Buffett on Alt Energy

It is fair to say that most people continue to equate the terms "alternative" and "energy" with expensive, unreliable and plain impractical. This naturally leads a majority of people to view alternative energy investing as a high-risk play on some unproven technology with an uncertain probability of success.

This is a perception we've tried to dispel on several occasions, whether we were talking about blue chip alt energy stocks, dividend alt energy stocks or utility alt energy stocks.

It's also fair to say that most people don't typically associate value investing and, by extension, Warren Buffett, with alternative energy. Yet after finishing to read the 2008 edition of his annual letter to Berkshire Hathaway's shareholders, I couldn't help but think that there were a couple of interesting nuggets (I know, I'm a week late).

A Few Classic Buffett Quotes

Although they have nothing to do with alternative energy, I couldn't help but include the few quotes below:

• On the markets: "By yearend [2008], investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game."
• On the economy: "By the fourth quarter [2008], the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have never before witnessed." [Italics mine]
• On markets and the economy: "We're certain, for example, that the economy will be in shambles throughout 2009 - and, for that matter, probably well beyond - but that conclusion does not tell us whether the stock market will rise or fall."
• On investor psychology: "When investing, pessimism is your friend, euphoria the enemy."
• On acquisition opportunities at the GEICO unit: "[...] Tony and I feel like two mosquitoes in a nudist camp. Juicy targets are everywhere." [This is my personal favorite]

Warren Buffett On Alt (and not so alt) Energy

Wind Power

Berkshire's (BRK.A) Regulated Utility business owns 87.4% of MidAmerican Energy Holdings which, in turn, owns a number of power and gas utilities. Buffett mentions he loves it when this business comes up with new projects "because in this capital-intensive business these ventures are often large. Such projects offer Berkshire the opportunity to put out substantial sums at decent returns."

And it so happens that many of these new projects have been in wind power. Buffett notes that MidAmerican's investments in wind capacity have made "Iowa number one among all states in the percentage of its generation capacity that comes from wind."

He further notes that since Berkshire purchased MidAmerican, "wind-based facilities have grown from zero to almost 20% of total capacity." When MidAmerican bought out PacifiCorp in 2006, installed wind capacity was expanded from 33 MW to 794 MW, a nearly 500% expansion.

In 2008 alone, the Oracle tells us, MidAmerican spent $1.8 billion on wind generation. Assuming a cost per installed MW of $2.5 million, that's about 720 MW - not bad for an energy source that's expensive, unreliable and impractical. And so where has MidAmerican gone under Berkshire ownership? It has become the regulated utility with the largest ownership of wind capacity in the US.

Keep in mind that all this investment activity most likely had to be approved by Buffett, and that he is no "flavor of the month" guy - if the economics made no sense there would be no Berkshire money going into wind. The exact nature of their thinking on wind (i.e. is it a play on the PTC?) is unknown, but their actions certainly indicate a strong interest.

Oil Prices

Buffett identifies one of his biggest investment mistakes of 2008 as buying ConocoPhillips (COP) when oil and gas prices were still high. He "in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year." But he makes this prediction: "I still believe the odds are good that oil sells far higher in the future than the current $40-50 price."

Not much of a prediction huh? This is someone who thinks the following of forecasts: "But neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years [in equity markets] in advance. (In our usual opinionated view, we don't think anyone else can either.)"

Of course he would never say how much higher, nor does he need to for people to find him credible. But given Buffett's typical time horizons (i.e. decades), it's probably fair to assume that he sees what many of us alt energy investors do: a fundamental and, in the long run, unbridgeable (at a reasonable cost) gap between supply and demand for oil.

Conclusion

This doesn't leave us with much in terms of concrete investment ideas. However, it does confirm that some of the trends upon which the alt energy investment thesis is based are occurring, and that they are being picked up by some of the sharpest investing minds out there.

Disclosure: None

Comments

[John Petersen]

It's also worth noting that MidAmerican recently bought a 10% stake in BYD for $230 million. BYD claims to be the world's largest manufacturer of Li-ion batteries for portable electronics and has recently introduced a PHEV-60 in China. Since the PHEV costs almost 60% more than the gas powered version of the same car, it's hard to tell whether the PHEV is intended as a serious product or a PR tool. In any event, I view the BYD investment as recognition that the energy storage sector is due to catch up with the rest of the AE industry.

2009 Mar 09 04:33 AM

[ding]

Buffett is betting on alternatives because of the coming subsidies.

