Clean Power

Published on June 11th, 2014 | by Rocky Mountain Institute


US Electricity Sector Gets Downgrade From Barclays, US Consumers Get Upgrade

June 11th, 2014 by  

Originally published on Rocky Mountain Institute.
By James Mandel

Barclays recently downgraded the U.S. electricity sector. That’s right, the whole sector. It’s now listed as “underweight,” meaning that if you were to hold a full portfolio of bonds for the U.S. economy, you might want to be a bit light on U.S. electric utilities, as they might not keep up with the broader economic growth trends. Why? One answer is the disruptive threat of solar-plus-battery systems. From the Barclays report:

Over the next few years… we believe that a confluence of declining cost trends in distributed solar photovoltaic (PV) power generation and residential-scale power storage is likely to disrupt the status quo. Based on our analysis, the cost of solar + storage for residential consumers of electricity is already competitive with the price of utility grid power in Hawaii. Of the other major markets, California could follow in 2017, New York and Arizona in 2018, and many other states soon after.

In the 100+ year history of the electric utility industry, there has never before been a truly cost-competitive substitute available for grid power. We believe that solar + storage could reconfigure the organization and regulation of the electric power business over the coming decade.

If that language sounds familiar, it’s because Barclays’ logic is very similar to that of our recent report, The Economics of Grid Defection, in which we forecasted the declining costs of solar plus storage and the time—coming soon—when those systems could reach parity with grid-sourced retail price electricity in a growing number of markets, including Hawaii, California, and New York. In fact, the Barclays report cites RMI as a key source in several of its analyses that lead to this conclusion.

Barclays believes we’re entering a post-monopoly world in which distributed energy resources will take a place alongside large-scale central generation as a critical energy resource and a widely available and affordable customer option. In a surprisingly strong prediction for analysts, Barclays views this transition as inevitable: “Whatever roadblocks utilities try to toss up—and there’s already been plenty of tossing in the states most vulnerable to solar, further evidence of the pressures they’re facing—it’s already too late.”

If you’re a utility, or an investor who’s got money in utilities, that’s some ominous language. Admittedly, a downgrade suggests two possible outcomes in the near future: 1) analysts tend to move in herds, so expect more news on the U.S. electric sector soon, and 2) capital is likely to get a bit more expensive for utilities, as millions of dollars shift out of the sector.

It’s not all bad news. As we discussed recently in “Caveat Investor,” this should ultimately lead to a stronger, more resilient power sector with stronger overall valuations, but the transition is likely to be volatile. The Barclays report suggests we’re about to enter that volatile transition phase.

So, what are the major trends we can learn from this, and what does a utility downgrade mean for the future of distributed renewables?

1) Distributed energy is hitting the mainstream. Historically, it’s renewables’ creditworthiness that has been challenged (while utilities have been considered rock solid), but now this trend appears to be reversing. We’ve seen declining costs of capital in solar (as recent securitizations demonstrate), new financial instruments emerging for related technologies, and lower costs overall. Despite this progress, there is still a large gap between the market acceptance of renewables and the market acceptance of central, fossil-fueled generation. The recent downgrade suggests that people are starting to take distributed renewables seriously, and that utilities and renewables are entering a period of equal (or at least comparable) market strength.

2) Issuing new bonds for thermal fossil generation will become more expensive. While many people focus on the construction costs of new assets (central and distributed generation alike), it’s more often the cost of capital that determines project viability. Traditionally, utilities have almost always been the lowest-cost provider of new energy resources, and part of this advantage has rested on ready access to and favorable terms from the bond market. If that advantage is eroding, then expect new players to be able to compete for providing the nation’s energy, including providers of much smaller, distributed generation.

3) Distributed storage, when combined with already mature trends in generation and energy efficiency, compounds the disruptive threat of consumer-scale investments in energy. Many people have worried that declining demand (through energy efficiency) and distributed generation are putting enormous stress on the traditional business model for investments in central generation. That has not changed at all. So why does the emergence of storage, something that doesn’t reduce consumption or increase generation, suddenly give the markets concern? Simply put, the addition of storage gives customers the option to entirely disengage from their relationship with the utility. While most customers won’t choose to leave, and for good reasons, the threat of grid defection creates consumer leverage that will slow recent upward trends in utility rates out of competitive necessity.

4) These trends are likely to accelerate. As capital shifts from central to distributed generation, this just improves the economics of distributed resources even further, through scale benefits as well as lower cost of capital. Few people would say that we’ve even come close to market saturation for any customer segment for renewables and efficiency. As the traditional electric sector becomes a more challenging place to park capital (or even just a less certain place), more investors will start to notice that investments in distributed resources have similar risk-reward profiles, and this movement of capital will be self-reinforcing.

Barclays took a fairly surprising stance for an industry not traditionally known for looking years into the future. That’s a great sign for the markets, which need to start responding to global, long-term trends. And while the Barclays report isn’t likely to move markets in the next 6 or 12 months, it does signal an important shift under way—distributed generation is likely to be an affordable and accessible choice for more and more customers alongside traditional utility-provided electricity. More options means more competition and increased relevance of the customer. And that’s an upgrade for users of electricity everywhere.

