When you run an company as large as Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), it's not always easy finding investments that will really move the needle. Luckily for Warren Buffett, an immense opportunity was just handed to him by the state of California, and no company is in a better position to capture this opportunity more than Berkshire and its subsidies. Let's take a look at the Golden State's recent decision regarding renewable power generation, the potential scale of investment were talking about, and why Berkshire is in an incredible position to profit from it.
Going green means seeing green for some investors
This week, California Governor Jerry Brown made some bold statements about environmental and energy policy in the state. As part of his agenda, he is looking to expand the state's existing renewable energy targets from 33% generated power from renewables by 2020 to 50% from renewables by 2030.
Like everywhere else in the US, it will take a gargantuan effort to make this happen. According to the State's Energy Almanac, about 20% of the energy supplied to the state -- 60,000 gigawatt-hours worth -- came from renewable sources. This is a pretty good place to start considering that much of the rest of the nation gets 13% of its power from renewables including hydropower, but it's far from meeting 50% of the 300,000 gigawatt-hours that were consumed in the state in 2013.
Not only will the state need to switch over a large portion of its existing generating capacity from natural gas to a form of renewable energy, but it will also need to meet its growing energy demands as well with these new sources. Based on state consumption levels, it will require 24.3 gigawatts of new renewable generation capacity just to replace existing generation. Using levelized cost of energy calculations from financial advisory group Lazard, the least expensive alternative method for generating power in California would involve a combination of wind power plus battery storage.
Even after making very generous assumptions about capacity and taking the low end estimate from this chart, it will cost at least $50 billion to go from its existing generation portfolio to one that would have 50% renewable capacity. That doesn't even include the infrastructure changes that will be needed to make this transformation, either. Bottom line, we are looking at an energy market that is prime for some deep pockets to come in and finance this massive transformation.
Right in Buffett's wheelhouse
Now it might seem silly to assume that just because Berkshire Hathaway has over $50 billion in cash sitting on the books that this power transformation is built for Berkshire. The real reason that it makes sense is because of the other investments that Berkshire has made in the past several years were almost tailor-made for this situation.
The state of California has lots of potential for utility scale solar power as well as offshore wind, but some of the most lucrative real estate for renewable projects are outside Cali's borders.
So for a company that wants to get a piece of the California renewable energy pie, the best bang for the buck may be to generate that power outside the state. To get it into the state, though, you will need to talk to Buffett. Between Berkshire's ownership in utilities Pacific Corp and NV Energy, it has control of a vast majority of the interstate transmission lines that feed California its electricity imports. Meaning that just about any renewable electricity that the state plans to import will have to pass through the Berkshire toll booths.
This gives Berkshire an amazing platform to work off of in order to profit from the monumental shift in California power generation. Not only could it deliver some of the lowest cost power to Cali since it owns the transmission system, but it also will get a small profit from any other companies' power projects since it will be providing the infrastructure to get that power into California.
Buffett has already said that he plans on investing another $15 billion on renewable projects over the next several years on top of the $15 billion Berkshire has already spent. With California looking to make such a large push toward renewables over the next 15 years, don't be too surprised if that $15 billion investment grows significantly.
What a Fool believes
There is no doubt that so much of Buffett's success has been related to his investing style, but you can't make as much money as he has without a few lucky breaks along the way. As the gate-keeper to the nation's second largest power market in terms of consumption -- and the second most expensive in the lower 48 -- Berkshire Hathaway has stumbled upon a massive investment opportunity that could fuel returns for decades to come.