There has been lot of chatter about rising interest rates posing "doom" for dividend-focused utilities. And there are charts like this one, showing near-term technical weakness ...
(Updated chart)
My colleague Marc Lichtenfeld addresses this fear in his most recent radio show. Personally, I think he covers it well.
And some people say this is actually a good time to buy utility stocks.
However, there is something else you need to worry about with utilities. And that other problem is the rising tsunami of solar-powered electricity ...
Source
There's no reason to freak out yet -- solar still only meets less than 1% of U.S electricity needs. But it's the rate of growth that should worry utilities.
The U.S. Energy Information Administration expects solar-powered electricity to grow by 79% this year and rise another 49% in 2014.
And it's no surprise that some big utilities are resisting solar power. The Seattle Times quotes Clark Gellings of the Electric Power Research Institute, a
utility industry association as saying: "We did not get in front of this
disruption...It may be too late."
Meanwhile, the head of Duke Energy puts it this way: "If the cost of solar panels keeps coming down, installation costs come
down and if they combine solar with battery technology and a power
management system, then we have someone just using us for backup.”
If I was a utility company facing that scenario, I might be thinking, "EEKS!"
What's more, two-thirds of all "distributed," or localized, solar in the U.S. has been installed in the past 2 1/2 years.
It's not just individuals. Cities are finding ways to wean themselves at least partially from utility-provided power.
And Deutche Bank thinks photovoltaic capacity in the U.S. could hit 50 gigawatts (although this would still only be 2% of the entire U.S. energy picture):
There is a more detailed analysis from Deutsche Bank HERE.
And my own home state of Florida may also be set for a solar boom. Interestingly ...
Where some states allow solar companies to sell electricity directly to
consumers, Florida prohibits the practice. Under Florida's monopoly
system, only utility companies, like Duke Energy and Tampa Electric, can
sell electricity to consumers. Solar companies must sell electricity
they generate to a utility at wholesale prices, which makes it difficult
for them to turn a profit.
Thanks, Gov. Rick Scott and the Florida legislature.
Still, 2% ... maybe the fears for Utilities are overblown? Maybe. But long-term investors -- the kind that usually buy utility stocks -- usually look at the long-term, right? And the long-term isn't looking so good unless utilities embrace change.
It's important to realize that we still need utilities for the simple fact that we still need an electric grid. Even solar-powered homes run off the grid at night, unless homeowners invest in expensive battery systems. So utilities aren't going away. But their role might change.
Meanwhile, the same Bloomberg story says that some companies ARE embracing the change ...
Other energy companies are challenging traditional utilities
by providing rooftop solar panels to power individual buildings. That includes
SolarCity Corp. (SCTY), which raised $92 million in its December initial public
offering. The San Mateo, California-based company had installed 287 megawatts
of commercial and residential solar projects, as of the end of last year.
It’s one of at least a dozen U.S. companies that
provide rooftop panels at no upfront cost to customers, who typically make
fixed monthly payments for the output under decades-long contracts, known as
solar leases or power-purchase agreements.
As cheap as solar is now, there are still a lot of ways that solar can be made cheaper.
For
example, there's a lot of red tape involved in installing solar power
-- estimates run as high as 50 cents a watt. If the red tape can be
cut, solar can bloom.
Also, a lot can be done on the financing side. What if you could include the cost of solar roof panels in the financing of a new home? I think there's some real opportunity for banks in financing home solar.
Personally, I like companies that embrace the future. In any case, select solar plays are something to consider.
Bottom line: I don't think rising yields are "doom" for utility stocks. And I don't think solar is either. But many utilities are going to have to change how they do business, and that can be scary for investors. It could weigh on those stocks until the companies figure out how to adapt.
