The energy sector is primed for disruption. The rise of solar as an efficient and realistic source of energy is becoming a reality today. Use of solar power using photovoltaic (PV) systems has been around for over a century. Last week's episode (Ep 12) of "Cosmos: A Spacetime Odyssey" featured a section on the invention of a solar-driven motor in the 19th century from Augustin Mouchot and a solar-based steam generator in the 1910s from Frank Shuman. However, due to the economics and ease of using cheap coal and oil caused the inventions to be overlooked at the time. For decades that have followed, solar was deemed too expensive as an energy source and never gained any traction. However, that is now changing.
The Market Drivers
There have been two big drivers in bringing solar prices down -- Germany (& EU by extension) and China.
We saw immense subsidies from Germany in the last decade that drove the technological innovation and prices down in the PV systems. However, Germany made a policy change after the Fukushima disaster to quit using nuclear power to fulfill its power needs. This was good news for the solar industry, but in a surprising move, Germany is now planning on cutting the subsidies to the solar sector, even though its facing rising energy costs.
The baton for making solar energy affordable now has been passed onto China. China took a decision to pursue clean energy avenues in order to solve its problems of both energy needs and pollution. The Swanson's law is an observation that the price of solar photovoltaic modules tend to drop 20% for every doubling of cumulative shipped volume. A detailed analysis of how China took this problem seriously and dove head-first into piling on the investments was recently published on Business Insider. BI has also featured a couple of interesting articles on the unprecedented drop in solar energy prices and Goldman's take on it. I recommend readers check out these articles as they make for an interesting read.
The US still faces the onslaught of the incumbent special interest groups, but the tide is slowly turning with new installations and support for the solar industry. The US solar energy production has seen meteoric rise over the last few years and the trend is expected to continue. In a latest endorsement, Warren Buffett is quoted to have said that he is looking to double his investment in solar and wind energy. Details of the US solar installation capacity can be found here.
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|Source: US Energy Information Administration's Annual Energy Review|
The utilities sector is prime for disruption. The sector has remained in the dark ages by relying on burning coal and gas to provide for the energy needs. The new EPA regulation sets a target to cut coal emissions by 20%. While this is definitely bad news for the coal industry, it may also spell bad news for the utilities sector. Not surprisingly, Barclay's downgraded the whole utilities sector.
Consider the case of home users installing solar panels on their roofs and providing electricity to the grid. The feed into the grid is during the day when electricity prices are more expensive, but the usage for home users is mostly outside business hours, when its cheaper. This works out great for the customers, but not so much for the utility companies. Some utility companies see the rising solar movement as a threat to their business and are trying to create roadblocks such as the one seen in Arizona and Oklahoma. But the widespread use of new technology always comes with such hurdles and will eventually find a way to disrupt the sector.
I do not think that the whole utilities sector is going to die. None of the utilities companies will see their coffers disappears and I don't see them going bankrupt. But I do see a lot of headwinds. The utilities sector is expected to cut coal reliance as per the EPA directive. This means relying on more expensive methods of energy production, be it natural gas, oil, nuclear or installing and operating solar/wind farms themselves, which comes with high initial investment.
Coupled with the current all-time highs in the market, high valuations of stocks in the sectors (with P/Es close to 20) and the risk of steep falls or crashes in case of rising interest rates, I am not too keen on the utilities sector. This is the reason, I decided to sell some of my positions recently.
We are not getting off the oil bandwagon anytime soon -- our cars still require us to pump the crude from the ground, but the greener sources of energy are changing the landscape. What is your take on the rise in the solar sector? Leave a comment below and share your thoughts on solar and the implications on the utilities sector.
Full Disclosure: None. My full list of holdings is available here.