Clean Power

Published on March 25th, 2014 | by Zachary Shahan


Warren Buffet: Utility Death Spiral Is Bull S*&^

March 25th, 2014 by  

distributed generation utilitiesWe’ve covered the “utility death spiral” a lot here on CleanTechnica. Frankly, we haven’t really seen anyone claiming that a utility death spiral from the solar revolution isn’t something to worry about… until now.

The Edison Electric Institute (EEI), an association of investor-owned utilities, published a report last year that discussed the great threat distributed solar was to utility profits. From that report:

Start with the increased cost of supporting a network capable of managing and integrating distributed generation sources. Next, under most rate structures, add the decline in revenues attributed to revenues lost from sales foregone. These forces lead to increased revenues required from remaining customers … The result of higher electricity prices and competitive threats will encourage a higher rate of [distributed generation consumer projects] …. These competitive and financial risks would likely erode credit quality. The decline in credit quality will lead to a higher cost of capital, putting further pressure on customer rates.

Recently, a survey of utility insiders found that “95% anticipate that their utility’s regulatory model will change over the next 10 years, and 57% believe it will change significantly,” and about 30–50% thought distributed solar generation was a great threat to the industry.

But Warren Buffet is calling out this death spiral talk as a bunch of bull. From Smart Grid News:

Last year, Warren Buffett paid more than $5 billion for the Nevada utility NV Energy. In his annual letter to Berkshire shareholders on March 1, Buffett confirmed that NV Energy will not be his last major acquisition in the power sector. Bloomberg confirms he is hunting for more utilities, predicting his targets include Wisconsin Energy Corp. and Alliant energy Corp. They say there are 19 utility and pipeline owners that meet Buffet’s minimum requirements for profit and a return on equity.

There are some key points to note, though. Famed investor Buffet isn’t just going after any utilities.

Buffett “is likely looking at a lot of small, regulated utilities that have a lot of growth on the table where his low cost of capital is an incredible advantage,” MorningStar analyst Mark Barnett told Bloomberg.

And over at UtilityDive, reporter Ethan Howland speculates that several European utilities may already be spiraling downwards, including Sweden’s Vatenfall and Germany’s RWE. But he concludes that Buffett will avoid such pitfalls by sticking to utilities that operate in traditionally regulated states.

He quotes Buffett as saying “society will forever need massive investments in both transportation and energy. It is in the self-interest of governments to treat capital providers in a manner that will ensure the continued flow of funds to essential projects.”

Interesting. And, indeed, some of our commenters routinely note the usefulness of utilities. Nonetheless, it seems that utilities are going to have to shift tremendously in the coming years. We’ll see if the ones Buffet picks are the best able to adapt to a changing world.

For more about this matter, see: Utility Insiders See Major Changes Coming (Charts)

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About the Author

is tryin' to help society help itself (and other species) with the power of the typed word. He spends most of his time here on CleanTechnica as its director and chief editor, but he's also the president of Important Media and the director/founder of EV Obsession, Solar Love, and Bikocity. Zach is recognized globally as a solar energy, electric car, and energy storage expert. Zach has long-term investments in TSLA, FSLR, SPWR, SEDG, & ABB — after years of covering solar and EVs, he simply has a lot of faith in these particular companies and feels like they are good cleantech companies to invest in.

  • ChrisU

    I see no clear argument made by Mr. Buffet, it sounds more like a mix of conventional and wishful thinking to me.

    • Bob_Wallace

      Some bad news for Warren. Solar is about to get a lot cheaper. Very quickly.

      First Solar has announced that they will cut their manufacturing cost over 40% by 2018. That should bring the total installed cost of solar (including racking and inverters) from around $1.59/watt to under $1/watt by 2017.

      If his purchases are well regulated and their prices are on the low side he might be OK. But a lot of utility companies, those that own coal and nuclear plants, are in for a world of hurt.

      • ChrisU


        good post. thanks.

  • Bob_Wallace

    Regulated utilities. Utilities with the ability to pass on costs to customers, regardless of the cost. Like what is happening in Georgia where customers’ pockets are being picked with help of the state and given to the utility to build new nuclear.

    Unless a miracle happens Georgia will have two new very expensive plants on line in a few years and even more cost will be shoved down customers’ throats with the help of the regulatory agency.

    Want to guess where customers will be most likely to leave the grid and go it alone?

    Regulated utility districts that have good sunshine resources.

    Warren may see some good opportunity for earnings over the next few years. But best he stay ready to dump these holdings if things start to turn sour….

  • Hans

    To paraphrase R.E.M. “it is the end of utilities, as we know them”.

    Utilities will be needed in the future, but in a different form as we know them today. Splitting power transmission and distribution from power production (as has been done in Europe) would make the transition to a renewable power production easier, because the transmission and transmission part would not be hindered by the interests of the power production part. To be more specific, the transmission part would not feel the need to sabotage newcomers to the production market to protect their conventional and nuclear power plants.

