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Warren Buffett Just Revealed His Vision for America's Energy Future

By Scott Levine - Apr 29, 2016 at 10:15AM

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The Oracle of Omaha sees this underestimated power source in the days ahead.

Image source: BHE Renewables.

Whether facing headwinds or riding tailwinds, Warren Buffett has proved the ability to prosper. Now he's looking to the wind to blow profits into Berkshire Hathaway's (BRK.A 2.58%) (BRK.B 2.58%) pockets.

MidAmerican Energy, an operating business of Berkshire Hathaway Energy (BHE), has stated its goal of supplying customers in Iowa with 100% renewable energy. Recently requesting approval from the Iowa Utilities Board for a 1,000-turbine project, Wind XI, MidAmerican Energy is attempting to step $3.6 billion closer to that goal.

Wind at its back
MidAmerican Energy is hardly a novice in generating and distributing wind power; the company has already spent $6.7 billion on wind power over the past 12 years. The commitment to renewable energy is clear. Coal accounted for 70% and wind accounted for 0% of MidAmerican's generation capacity in 2004; however, at the end of 2015, 41% of generating capacity came from wind -- and 37% came from coal. Upon completion, the Wind XI project will add 2 GW of installed wind capacity to the company's portfolio. According to Bill Fehrman, CEO and president of MidAmerican Energy, "Once the project is complete, we will generate wind energy equal to 85% of our annual customer sales in Iowa, bringing us within striking distance of our 100% renewable vision."

MidAmerican's actions reflect the efforts of BHE's overall commitment to renewable energy. According to the company's 2015 annual report, BHE has invested $16 billion in renewable energy and now accounts for 7% of the country's wind generation and 6% of the solar generation.

A hawk's eye on the Hawkeye State
Iowa utilities represent only one division of BHE's portfolio, but it's an important one. From 2014 to 2015, earnings from Iowa utilities have improved from $298 million to $314 million.

Image Source: BHE Renewables.

Should MidAmerican receive the go-ahead to proceed with the project, earnings will continue to climb much higher. The federal government renewed the production tax credit (PTC), at the end of 2015, which is worth 2.3 cents per kilowatt hour of wind-generated electricity supplied to the grid. Despite this improvement, renewable projects, as a whole, have failed to also report growth -- declining from $194 million in 2014 to $175 million in 2015. Although the declining revenue is unfavorable, it must be taken in context of the longer term, as renewable projects contributed only $50 million in earnings for BHE in 2013.

The forecast: chance of gusty wind
There is hardly a consensus that the wind industry's growth is clear, but the renewal of the PTC at the end of 2015 was a clear sign that the industry's growth is set to continue. Kyle Davis, BHE's Congressional relations director, affirmed this in response to the PTC renewal and that of the solar-friendly investment tax credit. He declared, "These policies will provide a critical level of certainty and continuity that will encourage ongoing private investments in wind and solar energy resources at lower costs for customers." 

Buffett reiterated this position and elaborated on it in the annual report, revealing that the company's interest in renewables is not just financially motivated: "BHE's long-established emphasis on efficiency -- even when the company didn't need it to attain authorized earnings -- leaves us particularly competitive in today's market (and, more important, in tomorrow's as well)." Some may be skeptical of his commitment, but the numbers don't lie. Here we see what each power source contributed to BHE Renewable's operating revenue for the following years:

Business Activity201520142013
Solar $383 $238 $73
Wind $99 $99 $121
Geothermal $165 $125 --
Hydro $23 $107 $129
Natural gas $58 $54 $32

All amounts in $USD millions. Data source: Berkshire Hathaway 10-K.

Of all the power sources, wind doesn't blow anyone away. Rather, it's solar that outshines the other sources. Representing 52.6% of the $728 million in total operating revenue for 2015, solar has increased 325% since 2013. Wind has been less impressive. Declining 18.2% in operating revenue from 2013 to 2015, wind business activities have dropped from contributing 34.1% to total operating revenue in 2014 to only 13.6% in 2015. But it's easy to forget that the PTC -- much to the chagrin of the wind industry -- had expired in 2012, affecting operating revenue for 2013 and 2014. Although it was renewed at the end of 2014, it was retroactive for the year, and the damage had already been done. Some skepticism around the future of the PTC has been removed -- it has been renewed through 2021. Nonetheless, investors must always remember Buffett's commitment to the long term. Short-term hurdles such as seasonal variability won't dissuade him if he recognizes potential value on the horizon.

Riding the tailwind?
Though not specifically mentioned in the announcement, Siemens (SIEGY 2.38%) is probably excited at the prospect of the new MidAmerican wind farm, for the two companies have often partnered together in the past. In 2013, MidAmerican placed an order for 448 turbines -- to be placed in five Iowa projects -- from Siemens. Before that, Siemens had supplied MidAmerican with 510 turbines since 2008.

But the partnership extends beyond the supplying of turbines. In October 2014, Siemens and MidAmerican signed a long-term service and maintenance agreement for 958 turbines at 12 projects throughout Iowa. At the time, it was, globally, the largest onshore service agreement to date for Siemens. The agreement extends to June 2024. 

The takeaway
Often dismissed, wind power continues to prove itself as a viable option in America's energy mix as volatility in fossil fuel prices continues, bankruptcies in coal companies abound, and wind prices become more and more competitive. According to Bloomberg, the "average long-term contract price for wind power paid by utilities has dropped 60% since 2009." Reducing the reliance on coal and increasing the reliance on wind, Buffett's commitment is clear.

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