If CO2 emission reduction is the goal, then fossil fuels must be artificially "crippled", so that cleaner alternatives can compete. The reason that fossil fuels must be artificially "crippled" is because cleaner alternatives are more costly for the end user. If this were not the case, we would already be using cleaner alternative fuels. The proof is in the pudding!

So, the solution requires us to artificially increase the cost of fossil fuels, so that cleaner alternatives are competitive. Anything less will not reduce CO2 emissions.

The solution is simple. Take the spread between the cost of fossil fuel and alternative fuel. Divide it by 2. Add that to the cost of fossil fuel as a carbon tax, and take the revenue from the carbon tax and give it to the alternative fuel providers as a subsidy. It is now revenue neutral to the government, and it has artificially made alternative energy competitive to fossil fuel. Easy peasy, lemon squeezy!

Unfortunately, this is a bitter tasting medicine. It is politically unwise to vote for a bill that increases the cost of energy to the voters, especially when it would be so obvious to the voters who was responsible for their costs going up.

So, what about the trade and cap system we might ask? Besides the fact that it will not reduce CO2 emissions (see Europe for results), the cost of fossil fuels must still go up; it has to. Otherwise, alternative energies will not be price competitive with fossil fuels. It’s still a tax, but it’s a Ninja tax. It is much harder for the voter to connect the dots.

How exactly will energy costs increase if they are not taxed? The trade and cap system will be an actual market with people and salaries and benefits and buildings, and computers systems. Who do you think is going to pay for all of that? The answer is anyone who burns gasoline or diesel, burns natural gas, uses electricity, or buys a product or service made in this country. To make matters worse, they will be trading CO2 emission credits. The fossil fuel companies who burn CO2 will have to buy credits from the alternative energy companies. Who do you think is going to pay for the cost of the credits? Again the answer is anyone who burns gasoline or diesel, burns natural gas, uses electricity, or buys a product or service made in this country.

But wait, it gets worse. The CO2 emission credits will be like any other commodity. There will be speculating and brokering. There will be futures and hedge funds. Think Enron and Banking together. So at the very best, the consumer will have to pay for all of the buildings, and people, and cost to purchase emission credits. At its worst it will be limited to what the greed and corruption of self interest allows for.

So at the end of the day whether we are implementing a carbon tax or a trade and cap system, the cost of our energy must go up until fossil fuels are sufficiently crippled enough for alternative energies to be price competitive.

Which leads us to our next question, so if both ways lead to higher energy costs, what’s the difference? Who cares? The difference is morality, and we should all care. If our legislature is unwilling to enact the most transparent and effective solution because of fear of voter backlash, but are willing to enact legislation that has the exact same net effect, but it is harder for the voter to connect the dots; they are doing their will, and not the voters will. If they had wanted to do the voters will, they would inform us of these options.

So, the next question we have to ask ourselves is why? What’s in it for them? For some of them, they care too much. They really believe that we are facing imminent danger, and that the end justifies the means. To those people I say; enact the carbon tax, and stop worrying about your own political future. If you really believe we are facing imminent danger, you would want to enact the best solution possible, and you wouldn’t worry about your own self interest. But for others, a trade and cap system is another system to be exploited. It provides an opportunity to reward political donors for their contributions, and can be used to punish political opposition. For these people the only thing that matters is their self interest. They probably believe they are a force for good, but their actions show their true motivation.

Which brings us to our final topic, how to reform our government? The solution is simple. Using this discussion as a guide, we can see that the simpler we make government solutions, the harder it is for our politicians to exploit these systems for their own self interest and the self interest of their political supporters. This is not a party thing. This is a human thing. Republicans and Democrats both do it. It is not in our best interest, and the only way we can stop it is to force them to simplify the systems our government legislates. History has shown that when men are tempted a certain number will succumb to temptation. We the People must demand systems be simplified so that they will not be politicized by men. That way, no matter who is in office, the temptation has been removed or minimized. The biggest system being used today by our politicians to reward and punish political allies and opponents is the tax code.

2009 Mar 09 09:01 AM

[Douglas Hvistendahl]

In alt-energy investing, be sure to look at possibilities in being a customer. Here, PV solar won't pay except for special situations, such as being off-line. But I'm looking into a heat pump to move summer heat from the attic into the dirt under the house. A preliminary effort by using fans to blow summer air through the basement into the house has produced cheap cooling, and warmed the dirt enough to notice.

