Rooftop solar is the biggest threat electric utilities have ever faced. Image source: SolarCity.

The electric utility industry is facing its biggest threat ever, and even Warren Buffett is fully aware that rooftop solar power is something he should be concerned about long-term. His recent letter to Berkshire Hathaway (BRK.A 0.68%) (BRK.B 0.93%) shareholders was a major admission that distributed energy is a long-term threat to his utility business and has forced utilities to be more competitive in how they operate.

This comes as Buffett's utility, NV Energy, is locked in a battle against residential solar companies like SolarCity (SCTY.DL) and Sunrun (RUN -2.94%), who are fighting a punitive ruling by Nevada regulators. And now we have evidence that he sees these companies as a big threat to the steady growth and returns utilities normally generate.

Warren Buffett's conflicted view on renewables
It's worth noting that Warren Buffett isn't against renewable energy or the subsidies that come along with it. Berkshire Hathaway Energy has invested $16 billion in renewable energy and owns 7% of the country's wind capacity and 6% of its solar. All indications are that that investment will continue.

But those are large wind and solar projects. Where Buffett has increasingly begun seeing a threat to the steady utility business is from electricity-generation capacity homeowners own or lease from third parties. These are the systems SolarCity and Sunrun build, and they're offering energy for less than utility prices and changing the monopoly dynamic utilities have always enjoyed. In his letter, Buffett says:

In its electric utility business, our Berkshire Hathaway Energy ("BHE") operates within a changing economic model. Historically, the survival of a local electric company did not depend on its efficiency. In fact, a "sloppy" operation could do just fine financially.

That's because utilities were usually the sole supplier of a needed product and were allowed to price at a level that gave them a prescribed return upon the capital they employed. The joke in the industry was that a utility was the only business that would automatically earn more money by redecorating the boss's office. And some CEOs ran things accordingly.

That's all changing. Today, society has decided that federally subsidized wind and solar generation is in our country's long-term interest. Federal tax credits are used to implement this policy, support that makes renewables price-competitive in certain geographies. Those tax credits, or other government-mandated help for renewables, may eventually erode the economics of the incumbent utility, particularly if it is a high-cost operator.

There are two things worth noting within that statement. The first is that competitors like SolarCity and Sunrun are offering a viable energy alternative that threatens utilities. The second is the jab at subsidies, which help make these competitors financially viable. 

Subsidies or no subsidies?
If you've been following the rooftop solar debate closely, you know that subsidies are always a big part of the discussion. Utilities point out that federal subsidies make solar more affordable, and argue that non-solar customers are unfairly subsidizing energy purchases from solar customers through net metering (which studies fail to prove at low adoption rates).

Solar companies argue that utilities are regulated monopolies and are therefore getting the greatest subsidy of all: no competition. They argue they're only trying to bring competition into the market.

Warren Buffett and Elon Musk have recently battled over this concept. And in a recent CNBC interview, Buffett said:

We don't want our million customers that don't have solar to be buying it for 10.5 cents when we can turn it out for them at 4.5 cents. We don't want the non-solar customers, of which there are a million, to be subsidizing the 17,000 solar customers. Solar customers are subsidized by the federal government, as we are through our wind and solar operations.

Here you get a look at how Buffett looks at subsidies and renewable energy prices. If he can buy renewable energy cheaply and use subsidies efficiently -- great. But if customers can save money buying solar energy from their own roof, why should they get a subsidy to do so? I wrote about these different viewpoints in this debate in an article last week. If you're the utility, it's easy to argue that you can buy energy at cheaper rates than rooftop solar companies are selling it. But that's not the cost to get energy into someone's house, which is the true cost we should be measuring. 

Buffett's comment about non-solar customers subsidizing solar customers is a hotly debated concept in renewable energy, and there's little evidence that it's actually true at low penetration rates like Buffett has in his energy business' territories. At the very least, solar on a customer's roof is worth more to the grid than wholesales rates, even if it's worth less than retail rates. This is what California recently ruled in Net Metering 2.0 plans, which were applauded by the solar industry.

The threat is here
What's interesting about the comments Buffett has made in recent days is that's he's acknowledging the threat renewable energy poses to utilities and trying to build a case against those threats. Depending on where you sit, you may believe his case or think that the utility monopoly needs more competition.

But there's no denying that utilities can see a renewable energy threat coming, and after decades of being the only energy game in town, that concerns them very much.