Blackout: The Failing Model Of Electric Utilities

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by: Wall Street Daily

By Tim Maverick

BLACKOUT: The Failing Model of Electric Utilities

The rush to be a part of the most profitable market trends often looks like the madhouse of shoppers scrambling for that must-have holiday gift.

With the Federal Reserve inspiring a sense of desperation around fad markets, it's important to stay cautious. The popular stock you pick now may have to be "returned" later at a lower price.

This is especially true when it comes to electric utilities, as of late. Many of these - particularly in the eastern U.S. - are under pressure from lower demand, depressed electricity prices, and tightening environmental regulations.

Current regulations alone will cost the industry nearly $10 billion annually.

And now, solar energy and a surge in solar panel installation threatens to blow an even bigger hole in electric utilities' bottom lines.

Ch-Ch-Ch-Ch-Changes

Apparently, U.S. electric utilities' management teams aren't fans of the late David Bowie - they've been turning a blind eye to the changes in their industry for a long time.

This is because the new realities of power generation are turning the once-staid electric utility industry on its head.

Even Warren Buffett warned about this in his latest letter to Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) shareholders. He explains that subsidized solar and wind power is eroding the economics of poorly run electric utilities.

Utilities are struggling with modern advancements and how to integrate wind farms and solar plants into their systems. Cheap power from these sources is undercutting the electric utilities' business model that's been around for over a century.

The profitability from conventional power sources such as coal power plants is disappearing. Revenues are sliding, too. In 2015, utilities' revenues fell 1.3% to $388 billion.

And the pressure on electric utilities is only growing. This fact should worry investors who bought these stocks for their dividend payout.

The Threat of Solar Energy

Industry consultant ICF International states that grid managers serving the eastern United States plan to cut the amount of electricity they buy from conventional power plants by roughly 1,400 megawatts by 2019.

Translated into revenue, ICF estimates those megawatts are valued at $2 billion in lost revenues for the utilities involved.

Not surprisingly, the utilities in question have inspired talks of an Armageddon scenario in which the electric grid becomes "unreliable" thanks to "weather-reliant" renewable energy sources. In case of End Times, solar energy would be useless.

Utility companies point to Germany for sympathy. There, many conventional power plants have been scrapped because they're unprofitable, leaving unemployment in their wake.

But perhaps they ought to find another reference. Thirty percent of their power now comes from renewables, and German consumers there are enjoying the lowest power prices in more than a decade thanks to the move toward renewable power sources.

Utilities Strike Back

Electric utility managements aren't just sitting back, watching their businesses disappear. They have mounted a counterattack.

It comes in the form of changing the way they charge customers. Instead of charging based on the amount of electricity consumed, utilities are now simply raising the fixed fees on each monthly bill.

Why? So they can afford to keep the electric grid up and running.

Lisa Wood is a Vice President at the non-profit Edison Foundation. She told The Wall Street Journal that "the [electricity] grid is becoming a more complex machine, and there needs to be an equitable sharing of its costs."

What It Boils Down to…

Even if you add rooftop solar power to your home - guess what? You won't be seeing the cost benefits of that renewable energy anytime soon.

Your electric bills won't be much lower in the years ahead because the utilities companies will simply charge even more in fixed costs just to maintain the grid, whether or not you're using its power.

For investors, this throws up a major caution sign for the electric utilities market. Especially due to their high valuations, driven by yield-hungry investors ignoring the signs of a fleeting market trend.

S&P 500 Electric Utilities (Industry)

Soon enough, I fully expect to see a red flag raised regarding these stocks.

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