Will Warren Buffett’s Bet on Wind Power Blow Up in His Face?
“Investing in utilities is not a way to get rich… it’s a way to stay rich.”
So says Warren Buffett. And as the fourth-richest person on the planet, he would know.
But it’s not just traditional utilities Buffett’s investing in these days. He’s placing bets on renewable energy sources, too – particularly wind power.
Since December 2011, MidAmerican has acquired 1.6 gigawatts (GW) of wind and photovoltaic projects. On November 8, the company finalized the purchase of two California wind projects – the 550-megawatt (MW) Topaz Solar Farm and the 168-MW Alta Wind VII – for about $2.4 billion.
By the end of 2012, the company will have invested some $4 billion in wind power in Iowa alone.
In total, MidAmerican now has more than 3,600 MW of wind power capacity, which is more than any other rate-regulated utility in the United States.
The problem is, as we approach the Fiscal Cliff, wind power subsidies are among the expenditures vulnerable to cutbacks. And that’s put the entire industry at risk.
Any Way the Wind Blows
Wind power has struggled to compete in recent years because low natural gas prices have reduced wholesale electricity prices, limiting the amount of revenue a wind turbine can generate. Yet the industry has managed to survive because of a federal subsidy known as the production tax credit.
The tax credit is worth $22 for every megawatt-hour of electricity generated by a wind farm during its first 10 years of operation. For MidAmerican’s new wind farms, that would amount to about $19 million per year, or $190 million in total.
However, the credit is set to expire at the end of this year – and it might not make it past lawmakers looking to rein in the budget deficit.
Iowa Republican Senator, Charles Grassley, said he’s hopeful Congress will renew the tax credit. But he acknowledged that its fate depends on negotiations over tax and spending issues as we approach the Fiscal Cliff.
“As important as I think wind energy is, we’ve got a big fiscal problem here,” said Grassley.
And while Grassley noted that the tax credit has been good for job creation, he also said that even a one-year extension would cost the Treasury about $5 billion.
If it’s not renewed, the wind power industry will suffer a serious setback. The credit has already been built into the economics of projects currently in the pipeline, as well as the manufacturing supply chain.
Without it, the construction of wind projects could screech to a halt. In fact, some manufacturers in the wind industry are already scaling back.
MidAmerican’s recent acquisitions are already up and running. So they won’t be immediately impacted if the subsidy is pulled. But in less than a decade, the benefits will have run their course. And by that time, the entire wind power industry could be sunk.
Indeed, natural gas prices would have to rise to $6/mmbtu – double their current level – for wind power to be competitive. If it remains cheaper than that, power companies will continue to favor its use over more expensive alternative energies.
They’re already switching to natural gas, since the fuel hit a record low below $2/mmbtu in April.
So even if the wind power subsidy is extended, ultimately, the industry might still be doomed.
And if that’s the case, Buffett’s utility plays won’t be adding to his wealth… They’ll be detracting from it.