Warren Buffet is not known for pursuing fads. His investment style is to examine every angle of a potential investment, fully understanding free cash flows and the associated risks. What then do we make of Buffets recent announcement that his company Berkshire Hathaway plans to invest an additional $15 billion into renewable energy projects?
It’s no secret that renewable energy projects are facing several challenges in both the short and long term. One of these challenges is the changing political landscape that could shape state and federal policies that have been central to building the industry. Another, is the proliferation of hydraulic fracturing which has produced abundant supplies of natural gas has also turned the traditional energy industry on its head. How will these new supplies of natural gas impact electrical energy prices? Will combined cycle gas plants make renewables relatively more expensive, or will they lower electric power prices making it easier for policy makers to continue to support renewables?
The regulation of carbon by the EPA also presents risks for the renewable energy industry. States may pursue compliance strategies that are slanted toward investments into natural gas that will require infrastructure investments that down the road may make it harder to invest in distributed generation technologies or remotely located renewable sources.
Despite these unknown factors, Buffet has decided to literally double down on renewable energy. What might he be seeing that gives him such confidence? The following might be a few of the reasons that shaped his decision:
Scale of Energy Industry and Disruption Opportunities
When you have billions of dollars to invest, you need large scale opportunities. Energy provides that scale; the need for electric power will continue to grow and renewables truly represent a disruptive opportunity.
Cash Flows and Tax Equity
Stable free cash flows from renewable energy projects offer significant returns and increasingly lower risk. In addition, investors like Berkshire Hathaway have significant tax equity appetites.
New Vehicles REITs, MLPs and Yield Co’s
The development of new investment options will continue to lower capital costs and increasingly even the playing field for renewables.
Technology Curve and Soft Costs
Although some cost curves on more mature technologies like utility scale wind turbines may be flattening, there are still ample opportunities for cost reductions in other technology areas like PV and storage, as well as efficiency improvements for supporting services in maintenance and operations. In addition, soft cost associated with financing, warranties, and risk management will also see cost reductions.
Although the ultimate impact on renewables is still to be seen, the fact that the US Federal Government is finally moving to regulate carbon will only help to slant the economics in favor of renewable energy.
Will the Oracle of Omaha once aging prove to be prophetic in his drive into clean energy? We all know that past performance is no guarantee of future returns, but in this case we think we’d side with Buffett.