The death of the utility: the most exciting investment trend ever?

published 3 June 2014

140603-solar-power — Solar power: transforming the utilities sector

Utilities are generally seen as being among the least risky defensive' stocks.

Around the world, utilities make money by selling life's necessities water, electricity, gas to customers who need their goods regardless of the economic backdrop. So sales levels are predictable.

Regulators meanwhile, specify the level of return they can make. So that tends to be predictable too.

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And it's not a very competitive market most customers can't tell whether they're paying too much or not, regardless of how many comparison websites they're sent to. So there's never much chance of massive disruption.

But this is all starting to change. And it means that in the not-too-distant future, the business model of the entire utilities sector could be turned on its head.

The two big changes threatening utilities

Two big technological developments are threatening the utility companies' traditional business models. One is the ongoing development of solar technology. As more and more people in the hotter parts of the world are able to generate their own electricity or buy green' electricity from small independent solar generators it makes life harder for traditional utilities.

The other is something called demand response'. This is mainly about the evolution of smart' devices that improve energy efficiency by enabling consumers to control their power usage more effectively.

So you might have a smart' thermostat that you can control remotely. Or that learns your usage patterns and works out the most efficient way to get the house to the heat you want.

As Bloomberg notes in a recent piece on the topic, home automation' is already big business. One of the largest companies in the sector Vivint was bought by private equity group Blackstone for $2bn in 2012.

In short, this is a business dominated by behemoths who are used to pushing a commoditised product in a heavily-regulated market to an essentially captive audience.

Now what's happening is that the consumers are no longer sitting back, content to have this stuff shoved at them. New technology is enabling them to take more control of where they get this power from perhaps even generating it and selling it themselves and how they use it. And that spells trouble for traditional utilities.

Could you buy your energy from your telecoms provider?

As Bloomberg notes, there are now lots of companies queuing up to nibble at the power generation market. Comcast the cable TV company has started a pilot project selling solar power alongside TV packages. AT&T the phone company has entered the smart thermostat business, as has Google.

Google is also licensed to sell the power it generates (running all those servers is an expensive business). So you're looking at a company that could potentially offer to both sell you the power, and the technology you need to manage it efficiently.

It's not doing this right now. But it's hardly a stretch of the imagination to see why Google might move in this direction. If you imagine the internet as a physical landscape, then Google already runs the majority of the virtual road network. It gets people from A to B and decides which destinations are important and which are not.

A move into driverless cars and energy management might seem like risky sideways shifts if you see Google simply as a search engine and marketing business. But once you start to think of it as a high-tech infrastructure company, these moves actually make sense.

While I might be concerned about the potential for mishaps if I was a Google shareholder,I can also see the logic to the move. And it's incredibly exciting.

This is the most exciting investment trend around right now

In fact, I think this is one of the single-most exciting investment trends around right now. There are plenty of investment opportunities, of course (some of which we talk about in our latest report, which I'll return to in a moment). But perhaps even more exciting is just how transformational this change could be for all of us.

A more competitive, efficient power sector would make life better for us all. As Eoin Treacy points out on Fullertreacymoney.com, "the advent of unconventional oil and gas coupled with technological innovation across a whole host of sectors increases the likelihood that energy price inflation will be much less of a factor in the next decades than it was in the last one."

If there's one thing that could fuel a genuine long-term, healthy bull market in the future, this is the trend to watch. That's why we've compiled a report which covers both the energy sector, and the wider implications of similar disruption in other key areas, such as finance. If you haven't seen it yet, take a look at it here.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.