2009 Mar 09 09:34 AM

[fg144331]

I feel that Buffett is tarnishing a bit, his comments & Media references to, are starting to get boring

2009 Mar 09 10:15 AM

[Obamitall]

Very good summary on what alt-energy is capable of
delivering today, and what the Dems are doing to mislead us in that area. Real change has arrived again(Deja-vu).
The PC types and the liberal pols do not mention nuclear at all, in spite of its safe history in this country. It is another piece of the solution to our failing policies as relates to energy.
In the area of carbon fuels, we are against coal, even though we ship mountains of it to China. Apparently the wind in China does not blow in this direction.
Washington, D.C. is a country all its own.
Thanks for the insight.


On Mar 09 09:01 AM ding wrote:

> Buffett is betting on alternatives because of the coming subsidies.
>
>
> If CO2 emission reduction is the goal, then fossil fuels must be
> artificially "crippled", so that cleaner alternatives can compete.
> The reason that fossil fuels must be artificially "crippled" is because
> cleaner alternatives are more costly for the end user. If this were
> not the case, we would already be using cleaner alternative fuels.
> The proof is in the pudding!
>
> So, the solution requires us to artificially increase the cost of
> fossil fuels, so that cleaner alternatives are competitive. Anything
> less will not reduce CO2 emissions.
>
> The solution is simple. Take the spread between the cost of fossil
> fuel and alternative fuel. Divide it by 2. Add that to the cost
> of fossil fuel as a carbon tax, and take the revenue from the carbon
> tax and give it to the alternative fuel providers as a subsidy.
> It is now revenue neutral to the government, and it has artificially
> made alternative energy competitive to fossil fuel. Easy peasy,
> lemon squeezy!
>
> Unfortunately, this is a bitter tasting medicine. It is politically
> unwise to vote for a bill that increases the cost of energy to the
> voters, especially when it would be so obvious to the voters who
> was responsible for their costs going up.
>
> So, what about the trade and cap system we might ask? Besides the
> fact that it will not reduce CO2 emissions (see Europe for results),
> the cost of fossil fuels must still go up; it has to. Otherwise,
> alternative energies will not be price competitive with fossil fuels.
> It’s still a tax, but it’s a Ninja tax. It is much harder for the
> voter to connect the dots.
>
> How exactly will energy costs increase if they are not taxed? The
> trade and cap system will be an actual market with people and salaries
> and benefits and buildings, and computers systems. Who do you think
> is going to pay for all of that? The answer is anyone who burns
> gasoline or diesel, burns natural gas, uses electricity, or buys
> a product or service made in this country. To make matters worse,
> they will be trading CO2 emission credits. The fossil fuel companies
> who burn CO2 will have to buy credits from the alternative energy
> companies. Who do you think is going to pay for the cost of the
> credits? Again the answer is anyone who burns gasoline or diesel,
> burns natural gas, uses electricity, or buys a product or service
> made in this country.
>
> But wait, it gets worse. The CO2 emission credits will be like any
> other commodity. There will be speculating and brokering. There
> will be futures and hedge funds. Think Enron and Banking together.
> So at the very best, the consumer will have to pay for all of the
> buildings, and people, and cost to purchase emission credits. At
> its worst it will be limited to what the greed and corruption of
> self interest allows for.
>
> So at the end of the day whether we are implementing a carbon tax
> or a trade and cap system, the cost of our energy must go up until
> fossil fuels are sufficiently crippled enough for alternative energies
> to be price competitive.
>
> Which leads us to our next question, so if both ways lead to higher
> energy costs, what’s the difference? Who cares? The difference
> is morality, and we should all care. If our legislature is unwilling
> to enact the most transparent and effective solution because of fear
> of voter backlash, but are willing to enact legislation that has
> the exact same net effect, but it is harder for the voter to connect
> the dots; they are doing their will, and not the voters will. If
> they had wanted to do the voters will, they would inform us of these
> options.
>
> So, the next question we have to ask ourselves is why? What’s in
> it for them? For some of them, they care too much. They really
> believe that we are facing imminent danger, and that the end justifies
> the means. To those people I say; enact the carbon tax, and stop
> worrying about your own political future. If you really believe
> we are facing imminent danger, you would want to enact the best solution
> possible, and you wouldn’t worry about your own self interest. But
> for others, a trade and cap system is another system to be exploited.
> It provides an opportunity to reward political donors for their contributions,
> and can be used to punish political opposition. For these people
> the only thing that matters is their self interest. They probably
> believe they are a force for good, but their actions show their true
> motivation.
>
> Which brings us to our final topic, how to reform our government?
> The solution is simple. Using this discussion as a guide, we can
> see that the simpler we make government solutions, the harder it
> is for our politicians to exploit these systems for their own self
> interest and the self interest of their political supporters. This
> is not a party thing. This is a human thing. Republicans and Democrats
> both do it. It is not in our best interest, and the only way we
> can stop it is to force them to simplify the systems our government
> legislates. History has shown that when men are tempted a certain
> number will succumb to temptation. We the People must demand systems
> be simplified so that they will not be politicized by men. That
> way, no matter who is in office, the temptation has been removed
> or minimized. The biggest system being used today by our politicians
> to reward and punish political allies and opponents is the tax code.

