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Solar downgrade could spark investor appetite surge

Solar downgrade could spark investor appetite surge

Everyone knows about the green credentials of solar power but many have long harboured doubts about its cost. Now, according to a leading investment bank, solar may be reaching a pivotal price point in comparison with conventional power.

A recent note from Barclays’ credit research downgraded US electric utility bonds to underweight as solar prices fall – a key moment given that these bonds are the epitome of reliable and defensive investment grade credit, with the iShares Utilities Bond ETF rising 8% in the past year.*

Now Barclays believes that the convergence of declining costs in distributed solar photovoltaic (PV) power generation and residential scale power storage is likely to upset the present state of affairs.

‘Based on our analysis, the cost of solar and storage for residential consumers of electricity is already competitive with the price of utility grid power in Hawaii,’ it said. ‘Of the other major markets, California could follow in 2017, New York and Arizona in 2018, and many other states soon after.’

The bank’s credit research team pointed out that, in the 100+ year history of the electric utility industry, there has never before been a truly cost-competitive substitute available for grid power.

It added: ‘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.’

So a clarion call to invest in solar? Not so fast, says Barclays, warning that  investors may be also ‘wary of optimism about solar power’ given a recent history of losses in that industry.

In fact, played properly, the conventional utilities sector may still provide decent investment returns.

The bank adds: ‘We see a rare opportunity for investors to express views about a potential for a major change at low cost and with good liquidity and recommend the following trades’:

· ‘Underweight the electric sector versus the US corporate index on tight relative spread  as investors start to price in the disruptive risk of solar + storage.

· ‘Rotate out of a basket of bonds issued by utilities where solar + storage is closer to competitiveness into one where solar + storage grid parity are more distant.’

*As at 5 August 2014- source Ishares

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