What seemed absent from the article is the effect of flat revenue on both their ability to make bond interest payments (pay down debt used for legacy transmission infrastructure), and the potential of higher interest rates on rolling debt (like utility bonds.)
Debt could make utilities catastrophically vulnerable to disruption from sustainable players and battery makers, whose business models do not need to factor in those same debt/infrastructure costs into their energy prices.
Not only would it be cheaper than grid power, the utilities will have a structural pricing disadvantage because they need to incorporate their debt and increasing interest rates on older debt into their cost model.
Question is, what is the "it," that forces this change? Graphene capacitors?
Interesting how uber exploited a similar dynamic with taxis, where medallion debt was a significant factor in cab ride prices. It suggest debt markets might be a place to hunt for disruption opportunity, where carrying costs create a structural price disadvantage for incumbents.
One problem is that it is hard to capture the quality of debt: Did a company buy up competitors that turned out not to be worth the price? Did they invest in infrastructure, which seems like good debt, but nuclear reactors have turned out to be albatrosses. You see much of the same thing in telecom. In both cases the customer is at least semi-captive, and can be fleeced to pay for mistakes.
So straight shorting debt play, you would need that level of resolution. If you are looking to fund disruptive startups to leverage a structural pricing disadvantage that results from incumbents costing model, which has exposure to multiplying interest rates and flat revenues, the quality of the debt doesn't so much matter.
I'm imagining things like, "3d print me a small refinery," or "blimp-drop me a sawmill in shipping containers," or "rent me a seed mill on a flatbed," "build me a foldable certified meat processing plant," or "create a new tractor platform with an open multi-tool interface." etc.
> the effect of flat revenue on both their ability to make bond interest payments
If your revenue is flat you had no business selling a bond.
The purpose of a bond is to buy a jump in regular revenue. If the jump doesn’t happen you default on your bond. Or you sell assets and eat the cost and try again with a better plan.
This isn’t really true. You take out a bond because you think you can make more ROI than the interest rate. Utilities in particular take out bonds to build power plants and hope to generate more profit than the cost of interest. The operate on long time scales (10 years or more) and depend on predictable demand to make their model work.
If we are in a world of rising interest rates, it suggests upward cost pressure downstream of companies who exploited the low interest rate environment to load up on cheap debt.
Hypothesis would be companies and sectors with highest debt to income ratio would be most vulnerable and point us in the right direction. A quick google search showed utilities were indeed the ones with highest debt ratios, followed by "industrials."
If this were all true, might also suggest that merely equity financed companies could exploit that structural differential.
It's part of the reason I am still a tesla/musk believer, as I think this is his underlying play.
At this point “it” is here. All that’s missing is sales and maintenance infrastructure. Maybe some product-level design and engineering. Basically, Tesla’s business model.
Debt could make utilities catastrophically vulnerable to disruption from sustainable players and battery makers, whose business models do not need to factor in those same debt/infrastructure costs into their energy prices.
Not only would it be cheaper than grid power, the utilities will have a structural pricing disadvantage because they need to incorporate their debt and increasing interest rates on older debt into their cost model.
Question is, what is the "it," that forces this change? Graphene capacitors?
Interesting how uber exploited a similar dynamic with taxis, where medallion debt was a significant factor in cab ride prices. It suggest debt markets might be a place to hunt for disruption opportunity, where carrying costs create a structural price disadvantage for incumbents.