2009 Mar 09 10:39 AM

[Jimbo]

I would like to enthusiastically support the position of ding. The area inside the Washington Beltway is a mysterious force field like the Bermuda Triangle.I propose two possible remedies: (1) limit members of Congress to twelve years only, then they leave to live under the laws they have passed for the rest of us.(note that the Social Security act, OSHA, and The Civil Rights Act of 1964 EXEMPTS Congress!), (2) make it a CRIMINAL: OFFENSE for any former member of Congress to lobby. The problem is that these proposals have to pass through Congress in some form to be enacted. That is like asking child molesters to vote against child molesting.

2009 Mar 09 11:33 AM

[La Marque]

Mid-American explains why Iowa is #3 in windpower production after Texas and California. Many states have enacted laws (and subsidies) requiring alternative energy, which does not include nuclear (because it has waste.)
Whether anyone believes in the peak-oil theory or not, oil is going to go up in price when the economy recovers to start the next bubble in something. This just makes AE just that much more attractive.

2009 Mar 09 03:06 PM

[henarl]

Ding: Unfortunately, those who put the good of the country ahead of their own self interest are a very small minority in Congress. So, it's likely to be cap & trade.

2009 Mar 09 04:06 PM

[samwise]

As a high school buddy of mine said in his yearbook quote "you can't fight city hall, but you can burn it down." that was a LONG time ago. deja-vu all over again? what's with all the Reagan bashing of late? Do any of the Obama voters even know who the guy was? Sometimes I feel like I'm living in Serbia where they're still talking about that "great war we lost in 1244" or something. LET IT GO, RIGHT? I thought the left was led by "moveon.org." In any case, great article, Bing. For all the anti-statists out there--when governments start talking about controlling FALLING prices (boy does housing stand out like a sore thumb right now) well, let's just say "that's LUDICROUS speed, Captain!" I know we're all plotting revolution right now--nothing wrong with a little stand-up comedy, too, right? Don't people find it funny that Geithner and Emmanual are only 4 feet tall?

2009 Mar 09 08:38 PM

[Hmm?!]

CAN WE ADDRESS THE REAL PROBLEM!!!

The real problem which may never be addressed at this rate.......there is no incentive to store AC power. Just plenty of non-toxic ways to do it (another story).

Twelve years ago I wrote a paper on how North America was becoming one large power grid. So Peaking units that only provided useful power 5 to 7% of the day could be mothballed.

Basically it took several days to get a large generator up, running and in sync with the grid. It still can't be done in a day.

So every 24 hours we provide for peak demand, waste horrendous amounts of electricity.............. I have to listen to enviro-idiots talk about solar panels (future toxic waste) and windmills.

Until we have a total brownout one cloudy or calm day and have wasted billions of dollars. Maybe then the envir-idiots will say.... there are green ways we could store all this AC power stuff. We got tons of it every night.

You mean turning down my AC and walking around in the dark for 20 years actually wasted more power than it saved......did almost zero for the environment? Yes unfortunately it does everyday.

2009 Mar 09 09:37 PM

[billp37]

We repeat:

Facts:
1 Laws of thermodynamics are tough to repeal
2 HEAT RATE - second law
3 CAPACITY FACTOR - reality

Money to be made from those who don't understand 1, 2, and 3.

And talk about wrecking our investment portfolios!

Yadlin said the Islamic republic hoped to use the expected dialogue with the Obama administration to buy time to procure the amount of high-enriched uranium needed to build a bomb comment?

www.jpost.com/servlet/...

Oy Veh!
en.wikipedia.org/wiki/...

2009 Mar 09 09:40 PM

[Road Runner]

Buffett has taken a lot of criticism lately because he lost money in 2008 and he bought into some companies recently before the stock of those companies plummeted. I even see some of that criticism on this blog.

Please everyone, stop with the extreme near sighted view of the stock market. We must wait at least 3 years before we can conclude whether he’s lost his touch or not. My guess is that in 3 years he’ll look like a genius – again.

“Be fearful when others are greedy and greedy when others are fearful” – Buffett.

2009 Mar 10 10:12 PM