It's been a good few decades for America's electric utilities. As regulated monopolies, they face almost no competition and enjoy access to cheap credit.

In a new note, a Barclays team led by Y.C. Koh says the industry is finally facing its day of reckoning, from a source many have long dismissed as an unviable pipe dream: solar.

Specifically, the threat is residential solar — that is, people creating their own electricity.

To prove that the threat is real this time, Barclays is downgrading its electric sector rating to "underweight" from "market weight."

"The regulatory responses to the growing competitive threat from solar + storage may prove inadequate to address potential strains to the credit profiles of issuers in these states," it writes.

There are two main reasons solar is finally for real, the group says. The first is that for more than a decade, there's been a huge push from governments around the world, and at every level, to subsidize renewables. Bloomberg New Energy Finance (BNEF) estimates that the annual output of PV modules increased almost 30 times in the past decade, from 1,000MW per year in 2005 to more than 30,000MW in 2013, Barclays notes. With that scale has come cheaper prices for panels.

Here's what the cost curve looks like:





The second reason is the advent of cheap storage. For the past few years, homeowners have addressed renewables' intermittency problem — the wind isn't always blowing, the sun doesn't always shine — by making a deal with their utility: They'll continue to buy electric power, but they get to keep their solar panels running when they're not home and sell any excess power they generate back onto the grid. This is called net metering.

Net metering has been a boon for incentivizing rooftop solar adoption. But what if you could truly power up your home through a solar-charged battery and only have to buy utility electricity in an emergency?

As recently as 2009, the all-in costs for such batteries would have been as much as $17,000. But with the expansion of electric vehicles, Barclays says the cost of storage has been falling rapidly and now stands at about $3,700. And it just so happens that the power required to operate an electric vehicle can power the average home for up to three days, Barclays notes, "potentially opening a new use in residential distributed generation systems." Battery costs could come down even further if Elon Musk's gigafactory launches, the group adds.

Yesterday we discussed this idea in detail. Here's the price-decline chart:

Barclays sees that the solar + storage wave has the potential to spread beyond its roots in California and Arizona. Here is their timeline for when solar costs could reach parity in all 50 states:

Cheap solar panels combined with cheap storage will spark a grid "defection spiral" that will pry away utilities' grip on the power monopoly. In this scenario, early adopters begin leaving the grid, incrementally increasing utilities' power costs rise — which further exacerbates the shift into solar and storage, and so on. We are already seeing evidence of step one, as utilities have begun complaining that solar customers are causing electricity prices for nonsolar users to go up.

This is maybe the most vivid description in the note of what solar will do to utilities:

[W]e envision an electricity market where demand for grid power falls, peak hours shift (perhaps dramatically), and regulatory mechanisms need to be adjusted or overhauled to accommodate some utilities becoming the electricity generators of last resort. We expect the net effect to be higher grid power costs (thereby exacerbating the consumer shift to solar + storage), lower average credit quality for regulated utilities and unregulated power producers, and increased recognition of the long-term threat to grid power.

Whatever roadblocks utilities try to toss up — and there's already been plenty of tossing in the states most vulnerable to solar, further evidence of the pressures they're facing — it's already too late, Barclays says:

We fully expect utilities and regulators to make a good faith effort to preserve the status quo “regulatory compact,” whereby the monopoly utility provides a safe and reliable service and regulators allow it to earn a reasonable low-risk return. However, we also expect them to be playing a constant game of catch-up as solar develops. The costs of solar and storage technologies are falling quickly and may fall even faster as higher demand builds additional scale. But the cost of distribution grids and thermally generated power are more likely to rise than to fall, in our view. As a result, regulators and utilities will be constantly trying to respond to a moving target, which is precisely the environment where slow-moving incumbents can fall behind.

It's been a good run.