■ What is the prospect for lower electricity prices? US electricity prices have steadily increased in nominal terms over the last five decades. However, using history as a guide,  we observe two distinct periods of falling prices driven by technology and government subsidies. We believe that a confluence of factors could once again result in structurally lower prices.

■ Factors at play – Cheaper natural gas, the falling cost of photovoltaic solar systems, and the emergence of battery storage have the potential to drive down retail electricity prices. Transmission and distribution expenditure is often cited as a key driver of higher electricity prices, but our research forecasts a relatively minimal contribution of these expenditures to the real electricity price through 2040.

■ Potential impact to power market participants – In discussing implications for power market participants under a declining electricity price scenario, we posit: 1) consumers and utility-scale renewable energy generators would benefit; 2) wires-only utilities would see a mixed/neutral impact; and 3) vertically integrated utilities and retail/commercial scale renewable energy generators would be challenged.

■ A closer look at SolarCity – As a proxy for the US rooftop solar market, we consider SolarCity’s business model with a particular focus on the annual price escalator included in customer contracts. If electricity prices fall, our analysis suggests that renewal rate assumptions may prove aggressive – a risk to the company’s valuation.

 Solar table Exec Sum

Source: Cornerstone Capital Group

For more information about this report, please contact Tanya.Khotin@cornerstonecapinc.com or Alice.Petrofsky@cornerstonecapinc.com.

Please see the attached document for important disclosures.

 

Sebastian Vanderzeil is a Research Analyst at Cornerstone Capital Group and recently earned an MBA as a Dean’s Scholar at NYU’s Stern School of Business. Previously, Sebastian worked as an economic consultant with global technical services group, AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia.

Michael Shavel is a Global Thematic Analyst at Cornerstone Capital Group. Prior to joining the firm, Michael was a Research Analyst on the Global Growth and Thematic team at Alliance Bernstein. He holds a B.S. in Finance from Rutgers University and is a CFA Charterholder.

Andy Zheng is a Research Associate at Cornerstone Capital Group. Andy graduated from Bowdoin College with an interdisciplinary major in Mathematics and Economics and a minor in Visual Arts.  He spent his junior year studying abroad at Oxford University and the summer prior to that at the Sorbonne in Paris. Andy passed Level I of the CFA Program in January 2014.