighter. Researchers at the University of Illinois have developed a new lithium-ion battery which is 1,000 times more powerful and recharges 1000 times faster than existing ones. Yes, it's a long ways from the research lab to production - but you see the potential. For now, since lead-acid batteries are the least expensive, they are often used in solar and wind installations. Both lead-acid and lithium-ion technologies continue to evolve.

Smart Devices

We all know the stunning success of smartphones. Out of nowhere, a good idea - mobile phones - evolved into an extraordinary one -smartphones. Almost overnight, smartphones have dethroned laptops. Smartphones and tablets show the value that is can be produced when rapidly evolving technologies (in this case LED lighting, battery,communication, and computing technologies) work together.

Two-way communication between smart devices, often using apps such as you see on smartphones, can control lights, appliances,and thermostats.

One example: You have always been able to save money by adjusting the settings on your hot water heater, but it was awkward, tedious, time consuming, and possibly dangerous. However, if you can control it with just a few flicks of the finger on your smartphone you are much more likely to do so. The same holds true with a multitude of other things.

Utilities: Are They Dinosaurs?

So what does it all mean for the electric companies and their investors? Probably nothing good. Reuters says regulated,monopolistic utilities will become dinosaurs. On-site, owner run, power generation - usually solar or wind - will diminish the need for expensive power plants and transmission lines.

It's just a matter of time before grid parity is reached. At that point utilities will effectively lose their monopolistic status.

Utilities Are Starting To Fight Back

Utilities, perceiving the threat, are fighting back by contesting net metering rates, subsidies, etc. Since monopolistic utilities are guaranteed a set return on their infrastructure anything, such as net metering, which reduces the need for it will reduce their income. It has become a highly politicized battle, especially in the Southwest. Arizona Public Service (NYSE:PNW), and Xcel Energy (NYSE:XEL) are asking state regulators to reduce incentives or impose charges on customers who install rooftop solar systems.

The net metering battle may soon be irrelevant. Commercial and residential customers are increasingly bypassing the grid entirely. Why put up with the hassles when improving storage technology will allow the generation and storage of power.

Currently you can buy a "Complete Off Grid Solar Systems" on eBay (from China of course) for $189 (100 watts) on up - no battery. Now, I am not by any means recommending this system - I have absolutely no idea how well it works. The point, however, is: this is the future. You can get your own power plant. No bills, no taxes, no regulations.

Multiple Converging Technologies Will Revolutionize The Power Industry

Renewable power generation is growing quickly while simultaneously technical advances in lighting and control mechanisms will reduce power consumption. This is bad news for utilities, good news for consumers and the environment.

The power grid will not disappear over night, but do look for it to shrink and change. Investors need to be aware of these changes. Utilities will no longer be conservative, income generating investments fit for widows and orphans.

Much like hundreds of million cars displaced passenger trains and horse and buggies, on-site power generation will likely displace or greatly diminish monopolistic electric utilities.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.