Warren Buffett made headlines this week when he pledged to double the $15 billion that Berkshire Hathaway has invested on renewable energy projects. While $15 billion sounds like a lot of money, and even for Berkshire Hathaway it's a large sum of money, it's still just a small fraction of the capital that needs to be invested in renewable energy.
The $48 trillion problem
According to the International Energy Agency the world needs to invest $48 trillion between now and 2035 to meet its growing energy needs. A bulk of those funds will be used to offset declining base oil and gas production and to replace aging power plants as well as to fund projects to meet the growing energy needs of emerging market economies. Overall, the International Energy Agency sees $10 trillion needing to be spent in power generation alone -- including $6 trillion on renewables -- with another $7 trillion in transmission and distribution.
Needless to say the $15 billion that Warren Buffett's Berkshire Hathaway is expecting to invest in wind and solar is not nearly enough. In fact, the base investment case of the International Energy Agency doesn't even get the globe any closer to its goal of keeping a lid on carbon emissions. Under a scenario of higher standards the world's investments in renewables would need to increase to nearly $9 trillion with overall investments in low-carbon energy supplies requiring a nearly $900 billion annual investment.
What this means for Berkshire Hathaway
While Berkshire Hathaway's $15 billion renewable energy bet is small potatoes in the grand scheme of things, that by no way means it's not a smart investment on his part. It's quite the opposite. Given that the globe needs to invest so much money on renewables it really points to the massive growth opportunity that Buffett and Berkshire Hathaway investors will be profiting on for decades to come. With so much capital required to meet future needs Berkshire Hathaway's energy segment will have a near endless supply of profitable growth opportunities to pursue in the decades ahead.
Further, Berkshire Hathaway is one of the few companies with the size to make large scale renewable power projects come to life. For example, last year Berkshire Hathaway made the commitment to invest upwards of $2.5 billion to build two solar power projects in California. This commitment is stemming from the company's purchase of the 579 megawatt Antelope Valley project from SunPower (SPWR +0.00%). Under the terms of the agreement SunPower is building and will then operate the project for Berkshire Hathaway. It's the second mega solar project that Berkshire Hathaway has purchased over the past few years as it also acquired First Solar's (FSLR 0.82%) Topaz Solar Farm for $2 billion a few years back. The First Solar project is a 550 megawatt solar farm, which, for perspective, is about half of the size of a new nuclear power reactor. Both projects are foretasted to yield solid returns for Berkshire over the long-term.
Investor takeaway
Warren Buffett's Berkshire Hathaway is making a massive bet on renewable energy. While the bet is actually pretty small in the grand scheme of things, the opportunity alone is so vast that Buffett can cherry pick the most profitable investments for Berkshire Hathaway. One of the reasons for this is that due to the size and scale of Berkshire Hathaway, Buffett can chose to invest in large-scale projects like those he purchased from SunPower and First Solar, which can really help move the needle for Berkshire Hathaway. So while his bet might not be big enough right now, there's ample room for it to grow in the future.
