The Next Stranded Asset Crisis Could Hit Utilities
By Leonard Hyman & William Tilles - Jun 01, 2026, 3:00 PM CDT
- Utilities look safe, but rising debt, capital spending, and regulatory dependence create significant long-term risks.
- Electric and gas utilities face growing threats from cheaper renewables, energy storage, and potential stranded fossil-fuel assets.
- Water utilities face mounting costs from aging infrastructure and climate change, which could require major rate increases.
Can it be real? Utility stocks offer a super combination of high dividends, steady growth, and potential total returns that exceed the cost of capital? All that with captive customers and the government standing by to make sure it all works out that way. Too good to be true? What about risks?
Risk in business has two meanings: the possibility of loss (or what might cause that loss) or the possibility that investments do not earn expected returns (or the cause of that underperformance). Utility planning tends to assume continuance of prevailing trends, a projection by ruler, more or less. That procedure will not call the inflection point, where risk lies, because utilities move with the agility of supertankers. They cannot easily change course. They have too much invested in what they are already doing. We need to ignore the projections and examine specific risks.
The electric, natural gas and water utilities, aside from being regulated, have these common financial characteristics:
- Plant account (rate base) in an inflationary environment generally grows faster than unit sales, so utilities, without significant cost savings from new plant, must raise prices in order to maintain a fair return on investment. That is the current situation.
- Cash generated from operations rarely covers capital spending, debt redemption, and dividend payments. Most companies in that fix can’t survive. Utilities can because investors believe that regulators will always come to the rescue, and that customers have no alternative suppliers.
- Due to long asset lives and inflation, utilities rarely reserve enough depreciation funds to pay for new plant when the old plant is retired. The market, it is assumed, will furnish the additional funds when needed. So far, it has.
- Most utility bonds are rated investment grade (which permits borrowing at low rates) despite high debt ratios. Creditors have faith that assets behind the bonds will retain value, that investors will buy new bonds to pay off old ones, and that regulators will assure payment of debt.
Assets retain value because regulators protect their earning power. That assures access to new capital. Without that assurance, the utility financing model is akin to a Ponzi scheme, with funds from new investors used to pay old investors, a process that continues until no more new investors show up. This model will fail if customers can find cost- competitive alternatives to utility service, or if utility assets become technologically obsolete before being fully depreciated, or if the cost -of -rescue becomes so great that regulators cannot take the political heat generated if they were to keep their implicit promises to utility investors.
Electricity
The electricity industry could turn into a case study in what happens when new ideas clash with the old order. Capital spending is in a vertiginous rise thanks to a combination of robust demand for electricity and catch-up spending to correct for years of under-investment. Prices are rising to pay for the spending, which politicians have noticed. Here are the risks:
- Customers now can produce and store their own power, often at costs competitive to utility prices. The cost of renewable energy and storage has been declining while that of utility power has been rising, making the go-it-alone path more attractive. The assumption that customers must buy from the utility no longer holds. Competitive alternatives exist.
- The industry seems intent on building fossil-fueled and nuclear generation. If renewables and storage continue to decline in price relative to those power sources, or if a post-Trump administration imposes carbon emission controls, those plant investments might be deemed imprudent by regulators seeking ways to contain prices, thus leading to financial disallowances, which reduce earning power.
To sum up today’s electricity story, the old structure is starting to show cracks in its foundation. Its choices of technologies weaken its future prospects and increase the chance of write-offs. The increased options customers have can now begin to impede the utility’s ability to recover asset cost via rates because customers who leave the system can’t be forced to support it. But not quite yet. Demand for electricity is so fierce that big customers who want so much don’t seem to care where it comes from or what it costs. When that boom subsides, investors might belatedly start to worry.
Natural gas
Natural gas pipeline and distribution services are regulated (but not the price of the gas) by state and federal agencies. The natural gas industry’s risks are closely tied to those of the electric industry, its biggest customer, and it faces similar environmental risk because use of natural gas emits greenhouse gases.
- Electric generation and industrial use account for roughly two-thirds of the gas consumption and most of the growth. Those markets are at risk from competing types of generation that could crowd out natural gas, and from new industrial processes that require less gas.
- The gas industry invests in assets despite minimal sales growth. It faces competition from other energy sources. Customers with long-lived appliances, though, may stick with gas until their equipment wears out. Public policy presents another risk by opposing new gas installations in order to curb greenhouse gas emissions. That would precipitate a slow decline in consumption, possibly stranding assets.
Some students of public policy cite the necessity of the offering as a reason to regulate it. By that standard, gas has been a convenience more than a necessity since the end of the gaslight era. Small consumers can find substitutes in electricity, oil, or bottled gas. Big users could turn to renewable energy, coal, and nuclear energy. The greenhouse gas problem won’t go away either. Long term, we expect that owners of the gas pipelines will look for something else to send through them (like hydrogen perhaps), but not yet, considering political reality and the desperate rush to meet new energy demands.
Water
Water and wastewater utilities face different issues, and they have different viewpoints. The world’s total water supply is fixed while the population grows. That has led water suppliers to emphasize water conservation. And that emphasis has worked. Water usage in the USA peaked around 1980. The industry views climate change as a challenge to deal with rather than deny. Its investment-grade bonds permit it to raise money easily. Its product is essential by any definition, with no substitutes for it (other than bottled water). Water utilities face two peculiar risks:
- They have not invested enough to repair and replace the aged plant. Thanks to low depreciation rates, the age of assets, and inflation during the long lives of the plant, replacement raises costs and requires significant rate hikes. Putting off replacements to avoid price hikes now makes the problem worse later. Add on the cost of service to new customers and climate modification measures, and the rate pressure piles on.
- Climate change may affect the viability of existing plants. Water utilities that depend on diminishing glacier melt, snow mass, and rain may have to abandon plants and reconfigure their systems, leaving assets stranded, and invest in desalination instead. Climate change, too, may drive out local businesses (agriculture especially) and population, leaving the water utility with the old asset base and fewer customers to support it.
In a sense, water risks do not come from industry competition, product substitution, new technology, or environmental denialism, but rather from the industry’s inflexibility and immobility in the face of changing environmental conditions. In some parts of the country, this will matter. In others, not. As a separate question, though, how long will it take for the political bodies that control the water and wastewater industries to face up to the economic costs of providing these services in a difficult new environment?
Summary
We are not in the business of predicting events. We leave that to soothsayers, stock market pundits and econometricians. We are just pointing out plausible risks that could easily strip a utility of a tenth of its earning power, which could not only endanger bond ratings but also translate into a loss of more than half of its earning power for its common stock. Remember that utilities are highly leveraged. Can regulators come to the rescue with double-digit rate increases? That would encourage even more defections from the utility. And the political winds seem to be shifting as well. Investors can make up their own minds about probability. We are just saying that the risks are there, and we don’t hear much about them. In other words, they are not in the stock prices.
By Leonard Hyman and Bill Tilles for Oilprice.com
