Distributed generation poses a potentially existential threat to the future of electric utilities, according to a new report by investment research firm Morningstar.
Distributed generation, which refers to a suite of technologies that produce electric power at or near the point of consumption, has already begun posing challenges to utilities in Europe.
Technologies such as rooftop solar reduce the value of utilities' legacy assets and centralized networks, and erode their efficient-scale competitive advantage, according to Morningstar.
By reducing purchases of electric power from the utility grid, utilities' costs to maintain and operate the grid must be spread across a smaller customer base, raising customer rates and increasing the economic incentive to cut the cord.
In the long run, Morningstar predicts that high deployment levels of distributed generation in the mainstream market could lower utilities' earnings, taper cash flow and reduce return on invested capital will fall. These factors would make future dividend payments less certain.
The threat is especially severe for utilities with significant baseload power generating assets, including coal and nuclear plants. Regulated utilities with high solar rooftop photovoltaic (PV) saturation are also vulnerable.
However, given that current deployment levels of distributed generation in the U.S. remain fairly low, it could take a decade or more before the distributed generation threat to U.S. utilities materializes on a meaningful scale, according to Morningstar.
Key takeaways from Morningstar's analysis of distributed generation include:
- Net metering, tax benefits, and technological innovation support the adoption of distributed generation.
- Solar financing and tax incentives increase the moat threat for utilities by lowering customers' upfront costs and expanding the potential customer base for distributed generation.
- Innovative companies like NRG Energy and Edison International are better positioned to build their competitive advantage with distributed generation.
Check back for a deeper dive on this analysis later today . . .