Image Credit: pcruciatti /

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About the Author

Since 1982, Rocky Mountain Institute has advanced market-based solutions that transform global energy use to create a clean, prosperous and secure future. An independent, nonprofit think-and-do tank, RMI engages with businesses, communities and institutions to accelerate and scale replicable solutions that drive the cost-effective shift from fossil fuels to efficiency and renewables. Please visit for more information.

  • JamesWimberley

    Having missed the boat on the solar boom first time round, Wall Street has gone overboard on home storage – a technology that barely exists and that faces major challenges. On paper, it should not make sense: there are large economies of scale in storage (as there are not in panels), so utilities will always be able to buy it cheaper than households. Massive home storage is predicated on irrational charging schemes, just as third-party home solar depends on failures in financial markets and regulations. Rugged homesteading independence from the grid is more a marketing ploy than a convincing case.

    • John Ihle

      I’m not following your “Massive home storage” comment re irrational charging schemes. There are so many charging schemes some of which (may and/or do) mitigate transmission investments, minimize distribution load and often save operational costs for upgrades, ev charging, time shift load as well as potential ancillary benefits re frequency and voltage support, etc. There are a lot of charging schemes all of which can or could save ratepayers money with respect to traditional utility investment. You obviously can do storage on massive scale but more and more, I think, having your own back up is going to make sense as more micro grids are constructed, the frequency of storms and the threat of terrorism. Costs will come down like they did with wind and solar, etc. and it will make better cents as time goes forward and new utility business models are devised. It will be interesting.
      Storage may not be super rational now but there is a huge shift in re and how the investment community views such investments.
      So I’m not sure, in your view, what’s “irrational”.

      • Bob_Wallace

        How about we use a bit of common sense. How often does one actually lose power from storms? From terrorism?

        Most/many utilities are working to make their distribution systems more rugged. The smart grid will make systems less likely to fail in a storm and make it quicker to isolate and repair losses which do occur.

        If you live in a place where outages are truly frequent then, perhaps, some sort of backup would make sense. From a purely financial basis (not environmental) the best option would be a small generator.

        The cost of storage that would carry your basic needs for a week or two would be astronomical. Especially if it gets used once a decade.

        If you want a solution that is more environmentally friendly then perhaps you should be driving a PHEV that has a built in inverter. You’d save the planet a lot of CO2 when you do your daily driving and you’d have a fairly clean and efficient “generator” parked in your driveway when you need emergency power.

        • John Ihle

          they said the same thing about wind energy 30 plus years ago when it cost over 35 cents to generate a kwhr of power from that resource. my sense is that storage will be substantially cheaper in the future.

          • Bob_Wallace

            Storage would have to drop a lot to make it reasonable for someone who loses power for a few days every few years.

            What might be fun would be to cost out a storage system that could carry your house for three days.

            And then price out a PHEV (Chevy Volt). I’d bet that between the gas savings plus the value of household backup.

            I can help you get started. I recently bought some new deep cycle batteries. 16 kWh of storage cost me ~$2,000.

            Figure out how much you’d need to carry you over your typical outage. Add in the cost of a battery charger and inverter.

            Let’s say it comes out to $7,000 (making up a number).

            New Volt MSRP $34,185. Federal credit $7,500. “Backup value” $7,000.

            That makes the Volt a ~$20k car.

            Now work through the fuel savings per year and I’ll bet the payoff for a Volt would be pretty quick.

    • Bob_Wallace

      I support this statement. As one who has been “ruggedly” off the grid for over 25 years.

      It makes some sense to store some electricity “at home” in some cases. If one lives in a place with expensive electricity (Australia, Hawaii) and cannot use net metering pricing.

      • John Ihle

        No one knows how or if residential storage would ever be paid for ancillary benefits like voltage/frequency support as well as time shifting. There are several factors that may prompt storage someday. The electricity business is/has been pretty dynamic over the last few decades and there may be those factors as well as others down the road that may facilitate the economics. I think so but I’m not holding my breath.
        I’m not ready to do storage, yet. I like the idea of pvev, which there has been some discussion recently, and someday I may take you up on your offer.

      • Ronald Brakels

        Welcome to sunny Queensland and its generous zero cent a kilowatt-hour feed-in tariff and 33 cent a kilowatt-hour grid electricity. Home energy storage seems inevitable here. And things are looking up for the world’s 1.4 billion or so who are completely off grid.

        • Bob_Wallace

          Yes, you folks down there are a rather special case.

          And for those who have little opportunity to hook to a grid…

        • drevney

          Same througout the middle east and north africa.

    • Calamity_Jean

      The hyping of “solar + storage” makes people think that they should do or must do both. Then they look at the still very high cost of storage and do neither. Which may be part of why storage is getting so much hype.

      My feeling is that if a household has it’s own well, it should have at least enough batteries to run the well pump and not much else for a few days. People who live in places that supply water are better off to just go with solar without storage.

  • Matt

    The second portion of storage disrution has nothing to do with renewable. If you could cheaply store a lot of power, then you can run your best thermal plants, at their best rate. Storing the extra power and then not running a peak plant. If the storage was “free”, and could store 50% of a days power use. How much of the reserve capacity is not longer needed. Yes a long way from there but things can change very fast.

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