Biggest risk to utility stocks: You going solar
Wilson Magee picked the right time to start buying and selling utility stocks. The lead manager on Franklin Templeton Investments' Global Listed Infrastructure Fund started looking at the sector 18 months ago, and in that time, he's already seen some big changes.
Since he started following the industry, renewable energy generation has climbed by about 16 percent. "The changes are significant from a long-term perspective," he said.
Renewable energy is powering more and more homes in the U.S. and elsewhere, and it's likely that trend will continue well into the future.
Source: Recurrent Energy
Since 2004, power generation from renewable sources has increased by about 50 percent in the U.S., and it accounts for 13 percent of all energy produced in the country, according to the U.S. Energy Information Administration. By 2050, renewables could account for 80 percent of all energy sources, according to the National Renewable Energy Lab.
It's not yet clear what that will mean for traditional utilities, but one thing's for certain: The utility sector will look a lot different in the future than it does today.
While it may be years before we see dramatic changes, it's never too early for investors to start looking at their utility exposure and figuring out who will emerge as the new utility sector threat, who will adapt and which legacy companies will be caught napping.
Magee isn't yet ready to say that a company such as SolarCity—which serves as a solar project installer and financier—will be the utility of the future, but he is keeping an eye on the transition to renewables.
There are many companies with large solar fields already operating in this space, such as NextEra Energy and Duke Energy, but more could materialize as solar prices decline, Aggarwal said.
Today the price per kilowatt hour (kWh) for solar is about 11 cents for utility-scale solar projects, according to the Department of Energy. It's still more expensive than using natural gas, which sells for about 6 cents/kWh, but the price has come down from 21 cents/kWh in just three years. The Department of Energy's "SunShot" program predicts the 6-cent goal will be reached by 2020. That would allow 14 percent of all U.S. electricity generation to be provided by solar.
Wind and hydroelectric power are almost as cheap as natural gas—both cost about 8 cents/kWh—but it's solar that offers the best opportunity to deploy new power generation: You can't put a windmill in someone's backyard, so it's limited to large, open spaces. Hydroelectric power, meanwhile, is limited to where there's water, and most of those places are already being used. The amount of hydropower generated in the U.S. today is almost the same as it was in 2004.
Many people think of solar companies that cater to the small-scale commercial and residential markets, including SolarCity and Sungevity, as solar panel sellers and not utility companies. SolarCity now has sales representatives in Home Depot and Best Buy locations, allowing residential customers to shop for a solar rooftop or backyard project just like they would a home improvement or electronics product. But in effect, they operate more like utilities, allowing their customers to lease the solar projects on their property. Any excess power that's created from a project is fed back into the neighborhood electric grid, and the user may then be given a discount on their electrical bill.
The fact that end user is generating power—rather than getting it from a utility company—is a major change.
People who have solar panels on their roofs still depend on their local utility to supply electricity when solar power runs low, but there could come a time when people disconnect from the power grid all together, Aggarwal said.
Continued: Biggest risk to utility stocks: You going solar
Black Blade: I continue to watch solar and want to install panels as a back up to my existing on-grid electricity. However, I can't make the numbers work no matter how I crunch them. It would cost me about $38,000 for what I need and then factor in maintenance and periodic battery replacement. The numbers just don't work. Maybe in a few years but not now. For now I keep generators on hand for back up power when the power goes out.