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Sell Utility Stocks

Utility Stocks are Under Siege

Written by Briton Ryle
Posted January 19, 2015

A new Whole Foods in Brooklyn is one of the most energy-efficient grocery stores in the country.

Solar canopies over the parking lot supply 20% of the store's electricity. Street lights out front are powered by little windmills that sit on top of the light poles.

There are even electric vehicle charging stations that are powered by both solar and wind.

Pretty cool, and made cooler by the fact that Whole Foods uses batteries to make sure there is power for these items even when it's cloudy outside.

I'm sure some people still consider this kind of investment in renewable energy a gimmick or a fad, but it's not. The ability to install a solar or wind system that provides electric power is very attractive to huge segment of Americans.

Heck, right now you can buy a 400-kilowatt solar system complete with battery storage at Home Depot for $1,500!

The Financial Times reports that over the past four years, solar installations alone in the U.S. have risen 400% for homes and 300% for businesses. GTM Research says 45,300 businesses and 596,000 homes now generate some or all of their own power with solar panels.

Solar panel prices have dropped 70% since 2006. Now, solar power costs around $0.22 per kilowatt, and electricity from your power company is around $0.15 per kilowatt. It won't take more than a couple years for the prices to be roughly equivalent.

Meanwhile, American utilities are spending millions on campaigns to discourage people from adopting solar power.

Consider the state of Georgia. For years, third-party financing of residential solar installations has been illegal. That's right — it was against the law for a homeowner to get a loan to put solar panels on his or her house!

How ridiculous is that?

And Georgia isn't the only state that kowtows to the utilities to make solar adoption by citizens more difficult. Florida, Virginia, Oklahoma, Wisconsin, and Arizona are among the states that actively discourage solar adoption.

But this tells you something important: Utilities see the threat from cost-effective solar power, and they are frightened by it.

Now, if you don't know, utility stocks were the best-performing stocks on the S&P 500 in 2014... boring, low-growth utilities.

But there's reason to think this performance will not continue...

This is What Utilities Fear

Bloomberg reports that wholesale power prices in Germany are down 32% since 2010. And the prices of German utility stocks have done even worse.

RWE is Germany's biggest power supplier. It traded between $60 and $70 a share as recently as 2010. Today, the shares have been crushed by over 60% to around $23.

This is because nearly 20% of German companies have gone off the grid and now generate their own power. And it's not just small businesses. Even a massive Dow Chemical plant that consumes 1% of all German electricity now produces its own power.

The Wall Street Journal reports that 23% of Germany's companies that have not already done so are considering investing in their own power generation.

I can't tell you exactly when, but this will soon happen to U.S. utility companies, which sold $400 billion worth of electricity in 2012. I will not be surprised in the least if the stock prices we saw for utilities in 2015 are never matched again.

If you own utility stocks, I strongly advise you re-evaluate your investment.

You don't have to take it from me. Ask yourself: Why is Warren Buffett investing billions in solar and wind power?

In just the past few years, his MidAmerican Renewables company bought the 550-MW Topaz Solar Farms in California from First Solar (NASDAQ: FSLR) and the 579-MW Antelope Valley Solar Project from SunPower (NASDAQ: SPWR). 

Warren Buffett has already invested $15 billion in solar and wind power here in the U.S. And he recently said, "There's another $15 billion ready to go, as far as I'm concerned."

The primary reason Buffett invests in solar is that prices are falling. They will soon be competitive with natural gas and coal, and one day, they will be more competitive. They will continue to take market share, and the power generation and utility companies that do not see this coming will be in trouble.

Investors that do see it coming, however, can make solid gains.

Look to Batteries, Too

Storage has long been a problem, especially for solar and electric cars.

Lithium-ion batteries have always been too expensive to provide a cost-effective alternative to oil or your local utility. That's why the $100k Tesla Model S can only go around 200 to 250 miles before it needs a recharge.

Each Tesla vehicle needs 7,000 lithium-ion cells (like what is in a laptop computer). They cost around $300 per kilowatt-hour (kWh).

Right now, Tesla is building a $5 billion factory that will double the world's lithium-ion battery output and cut costs by 30%. At that point, Tesla's costs will be very close to the $200 per kWh that research firm Sanford C. Bernstein says will make battery-powered cars competitive with conventional ones without subsidies.

Tesla founder Elon Musk is partnering with his company's current battery supplier, Panasonic, on the plant. Also note that he has shared the patents for his battery technology to push development faster.

And don't forget, Musk is also the founder of SolarCity (NASDAQ: SCTY), the company that finances rooftop solar installations on homes (otherwise known as distributed solar). A solar panel system could let you charge your electric car for $25 a month...

Musk's battery factory could be a huge boon for both electric cars and distributed solar power. These are huge growth industries that you need to be watching and investing in.

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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