The current Russia-Ukraine conflict has put a spotlight on the developed world's dependence on oil and gas, much of which comes from autocratic regimes. As such, though oil and gas stocks have been surging in recent days, so have clean energy stocks.
Given that concerns over climate change are compounding this problem, it could be time to look to clean energy stocks today. But many clean energy names still trade at high valuations, which could be a problem if interest rates rise.
However, one large-cap company is doing huge amounts to decarbonize the American electricity sector, and it's looking like a great value today as well.
Warren Buffett has been investing in clean energy since 2004
It may surprise you that Berkshire Hathaway (BRK.A -0.78%) (BRK.B -0.62%) is my favorite renewable energy stock, as electric utilities aren't necessarily the first thing people think of when they think of Berkshire. Yet Berkshire Hathaway Energy (BHE) was named by Buffett in his recent shareholder letter as one of Berkshire's four key "pillars," with the others being Berkshire's insurance operations, BNSF railroad, and Apple.
Buffett devoted lots of real estate to BHE in his annual letter, which came out last weekend. Last year, Berkshire Hathaway Energy earned about $4 billion pre-tax, good for 14.4% of Berkshire's total operating earnings.
That $4 billion figure is up a whopping thirtyfold since 2000, when Berkshire Hathaway purchased Iowa-based MidAmerican Energy. After the MidAmerican purchase, Berkshire began aggressively investing in wind beginning in 2004, with an initial investment of $300 million. Fast forward to today, and Berkshire Hathaway has invested $13.6 billion in wind production, with plans for another $3.9 billion wind and solar plant set to come online in 2025.
And that's just Iowa; when you consider the other territories Berkshire Hathaway Energy operates in -- the company has organically and inorganically expanded over the decades -- it has invested another $23.4 billion in solar, wind, and geothermal projects. Thanks to the investment, BHE has decommissioned 16 coal plants, with plans to retire another 16 by 2030 and all of its coal plants by 2049.
And BHE is going to grow for decades
While Berkshire Hathaway Energy has grown a lot to date, it may just be getting started. Buffett seems to be particularly proud of his utility, which will play a key role in lowering power prices and developing clean energy in America for decades to come.
In his 2019 letter, Buffett boasted that MidAmerican's huge investment in wind energy in Iowa had given it a competitive advantage over competitors. Not only does MidAmerican have the capacity to power the entire state of Iowa on its own, but its only main competitor charges 70% more than MidAmerican per kilowatt hour, because that competitor has only sourced 10% of its power from wind.
Image source: Getty Images.
In his 2020 letter, Buffett detailed how Berkshire is stepping up to make the tremendous investment needed to transform the electric grid in the Western U.S. -- a key project needed to provide America with renewable power. Because the best sites for wind and solar farms are far from population centers, they require huge, costly, and time-consuming transmission projects to be built to connect them with cities. In the 2020 letter, Buffett outlined a massive $18 billion, 25-year project BHE is undertaking to remake electric transmission lines throughout the Western U.S.
Berkshire Hathaway Energy is able to undertake these massive projects because of another competitive advantage. Other publicly traded utilities typically pay out a majority of their earnings as dividends to shareholders, so no utility can come close to deploying as much capital into growth ventures as Berkshire as quickly.
Since Berkshire is perfectly fine with its energy division reinvesting all of its earnings into these big projects, it can grow for much longer and get much bigger than other utilities. For the same reason, BHE can also invest in modern, efficient equipment, such as its wind advantage in Iowa, which means it can provide electricity at a lower cost than others, all while generating a sufficient return on its investment.
Berkshire is as unique in electricity as it is in insurance
Like Berkshire's competitively advantaged insurance operations, which can take on financial risks other insurance companies can't, Berkshire Hathaway Energy has the same kind of advantage in energy generation and transmission. The long-term growth of the business is an underrated part of the Berkshire empire, and it's another reason to love Berkshire, which has many business gems, as well as an extra $144 billion in cash on its balance sheet, waiting to be opportunistically deployed by Buffett's team.
