Warren Buffett has made his fondness for utilities well known over the last decade. And what's not to like? Customers are more or less captive to their energy companies thus guaranteeing a reasonable rate of return on the assets he installs in regulated territory.
But the energy industry might be changing faster than Buffett realizes, and Berkshire Hathaway's (NYSE:BRK-B) $10 billion takeover of Nevada utility NV Energy two years ago could show just how problematic the business is today. He's not being challenged by environmentalists or fossil fuel prices; instead, it's casinos on the Las Vegas Strip, NV Energy's biggest customers, that are threatening to leave the utility and find their energy elsewhere.
24/7 neon takes a lot of energy
It takes a lot of power to run a Las Vegas casino. MGM Resorts (NYSE: MGM) alone accounts for about 5% of NV Energy's electricity delivered, and that's from just 12 properties. Add in Wynn Resorts (NASDAQ: WYNN), Las Vegas Sands (NYSE: LVS), and data center company Switch, and NV Energy relies on just four customers for about 10% of its demand each year. All the more problematic is the fact that; all four companies want to leave the utility.
MGM recently filed an application with the Nevada Public Utilities Commission to purchase 174 megawatts of energy from Tenaska Power Services, an independent power provider. Wynn, Las Vegas Sands, and Switch have also filed paperwork to buy from independent sources.
The companies would still need to use NV Energy's infrastructure to get energy from where it's generated to the casino, but a 2001 state law allows them to shop around for energy instead of buying it from the monopoly utility. The problem for NV Energy is that Nevada has plenty of sunshine and lots of land to build solar fields that provide energy that is cheaper than buying power from the utility.
Corporate America going solar all by itself
More than likely, the casinos will follow a model Apple (NASDAQ:AAPL) is using with First Solar (NASDAQ:FSLR) to buy solar energy. Apple has agreed to buy 130 MW of energy from a project being built in California. But the project isn't on campus at Apple; it's south of Cupertino, and the energy will in theory be sent through the utility's transmission lines to Apple for consumption. The Las Vegas businesses would use a similar design, building power plants outside of Las Vegas (more than likely solar energy) and using NV Energy's power lines to get the power to the casino or data center.
This is a growing trend for corporations, and the problem for utilities is that large customers are now starting to either buy energy directly from solar and wind projects or are building solar on their own rooftops. This is a major challenge to the utility business model that has had a monopoly over energy for over a century. And Warren Buffett could be affected more than anyone if 10% of NV Energy's customers leave out of the blue.
Be careful what you wish for
The utility business model is being challenged more than it ever has been before by new forms of energy such as wind and solar. Now that corporate customers have the option to put resources on their own properties or buy energy from direct power purchase agreements, they're in total control over energy.
This challenges utilities as we know them and, as Las Vegas is showing, they could lose a big portion of their business. The utilities Buffett grew up with are changing, and NV Energy could feel the pain from new competitive pressure faster than even the Oracle of Omaha could have imagined.