Power markets in Europe have been in bizarro world. Renewable subsidies have actually led to more coal use and key industrial markets like steel have been faltering because of disproportionately high energy prices. The European Commission is looking to do something about that, which will be a big test for renewable energy and could set the stage for the United Stated going down the same path.
Oops! We'll fix this...
"The European Commission has adopted new rules on public support for projects in the field of environmental protection and energy. The guidelines will support Member States in reaching their 2020 climate targets, while addressing the market distortions that may result from subsidies granted to renewable energy sources." Those are the first two lines in the press release announcing the plan to, over time, put renewable power on par with other power sources.
It's about time, too. In a Q&A on the rule change, the Commission admits that, "Charges levied to fund renewable energy support make up for an increasing proportion of the energy bill for households and industry. One of the main objectives of the guidelines is to make support to renewable energy more cost-effective, which should eventually reduce energy costs."
Although those with an environmental bent may not want to hear it, The European Commission is finally admitting the truth—renewable power won't work unless it can compete on its own with fossil power. Or, put another way, "the market" should decide this one. Maybe not right away, but soon.
Meanwhile, back home...
Edison International (NYSE:EIX) has long complained about distributed power. This is where companies like SolarCity (NASDAQ:SCTY.DL) install solar panels on rooftops supported by regulations that allow it to "sell" power back to utilities at advantageous prices. About half of the electric solar in this country falls in this category, "net metered," according to the Energy Information Administration.
How good a deal is this? According to Edison International, customers with rooftop solar get an effective $0.20 subsidy per kilowatt hour. That subsidy is paid by every other customer. No wonder the utility's capital spending is heavily weighted toward transmission and distribution—and not generation. For example, Edison has over $2 billion in transmission projects on the drawing board over the next five years or so and nearly $10 billion in distribution. Meanwhile, it's been shutting power plants...
Still, that spending should help it win rate cases and keep revenues, earnings, and dividends headed higher. Although the top and bottom lines have been variable over the past decade, the dividend has been upped every year—which is the true test of a sleep-well-at-night utility.
Get it while its there
That said, SolarCity is doing its best to capitalize on subsidies while it can. In fact, it's built its power portfolio from around 30 megawatts in 2010 to over 500 megawatts last year. It aims to have over a gigawatt deployed by the end of this year.
SolarCity is obviously building as fast as it can. And the "Risks" section of its annual report explains why: "We rely on net metering and related policies to offer competitive pricing to our customers in some of our key markets." That includes Edison International's backyard, California, which is among the dozen or so states SolarCity serves. But, the focus on growth has left the bottom line drenched in red ink.
However, establishing a solid base before utilities like Edison International get the rules changed is clearly the most appropriate course of action. And the recent shift in Europe is proof that renewable power may have to fend for itself sooner rather than later. That said, the EU Commission, noted that its new guidelines "will have no effect on aid paid to the owners of existing installations." It would be good news for SolarCity if the United States mimicked that part of the rule.
Watch this fight
Keep an eye on renewable power subsidies in the United States. The issue pits the historic utility model against new models that, for now anyway, need notable government support to work. It's why SolarCity is striking while the iron's hot in its attempt to redefine what a utility is and why Edison International is complaining about it.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.