Financial analysts have funny euphemisms for “sell” or “avoid.” “Underweight” is the word Barclays Bank uses.
Last week, Keryn dug up an interesting development in the financial world. Last week, Barclays told all its financial analysts to downgrade their investment recommendation for all US electric utility bonds to “underweight” in their portfolios and recommendations to clients. This is not a change in bond ratings, just a change in Barclays recommendations to investors.
It is a very interesting development, because utilities issue a lot of bonds. They need them to finance infrastructure investments and new power generation. If fewer investors are interested in utilities’ bonds, that means their interest costs will rise, cutting into their profits.
What is Barclays concerned about? I’ll let them say it:
Electric utilities… are seen by many investors as a sturdy and defensive subset of the investment grade universe. Over the next few years, however, 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. We see near-term risks to credit from regulators and utilities falling behind the solar + storage adoption curve and long-term risks from a comprehensive re-imagining of the role utilities play in providing electric power.
Looks like Wall Street is finally catching on.