Utility company equities took a "what me worry" attitude this week to Barclays' downgrade of the debt of the entire electric sector thanks to long-term challenges from solar and storage. "In the 100+ year history of the electric utility industry, there has never before been a truly cost-competitive substitute available for grid power," says Barclays, but that's changing before our eyes.
The cost of solar + storage for residential customers is already competitive with the price of grid power in Hawaii, says Barclays, and could soon follow in California, New York, and Arizona, with many other states soon after.
Utility investors (at least on the credit side), says Barclays, are depending on a continuation of the "regulatory compact" - in which utilities keep the lights on in exchange for low-risk returns - to protect them from the disruptive forces at hand. It's worked in the past, but "technological change creates precisely the environment where slower-moving incumbents and their regulators can fall behind the curve, risking credit volatility."
Seeing "a rare opportunity," Barclays recommends credit investors underweight the electric sector against the broader U.S. Corporate index (AGG), and rotate out of paper issued by utilities in areas where solar is closer to being competitive.