Dive Brief:

• Barclays Bank’s bond rating service has downgraded the entire U.S. electric utility sector bond market rating against the U.S. Corporate Bond Index due to the challenge from ratepayers’ increasing opportunities to cut grid electricity consumption with solar and battery storage.
• Barclays recommended investors move out of utilities’ bonds wherever solar-plus-storage is becoming cost competitive, including in Hawaii now, California by 2017, New York and Arizona by 2018, and “many other states soon after…” because solar-plus-storage could “reconfigure the organization and regulation of the electric power business” in the next ten years.
• Electric utility bonds are nearly 7.5% of Barclays’ U.S. Corporate Index by market value but the U.S. utility industry is facing real competition in the cost-effective delivery of electricity for first time in its hundred-plus year history. The industry and regulators are ignoring the risks of “a comprehensive re-imagining of the role utilities play,” Barclays wrote.  

Dive Insight:

Barclays’s assessment concluded that though investors understand electric utility bonds as solid conservative investments, continuing declines in the costs of distributed solar PV and residential-scale storage are “likely to disrupt the status quo.”

The failure of utilities and regulators to respond to the challenge, according to Barclays, is due to reliance on the protection of the “regulatory compact” that has traditionally guaranteed a ratepayer-funded return to the “monopoly utility” in return for the obligation to supply electricity. Regulatory compact protection and a bias against the complexity of technology have often made the electricity utility industry and other industries with stable operating models late to respond.

Today’s rapidly-evolving technology, Barclays concluded, creates credit volatility for slower-moving utilities and regulators and can lead to unanticipated bondholder losses.

Barclays also cautioned against the solar industry’s tendency toward over-optimism while recommending wider utility bond sector spreads to cover regulatory mistakes “and/or a permanent change in the utility business model.”