Going Green Could Dim Utility Sector ETF Outlook

July 19th at 11:30am by Tom Lydon

The push into solar and alternative energy will help reduce our reliance on fossil fuels, but as we go green, the energy-efficiency programs could weigh on utility sector stocks and exchange traded funds.

According to Fitch Ratings analysts, alternative energy programs will cut into utility revenues and profit margins and discourage investments in to new transmission projects in five years, reports Christopher martin for Bloomberg. [Solar ETFs Shine As China Expands Capacity]

Glen Grabelsky, Fitch’s managing director of utilities, power & gas, singles out Midwest and Northeast utility markets that could face increased competition as businesses and homeowners install their own generators or upgrade to more efficient systems.

Moreover, favorable alternative energy subsidies is cutting into utilities’ profits. For instance, regulators in 43 states require utilities to acquire surplus power produced from solar panels. Grabelsky believes that state regulators could eventually allow utilities to shift some of the burden onto customers who aren’t using solar sources.

“You can only burden the other customers to a certain degree,” Grabelsky said in the article. “For now it’s fairly negligible but in five years it will become noticeable. Each year the disparity will grow.”

Over the past year, power supplied by U.S. utilities decreased 3.4%, mostly due to energy efficient programs and solar generation. Grabelsky warns that if this continues, utilities won’t be able to invest in new projects or upgrade transmission systems.

“It will have a negative impact on their ability to raise capital,” Grabelsky added. “Regulators will ask, ‘Do you really need all that new transmission when there’s no demand growth?’ There’s the potential for stranding assets.”

Solar ETFs have been among the best performing funds year-to-date. The Guggenheim Solar ETF (NYSEArca: TAN) has gained over 60% so far this year.

The Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities ETF by assets, sank 3.5% in the second quarter while the iShares U.S. Utilities ETF (NYSEArca: IDU) dropped almost 2.4%. Utilities have been underperforming the broader markets as investors shifted over to riskier bets to join the broader equity rally. [Utilities ETFs Have Recovered Almost All of May/June Swoon]

For more information on the utilities sector, visit our utilities category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.