Warren Buffett's utility in Nevada is having a rough year from a public-relations standpoint. NV Energy, which is owned by Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), has felt a backlash from residential solar customers after regulators made punitive changes to net metering, and now most of the Las Vegas Strip may be looking elsewhere for energy.
MGM Resorts (NYSE:MGM) and Wynn Resorts (NASDAQ:WYNN) have said that paying $102.6 million to leave the utility and find their own energy is better for their businesses than staying with NV Energy. Las Vegas Sands (NYSE:LVS) stopped short of committing $23.9 million to leave NV Energy this year but is leaving its options open. As these resorts collectively make up 7% of the demand in NV Energy's territory, this is a big deal for the utility.
Why Buffett's NV Energy is losing customers
The reason Nevada's biggest casinos want to leave NV Energy has more to do with independence and appearance than the cost of energy. Wynn Resorts, Las Vegas Sands, and MGM Resorts have all talked about using more renewable energy, particularly solar energy, which is abundant and cheap in Nevada. But with limited real estate on the Las Vegas Strip, they need to buy power from independent power producers, requiring flexibility from their energy supplier. A 2001 law meant to give incentive for the construction of more electricity supply also gave commercial customers an out from the utility, provided they paid a fee to make sure their leaving had no impact on the broader customer base.
This is what data-center company Switch, another large energy consumer in Nevada, tried to do when it battled to leave NV Energy to buy renewable energy on its own. It wasn't until the middle of last year that Switch and NV Energy met an agreement for the utility to sell the company 100% renewable energy and keep it as a customer.
Las Vegas casinos aren't as altruistic in their desire to leave the grid, but with renewable energy being inexpensive to purchase and a positive PR move, they're looking at it as an option. MGM Resorts has a large solar array on Mandalay Bay, and Wynn Resorts has talked about powering its Paradise Park expansion with solar. More likely than not, the renewable energy they can get will be augmented by natural gas power as well.
NV Energy will still play a role in The Strip's energy
As of right now, it looks as if MGM Resorts and Wynn Resorts will be leaving NV Energy later this year, but they'll still be using parts of the grid. Even if they buy energy from independent power producers, they'll need to use the transmission and distribution lines NV Energy has in place. And that's allowed by regulators, given appropriate fees.
But this highlights a larger challenge for utilities in general. They've had a monopoly on the entire electric industry for a century, and now independent power producers, renewable energy, and companies' desire to control their own energy destiny is changing the dynamic.
Why this is a big deal for Warren Buffett's utilities
NV Energy's loss of the Strip's largest casinos really just highlights the broader energy trends taking place in the United States. Homeowners can now build and own solar-energy generation on their roofs and even self-consume most of that electricity with energy storage (although this isn't economical on a broad level yet). Commercial customers such as Wal-Mart, Apple, Switch, MGM, and Wynn are also seeing the benefits of building their own solar power plants and/or buying energy from independent power producers.
Energy choice is a wave of the future, and in a state where solar energy is abundant, NV Energy has to adapt to survive. Even Buffett is seeing the disruptive forces in energy, and they could hit his utility business hard if his biggest customers in Nevada start looking elsewhere for energy.
Travis Hoium owns shares of Apple, Berkshire Hathaway (B shares), and Wynn Resorts, Limited. The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool owns shares of Wynn Resorts, Limited and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.