3 Utilities Most Likely To Fall In Death Spiral, According To Morningstar

Utilities that rely on nuclear fleets and speculative coal plants are most vulnerable to the solar-powered "death spiral" roiling the electric industry, Morningstar analysts conclude in a report to institutional investors.
Utilities like Exelon and Dynegy will suffer most as centralized power generation loses value to competitive solar installed by customers at home, according to Morningstar's "Utilities Observer" report for February. Heavily regulated utilities like Pinnacle West parent of Arizona Public Service, are also vulnerable in places where regulators have only begun to address the competitive threat from distributed generation.
The Morningstar report begins with a warning to investors:
Investors beware: Distributed generation could kill utilities as we know them today. It could take a decade or more in the United States, but some European utilities already are facing change-or-die challenges due to DG. Technologies such as rooftop solar reduce the value of utilities’ century-old centralized networks, and erode their efficient-scale competitive advantage. As more customers adopt DG, utilities’ costs to maintain and operate the grid must be spread across a smaller customer base, raising customer rates and increasing the economic incentive to cut the cord. The death spiral ends when investors—equity and credit—are left holding an empty purse of dormant power plants and copper wires.
On the bright side, the analysts point investors toward utilities that are exploring ways to build competitive advantages with distributed generation, like NRG Energy and Edison International . These utilities are changing their business to take advantage of opportunities in distributed generation, as suggested by former Energy Secretary Steven Chu.
The analysts suggest investors also look for utilities that have regulatory protection for their legacy business:
"Regulators in Arizona, California, and Colorado have shown willingness to address DG, specifically net metering deficiencies. We think utilities such as Southern Company (SO) in Georgia, NextEra Energy (NEE) in Florida, and Wisconsin Energy (WEC) benefit from constructive regulatory jurisdictions where regulators will work diligently to protect utilities’ abilities to earn fair return on invested capital."
According to Morningstar, these companies are best positioned to survive and benefit from opportunities created by distributed generation:
NRG Energy (NRG): Despite a large fleet of legacy coal, nuclear, and natural gas power plants, NRG has kept on top of the distributed generation threat and claims to be the largest solar power developer in the country.
Edison International (EIX) benefits from progressive regulations and has made targeted investments in solar power and distributed generation.
SunPower (SPWR), a solar module manufacturer and systems installer, SunPower has taken advantage of subsidies and insulated itself from the sector's challenging economics, the analysts say.
The biggest losers in the death spiral, according to Morningstar:
Dynegy (DYN) "The company’s coal fleet, which represents more than half of its generation portfolio, is our biggest concern. Baseload coal generation could lose its relevance as DG grows because it lacks the quick-start capability that would make it valuable to fill those periods during the day when DG users must draw power from centralized wholesale markets."
Exelon (EXC) "Exelon’s merchant nuclear fleet can’t provide quick-start backup power to support DG and is at risk if wholesale electricity prices fall." As recently as November Morningstar analysts saw Exelon's nuclear fleet as an asset, at least in the near term.
Pinnacle West (PNW), a holding company for Arizona Public Service: "Absent more regulatory clarity, we think Pinnacle West’s ability to earn at least its cost of capital and support its narrow moat is less certain than for most other regulated utilities."
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