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3 January 2014 By Robert Cyran, Christopher Swann

America’s utilities face a German-style solar burn. So far, solar power accounts for just 1 percent of U.S. electricity demand, against 10 percent in Germany. But generators stateside are already feeling the heat and pushing for levies on solar panels. They’re keen to avoid the scorched profit seen at traditional Teutonic utilities like E.ON.

Germany’s enthusiasm for solar energy has set it apart. After years of generous subsidies, by the end of 2012 it boasted around 30 gigawatts of photovoltaic generation capacity – a third of the total in the world, according to the Renewable Energy Policy Network for the 21st Century. That is about four times more than the United States – or 16 times as much per head of population.

That may have delighted environmentally conscious electricity users. But it has been painful for German utilities. Millions of customers who have installed rooftop solar panels now need to buy less electricity from E.ON or RWE. These former captive customers have also now become competitors of sorts, selling surplus power back to the grid.

Solar panels also act as a disproportionately powerful downward force on electricity costs, since they are most productive during the middle of the day when utilities traditionally enjoy peak prices. That helps explain why wholesale power prices in Germany have plummeted from a 2008 high of more than 80 euros per megawatt-hour to under 40 euros. Defenders of the utilities also argue that homes with panels are essentially free-riding on the grid, taking advantage of its flexibility to either draw or supply electricity while contributing nothing extra toward the high cost of maintaining it.

Whether that’s entirely fair criticism or not, utility profits have been crushed. Net income at German electric utility E.ON is forecast to dive 43 percent in 2013 compared to the previous year, according to Thomson Reuters. Since January 2008, both E.ON and rival RWE have lost about 70 percent of their market value. Peter Terium, RWE’s chief executive, said in November that his operating model was “collapsing” and announced that one in 10 jobs would be cut. German utilities have other challenges, including the government’s retreat from nuclear energy after Japan’s Fukushima accident in 2011. But solar panels have contributed to their distress.

American utilities have taken note. The cost of panel technology has been falling sharply and companies like Elon Musk’s SolarCity help households install solar panels at little or no upfront cost. With panel prices still falling by about 5 percent a year, on SolarCity’s estimates, within a few years the U.S. government’s subsidies – modest compared with Germany’s – won’t be needed to make solar power competitive.

A home solar system is being installed in the United States once every four minutes, GTM Research calculates. At that rate 1 million houses will have panels by 2016, a 10-fold increase on 2010. About $170 billion of utility revenue across the country could be at risk from solar competition by 2017, according to the Edison Electric Institute, a lobby group – about a third of the industry’s top line.

If the threat on a German scale still seems distant overall, it’s more immediate for utilities in sunny states like Arizona and California, where solar panels are most financially appealing. Arizona’s main electricity provider has already taken the issue on, pressing the state’s regulators to impose a monthly fee on customers with panels. Utilities in northeastern states, where the price of electricity is high, may also suffer earlier than generators in other parts of the country because the economics of solar power will become attractive sooner.

Aside from price pressures and grid costs, utilities risk being left with underused coal, gas and nuclear generating plants. Exelon, a huge U.S. utility that has specialized in nuclear power, could be particularly hard hit from falling prices because of the high fixed costs of running such plants.

The heavy debt load that utilities typically carry also makes them vulnerable. The relatively small Hawaiian Electric Industries, for example, would need to devote five times its 2013 earnings before interest and tax if it had to pay off its $1.5 billion of net debt. The giant Exelon’s $19 billion debt mountain would take about as long to whittle down. But if revenue fell by one third, as the EEI suggests is possible, and margins were cut in half – as has happened to E.ON in Germany – debt would then represent about 15 years’ worth of EBIT at both firms.

There’s time to prepare, and the damage won’t be fatal. Regulators will find ways to help utilities keep functioning. For example, as in the first step taken by Arizona’s watchdogs, panel users may be saddled with extra fees to defray the utilities’ grid costs.

Still, Uncle Sam’s electric utilities trade on an average enterprise value of more than eight times next year’s forecast EBITDA while E.ON, for one, is now valued at just five times EBITDA. The U.S. and German sectors are of course different. All the same, investors in American utilities need to keep an eye on the sun.


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