1 Utility Realizes Solar Electricity is Here to Stay

1 Utility Realizes Solar Electricity is Here to Stay

Edison International pays customers more for the power they generate from solar panels than it costs to generate electricity. That's led to an important shift at the company.

The writing on the wall
California provides subsidies to encourage the installation of solar panels. It also created a mechanism for homeowners and businesses to sell extra power to the electric grid. Called net metering, it's a win for customers because they get paid more for the power they put into the system than it costs Edison International to make its own juice.

Getting while the getting's good
One company making good use of this opportunity is SolarCity . It builds and owns the solar systems that it installs but leases them to the owners of the buildings and homes on which they are mounted. SolarCity monetizes the systems through its lease agreements, the majority of which are for 20-year terms.

That's a great model of predictable cash flows, and one that's led to swift adoption. On the residential side, the company's installations increased over 140% in the second quarter, year over year. It now has around 390 megawatts of solar power generation deployed. The company is still in growth mode, particularly since subsidies are so generous right now, so it's losing money. But it's potentially building the "power plant" of the future.

Power lines
The majority of SolarCity's installations are in California. That's one of the reasons why California based Edison International has moved away from generating electricity and toward distributing it. The "utility" only generates about 25% of its own power, buying the rest from others. In fact, looking out over the next few years, the company's capital spending will almost all be devoted to distribution and transmission. Clearly Edison is preparing for a very different future.

Not the only one
Edison isn't the only one focusing on transmission and distribution. American Electric Power boasts about owning 40,000 miles of transmission lines. And it expects transmission assets to add $0.36 a share to earnings by 2015, up from just $0.06 in 2011. Clearly, this is a big and growing business for the giant utility.

There's also ITC Holdings , which only owns power lines. Its 15,000 miles worth of transmission lines operate mainly in the eastern portion of the country. Still, it is the only pure-play for taking advantage of transmission assets. And it's inherently prepared for a time when customers sell power into the grid.

Although it's a stretch to suggest that power companies are going away because of solar installations, there's no doubt that this is an important shift. For example, SolarCity has partnered with Wal-Mart and already has 160 systems installed, with more planned. Wal-Mart's goal is for the systems to provide up to 30% of a store's daily use—that's power that electric utilities won't get to sell to Wal-Mart.

SolarCity also has agreements with home builders like high-end focused Toll Brothers. The company built about 500 homes in its southern and western markets alone in its fiscal third quarter, with a backlog of nearly 2,000 homes in just those markets. It doesn't take much imagination to see that Toll Brothers' typically well-heeled customers might like to add a solar installation for the financial and social benefits while initial home construction is underway. These pre-wired installations could also help improve uptake by enhancing the cosmetic appearance of the home.

Follow the lead
Edison International is taking an aggressive approach to net metering and distributed power. While that's partially a function of its California customer base, the trend toward customers generating power is real and will have a profound impact on utilities. SolarCity is a high-risk play on the trend if you are a solar devotee, but companies focusing on transmission are lower risk, prepared for today, and getting ready if solar leads to a changed future.

Increased revenue security could help dividend stability. Here are 9 Motley Fool dividend paying favorites

Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

The article 1 Utility Realizes Solar Electricity is Here to Stay originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends ITC. 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Originally published