The short answer is no. Not yet, anyway. But they are definitely
in an environment that is changing rapidly—and threatens the way in which
utilities traditionally conduct their business.
During the better part of the past century, demand for electricity
advanced inexorably, year after year, save during a couple of economic
downturns and the Depression itself. Now, that trend has come to a screeching
halt.
You might find this hard to believe. But the data don’t lie, and here they
are:
Electricity demand peaked in the summer of 2008, before flatlining and
actually declining a little over the past six-and-a-half years. That hasn’t
happened for a comparably long period since the 1930s.
So what’s going on here?
Many analysts attribute the situation to an anemic economy, which has
struggled to recover from the meltdown of 2007-09. This factor surely plays a
part, but there are other powerful forces at work that aren’t going away. And
they point to an ongoing slide in the demand for electricity in the US,
regardless of the economy.
First, demographics. For many years, electricity
production has closely followed the population growth of the United States.
With gains in efficiency especially, the slopes of those lines began to
converge over the past few decades:
Today, however, the American population is barely growing, up just 0.71%
in 2013, the lowest such number since 1937. And that follows growth rates of
0.75% in 2011 and 2012. People are having fewer children and they’re having
them later, even as the baby boom generation begins to age and die off. The
fertility rate in the US in 2013 was 1.86 children per woman; not even close
to the 2.1 level needed merely for replacement. If there were no immigration,
the US would be losing population. This is a long-term development
that shows no sign of reversing anytime soon.
Second, conservation. Energy efficiency has become the
new normal, whether we’re talking about residential construction, government
buildings, manufacturing, or household appliances. Houses are built tighter
and better insulated, to cut down on heating and air conditioning costs. All
new federal government buildings must meet strict Department of Energy
standards that cover the building envelope, HVAC, water heating, power, lighting,
and other equipment for different climate zones. Developers of high-rise
apartment complexes and office buildings strive to meet ENERGY STAR
guidelines. Private dwellings are increasingly integrated into the Internet
of Things, where computers monitor everything electric to maximize savings.
Even the lowly incandescent lightbulb is now illegal to import and sell in
the US, in favor of much more energy efficient CFL and LED bulbs.
Third, the Smart Grid. This is an extension of
conservation. The electric grid in the US is undergoing an elemental and
profound makeover. As we’ve always known it, the grid was thrown together
chaotically, a hodgepodge of overlapping companies, aging generating plants,
and creaky transmission lines. It’s a wasteful mess. According to former
Federal Energy Regulatory Commission Chairman Jon Wellinghoff, “The United
States loses more than 40 percent of the electricity it produces because of
inefficient grid infrastructure.”
No thought was ever given to the most efficient ways of delivering product
to the user, nor to making it function as a seamless whole. Formerly, we
didn’t have the means. But we do now.
In electric grid 2.0, real-time electronic controls will replace the
system’s existing electromechanical switchgear; integration of power and
communications will create a dynamic, interactive feedback mechanism that
supports the real-time exchange of power where needed; old analog metering
systems will give way to digital two-way energy information systems, that
will not only remove inefficient manual labor from billing but allow price
signals, market information, and buyer decisions to change and optimize
consumption; distributed generation sources will improve system reliability
and capacity; and, ultimately, there will be a network of connected
micro-grids that will be able to automatically self-monitor and heal.
Construction of the Smart Grid has barely begun. But it’s going to have
enormous effects on energy demand.
Fourth, the rise of renewables. Alternative energy
sources are not the joke they were even 10 years ago. The cost of producing
electricity from solar collectors, once prohibitive compared with fossil fuel
plants, has dropped like a stone. A recent Deutsche Bank report looked at 60
countries globally and concluded that in about half of them—including the
largest markets, from the US to Japan to Germany—the cost of solar power is
already below the cost of retail electricity and rapidly approaching
wholesale averages for fossil fuels.
Of course, utilities can, should, and will harness solar energy for their
own purposes. However, the threat comes not from huge solar farms but from
the blistering pace of solar installations. Home systems have been doubling
every year and businesses are not far behind, turning solar adoption up a
steep curve that now resembles a truly disruptive technology.
The massive cost drop in solar has led to all kinds of interesting new
projects, which are driving the climb in installations. For example,
large-scale housing developments in which all the homes are being
deliberately designed to be energy self-sufficient are proliferating in the
US. Many will be feeding excess electricity back into the grid, not taking it
out.
Besides cost, solar energy’s biggest stumbling block has been storage. You
have to be able to stockpile your energy supply for nighttime and cloudy
days. This need has driven great advancements in both generation—such as
molten salt solar cells that continue generating electricity for six hours
after sunset—and in battery technology.
California has embarked on a massive project that mandates 1.3 gigawatts
of solar storage by 2020. And storage on a smaller scale is proceeding at
warp speed. In early February, entrepreneur Elon Musk announced that his
latest project is mass production of 10-kilowatt-hour home-battery
packs—designed by Tesla and manufactured at a giant “gigafactory” in
Nevada—that will power a house for two full days without sun. 500 homes
outfitted with these batteries are already proving up the tech in California.
Musk expects them to go commercial in about six months.
They will be standard on all homes built by his company, Solar City,
within five years. Solar City has been following a highly successful business
model: install panels on people’s roofs, lease them for less than they’d be
paying in energy bills, and sell surplus energy back to the local utility.
Founded only in 2006, Solar City now has 168,000 customers and is the largest
solar installer in the US by far.
In addition, Tesla batteries are increasingly used by businesses, like
Wal-Mart, which store energy when it’s cheap and then tap reserves during
peak load periods, when electricity costs more, in order to slash
expenses—which utilities support, as it helps them prevent brownouts at
inconvenient times, like a sweltering hot day with all those air conditioners
running. The savings involved are so great that demand for collector/battery
systems like this, from stores, schools, hospitals and so on, is essentially
unlimited.
Nor is the alternative energy revolution confined to solar. For example,
Iowa generated only 4% of its electricity from the wind in 2005; today, the
figure is 28%. At the household level, wind power is still in its infancy.
But efficient, frictionless turbines that utilize mag-lev technology are on
the way. They will be cylindrical, rather than today’s more common propeller
designs, turning in very modest breezes. As costs come down, they will become
practical for home usage, especially with battery storage for calm days.
Now add in one more evolving threat to the old fossil fuel
utilities: possible liability lawsuits for environmental and
property damage, along with the certainty of eventual government penalties
slapped on them because of their alleged contribution to climate change.
All of these things place conventional utilities in an increasingly
precarious position. The outlook is grim if they don’t transition gracefully
to the new reality.
So, should you divest yourself of those heirloom utility stocks you’re
counting on to finance your retirement? Let’s just say you should take a
long, hard look at them. They’re not quite portfolio bombs, but they’re
ticking.
On the other hand, you can hedge your utilities by picking the best of the
best stocks from the emerging alternative energy and smart grid players. No
longer small-cap long shots, dependent on governmental largesse, the industry
is rife with profitable multibillion-dollar companies vying for global share.
In Casey Extraordinary Technology, we follow the industry closely
and have selected a handful of companies we believe are best positioned to
rapidly grow profits while helping reshape world energy consumption. Sign-up
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and see why we’ve beaten our index by a large margin every single year since
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