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UBS Analysis: Efficiency and Solar Create 'Difficult Road' for Global Utility Sector in 2014

The financial services firm UBS is predicting a “difficult year ahead” for global investor-owned utilities.

In a recent research paper, UBS equities analysts outlined a combination of challenges for utilities: rising interest rates that will likely push investors toward higher-risk stocks and away from utility stocks, as well as the slowing demand for power worldwide.

The second issue is a structural one that will afflict utilities well beyond 2014. Through 2020, UBS analysts predict negative growth in Europe and Australia, zero growth in the U.S., and substantially slower growth in developing countries where new power supplies are being added most rapidly.

“We forecast year-on-year power demand growth to be negative in key developed markets in 2014 and beyond,” wrote the analysts. “Regulatory and consumer focus on energy efficiency initiatives will further erode the demand pie. Simultaneously, we expect renewables — especially solar and wind — to continue to gain competitiveness as cost structures improve, and renewables supply to further pressurize the demand curve and profitability of conventional generators.”

Aside from Indonesia, most key emerging markets will see considerable declines in electricity demand compared to traditional growth rates. A combination of emerging efficiency standards and increasing renewables deployment are causing the slowdown. However, UBS is still modestly bullish on these markets due to their overall growth potential, as the following chart indicates.

Two reports just released by the U.S. federal government echo the demand trends for developed markets outlined by UBS. 

On Friday, the Energy Information Administration reported that U.S. electricity sales have fallen in four out of the last five years, and will likely decline again in 2013. According to EIA, demand in the industrial sector continues to drop, while demand in the commercial and residential sectors remains flat. Meanwhile, utilities are set to spend $15.6 billion on efficiency programs by the end of the decade, with an increased focus on demand response.

Renewables also continue their strong ascendance in America, aided by flat demand. According to the latest figures from the Federal Energy Regulatory Commission, renewables provided 99 percent of all electricity generation capacity in October, and 100 percent in November.

However, overall penetrations are still relatively low compared to Europe, and U.S. power providers have avoided many of the hardships that large European utilities have faced. Since 2008, the top twenty European utilities have lost half their value due to a confluence of conditions in deregulated markets: declining demand for electricity, an over-build of fossil plants, and slipping wholesale prices from renewables.

Along with efficiency, UBS predicts that distributed solar will have the most disruptive impact on utilities in the coming years — particularly in Europe.

“Over 2014, distributed, point-of-use solar should prove to be the most disruptive renewable technology. Distributed solar (rooftop solar panels at end-points of consumption) are becoming economical at a faster pace compared to utility-scale solar or wind installations,” concluded UBS. “In several liberalized power markets, rooftop solar panels are driving power prices at the margin; and given their zero marginal production costs, they are pushing thermal generation down the merit order.”

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Stephen Lacey's picture

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Schalk Cloete's picture
Schalk Cloete on Dec 24, 2013 12:06 pm GMT

It will be interesting to observe the interaction between subsidized intermittent renewables and utilities over coming years. The current theme of heavily subsidized solar undermining the utility industry on which it will remain totally dependent for the foreseeable future obviously cannot last forever. 

Ultimately, the only cost saving by distributed solar is the few percentage points of distribution losses avoided by delivering power at the point of consumption. Aside from that, it still requires all the traditional generation, transmission and distribution infrastructure to provide power when the sun is not shining (peak demand is often in the evenings). It can therefore be expected that distributed solar will be increasingly required to pay for this service such as is now starting in Arizona. 

In a fair-value system, distributed solar would be charged the difference between retail and wholesale prices for every kWh of locally consumed solar electricity (initially receiving a discount for avoided distribution losses until this is cancelled out by costs associated with increased cycling of load following plants as PV penetration increases) and recieve current wholesale prices for every surplus kWh it sells back to the grid. 

Bob Meinetz's picture
Bob Meinetz on Dec 27, 2013 8:07 am GMT

Stephen, in regards to:

According to the latest figures from the Federal Energy Regulatory Commission, renewables provided 99 percent of all electricity generation capacity in October, and 100 percent in November.

I hadn’t realized that all coal, natural gas, and nuclear plants had shut down for the month of November – but that’s really all one can possibly conclude from a statement like that. This is either:

1) Fantastic news – renewable sources of energy have put us solidly on the path to 100% carbon-free, sustainable living.

2) Another hyperbolic, exaggerated, misleading misuse of statistics dreamt up in the renewables envirosphere and growing like a weed, enriched by wonderment and unimpeded by critical thinking.

I hope it’s #1, you’re sitting on quite a scoop here. But only because I hadn’t heard it on CNN first I’m a bit incredulous. And you’re quoting the UBS paper without providing a specific source, which is somewhat of a journalistic no-no. Please – sources for both. Thanks.

Bob Meinetz's picture
Bob Meinetz on Dec 28, 2013 9:40 pm GMT

Todd, that’s quite a different story, isn’t it? As stated, it falls squarely under #2:

Another hyperbolic, exaggerated, misleading misuse of statistics dreamt up in the renewables envirosphere and growing like a weed, enriched by wonderment and unimpeded by critical thinking.

The problem isn’t fixed – it appears uncorrected in the original article, and still no source has been provided by either you or the author. Regarding the UBS paper – I spent some time searching for it online, but all links lead back to GreenTech Media. It appears to be a complete fabrication, but of course one solid reference could remedy that promptly.

Schalk Cloete's picture
Schalk Cloete on Dec 29, 2013 7:46 am GMT

Bob, I agree with you on the negative impact of greenwashing articles copied in from renewable advocacy websites where authors simply ignore any and all counter-arguments presented in the comments section. I complained about this to the management of TEC some time ago and I think the situation has improved since then, but it would still be nice to see some stricter standards on these kinds of articles (or some engagement from the authors posting them). 

Bob Meinetz's picture
Bob Meinetz on Dec 30, 2013 1:53 am GMT

Thank you, Todd. The problem is still not solved however – it hasn’t been corrected in the original post, and there is no source for the theme of the entire article – the “recent research paper” attributed to UBS.

This has been quoted and reposted widely around the internet but all links lead to GreenTech Media, not UBS. As usual, everyone in the renewables echo chamber is enthusiastically reposting stories which support their beliefs without the slenderest thread of verification. I’ve contacted UBS about the article and will find out this week, one way or another, whether the paper actually exists.

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