A new report by the Rocky Mountain Institute offers electric utilities a stark choice. They can either align their policies to accept solar and wind power now, or they can be destroyed by solar and wind power later.
The report traces the risks of "grid defection" - customers removing themselves entirely from the current electric grid - in a variety of cities. In some, like Honolulu, solar is already the cheaper choice. Others, like Louisville, are still trying to hold onto coal. Some, like San Antonio, are sunny, while others, like New York's Westchester County suburbs, are not. Los Angeles was the fifth city studied.
The study estimated the cost of electricity using the grid, solar panels, and panels plus storage going out 25 years, estimating when customers might choose to leave the grid over costs. In all cases, defection became an issue within 10 years.
To the authors of the study it means that utilities which choose to confront solar, pushing state policies limiting net metering, or charging for simple connections to the grid, are going to wind up with inefficient, redundant systems as customers disconnect. Integrating solar customers into the grid will limit the capital these utilities must spend and over time improve results.
Yen Yoo has described what is happening in a recent piece about Duke Energy (NYSE:DUK), concluding that the company may be a poor investment as solar is increasingly used to replace peak power. Even after buying a solar supplier Duke is not competitive with companies like SolarCity (SCTY), due to its high capital costs elsewhere.
The theme is playing out in Massachusetts, where National Grid (NYSE:NGG) is fighting net metering with a statewide cap, and the stock is down 3% over the last year. By contrast Pacific Gas & Electric (NYSE:PCG), which serves sunnier California and is more accepting of renewables under state law, is up 22%.
The RMI report says all this will eventually hit the bottom line. That's why you see a 5.28% yield on NGG and a 3.35% yield on PCG. Investors have already adjusted to the risks in the prices of these stocks.
In Texas, the least-regulated state utility system, Energy Future Corp. declared bankruptcy last year due to high costs. A big winner from that was NRG Energy (NYSE:NRG), which is focused on solar. Things may play out even faster in Texas than elsewhere, as the municipal system in Georgetown recently signed a long-term deal with SunEdison (SUNE) that will see it go all-renewable by 2017 in order to save money.
Back in August, I wrote about how all this will play out in comparing PCG to Southern Co. (NYSE:SO), a South Eastern utility that relies heavily on coal and nuclear fuel. The turn has not yet come - Southern has outperformed NRG since August with a slight gain of 2% against an 18% loss at NRG - but it should work over time.
Let's summarize. Utilities that are adding coal and nuclear capex while trying to kneecap solar providers are facing a sunset as solar costs keep declining and customers start defecting. Those that integrate solar, and wind into their grids may find a bumpier ride in the near term, but should see sunnier skies ahead.
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