When we think of "green" investing, superstar investor Warren Buffett isn't the first name that leaps to mind. Yet the cagey old money-man's investment vehicle, Berkshire Hathaway (NYSE: BRK-B ) is plunging deeper into the sector with a subsidiary's purchase of two wind projects in California. Renewable energy is a potentially high-growth segment of the energy industry, but there are many question marks hanging over its future.
Electricity from the air
The Berkshire subsidy that did the buying is MidAmerican Energy, and its new assets are a pair of wind energy facilities not far from Los Angeles. The two projects are still under construction; when completed they will have a combined peak capacity of 300 megawatts of electricity, enough to power around 80,000 homes. The energy produced will be sold to regional utility Southern California Edison, a subsidiary of longtime market stalwart Edison International (NYSE: EIX ) .
The buy adds to MidAmerican's ever-growing portfolio of wind assets, which were already projected to reach over 2,200 megawatts of generation capability by the end of this year. The company is happy to make bets on the future of wind as a renewable energy provider; around 31% of its total generation capacity comes from this source.
But is that a good wager to place just now? Very possibly not.
Blowing the wrong way?
Few doubt the value of renewable sources like wind. Fossil fuels such as oil, efficient as they may be, are dirty sources. Harnessing environmental elements like the wind, water, and sun, is a significantly cleaner activity. This also allows America to wean itself of its perceived, if not exactly accurate, dependence on foreign fuel inputs.
These are the main reasons why the Obama administration has committed billions of dollars in taxpayer money to boosting renewable energy in this country. Of late, this effort has come under fire, no thanks to the heavy lobbying of the oil industry and the embarrassing collapse last year of Solyndra, a solar cell manufacturer and recipient of big dollops of government largesse. Compounding this, Mitt Romney has made reliance on old-fashioned fossil fuels an important plank of his presidential campaign.
This has taken the breeze out of the prospects for wind energy. Prior to the recent developments, the future of the segment seemed assured. The government, even before the Obama initiative, was happy to subsidize the industry in the form of tax credits to the tune of around $1 billion per year.
Everybody likes a tax credit, so the wind segment grew exponentially -- in 2011, for example, nearly one-third of all energy capacity additions in this country were in wind, making it second only to natural gas (at 49%). Second also happens to be America's rank among all countries in terms of cumulative wind generation capacity.
Many of this country's traditional energy majors are riding the wind, as it were, in a big way. Firms like Duke Energy (NYSE: DUK ) , Exelon (NYSE: EXC ) , and NextEra Energy (NYSE: NEE ) each, in one form or another, started out as traditional fossil-fuel-heavy producers. These days they are among the top renewable producers in the country and each has a significant wind power unit.
But that may be more hindrance than help in the upcoming months and years. That convenient tax credit might just vaporize; with the political climate being what it is, it's no longer the almost assured bipartisan "yea" it was for years in Congress. The problem with that is that the credit is up for renewal every year; 2013 is no exception. So there's a very real possibility that the money tap will close abruptly at the end of this year.
It's not only the doubts over the tax credit that are taking the spin out of the wind industry's turbines. Domestic electricity demand has been relatively weak, and since wind isn't the only renewable game in town it's been buffeted by competing sources. Chief among these is natural gas which, thanks in no small part to declining prices, has steadily risen in popularity over the last half-decade or so.
So it's not surprising that MidAmerican, plus bigger colleagues like Exelon and NextEra, has seen revenue and profitability declines or stagnation over the last year or so. Meanwhile, jobs in the sector are floating away. According to industry figures, around 85,000 people worked in the business at its peak in 2008-2009. Of that number, around 10,000 have lost their positions since then.
Famously, Berkshire has some of the best managers on the planet guiding the company's subsidiaries. The brain trust at MidAmerican must be believers in the future of wind power. Will the tax credit be renewed? Will wind gain on rivals such as natural gas? The company is betting a contrarian "yes" on both. The gamble might not pay off but if it does, investors in any company involved with wind energy stand to win, not only financial high-flyers like Warren Buffett.
The MidAmericans of the market will surely benefit when the price of natural gas rises. One other stock mentioned in this article is particularly well positioned for a boost in that event. Find out which company this is by downloading our free report, "The One Energy Stock You Must Own Before 2014."