    Power transmission is a natural monopoly, power production is not. So, it is high time to rethink the organisation of utilities

    • Banned by Bob


    • Matt

      I started on the “Split production, Long transmission, and local distribution” rant years ago. And it is clearer everyday that we need it more and more.

    • TedKidd

      Taking Han’s point further – Deregulation of supply happened in NY a long time ago.

      We are beginning to see shift from volume based delivery to more fixed cost fees. Ultimately I don’t think Utilities will be much more than power management & brokerage. Basically a toll road or warehouse for energy.

      Seasonally, production is simply too mismatched to consumption at the micro level. Efficiency of “grid as battery” and source of additional energy is too efficient, and probably will be for our lifetimes.

      I simply don’t see people shifting “off grid” unless those fees cover a LOT of surplus capacity at the individual level – wasteful and unlikely in my mind. Supply and demand won’t allow price to get there.

      • mds

        “I simply don’t see people shifting “off grid” unless those fees cover a LOT of surplus capacity at the individual level – wasteful and unlikely in my mind. Supply and demand won’t allow price to get there.”
        It isn’t black and white. In some areas “off grid” will make economic sense. Maybe individuals will need a few weeks of deep backup, but compressed air, hydrogen electrolysis + fuel cells, or NG + fuel cells could do that job. I think supply and demand will get there. (33c/kWh to 45c/kWh in Hawaii as of Sept 2011, and lots of sun means DG solar is happening. Utilities will figure out how to help or lose many more customers. California, Arizona, Nevada, Texas, Australia. …) In other areas seasonal demand is much longer, months here in Seattle area, and utility’s grid power will still make sense. We’ll see a mix. Bob’s point is also important. Utilities who fail to support lower-cost DG power, causing stranded asset costs and driving up the cost of their grid electricity, will lose more customers to “off grid”. Those bad behaving utilities in sunny areas could shrink radically.

      • Bob_Wallace

        Large scale wind provides cheap electricity. The grid can compete with end-user storage using wind.

        Utilities can also provide backup generation (CCNG plants) at a better price than end-users can provide their own (small fuel generators).

        Utilities may even be able to provide cheaper storage because they can purchase in bulk and possibly use technology (pump-up, liquid metal batteries, etc.) that are cheaper than the technology end-users could install.

        The real question is who will paid for the obsolete resources that utilities now own – coal and nuclear plants. Those failed assets may drive some utilities into bankruptcy, but utility company will exist after their reorganization. Utilities will not close their doors and let power lines go dead.

        We’ll likely be spending taxpayer money keeping utilities in business as they shed their large thermal plants.

        • JamesWimberley

          Why only “possibly” for pumped storage? It’s a mature and large-scale technology, needing 0 technological breakthroughs. It will be a very long time before any sort of batteries will be competitive with it. The 1.7GW Dinorwig pumped hydro plant in Wales is designed so that it can, by itself, reboot the entire UK national grid after a total blackout. The only real problem is a regional shortage of sites – the US Midwest and Florida are flat.

          • Bob_Wallace

            Utilities can use pump-up. I should have been clearer.

            There are options for pump-up that don’t require “mountains”. Denmark is working on a storage “island” in the ocean where water would be pumped out of a reservoir built on the ocean floor. When power is needed sea water would be allowed to flood back in through turbines.

            Pump-up can go underground. Old subsurface and open pit mines are candidates as are old rock quarries.

            And there’s HVDC transmission. Large scale storage could be located some distance from use. Wind farms along the eastern edge of the Rockies might find it advantageous to store some energy and then have stored to sell when winds drop.

          • globi

            When you have HVDC you don’t need to pump.
            Not only do interconnected wind and PV power plants complement each other and provide base load, but hydro power plants can simply reduce their power output.
            The US and Canada have 154 GW of hydro capacity installed:
            That’s more hydro capacity than PV and wind capacity combined.

          • Adam Grant

            I wonder if some of the larger limestone caves under Florida might be reinforced and lined with concrete for use in pump-up storage.

          • Bob_Wallace

            I’ve wondered the same. Florida is pumping out their ground water, should be some vacancies.

          • Calamity_Jean

            No, because Florida is just barely above sea level, and the limestone is porous. Caves far enough down to make power storage reservoirs are all full of water, and can’t be pumped out to install concrete linings because sea water will come in through the rock.

  • @solarboy2014

    We’re at a tipping point – either utilities accept that solar is a real alternative and they diversify their models to include solar (as Xcel Energy are now doing in Minnesota) or they will continue to fight the rising solar tide through lobbying, litigation and PR.

    They know what the ‘correct and right’ path is. However they may not take it.

    • David Fuchs

      The problem for the utilities is, over the next 10 years solar with batteries will be cheaper than grid based energy. Over 20 years the cost will be much lower. This becomes a serious problem for the utilities, they need to maintaining the grid they transport energy over, and that is a costly endeavour that makes them non competitive financially.

    • Clem Roberts

      Clean Green Energy LLC merging with MKBY. This will be a powerhouse stock for generations to come offering solar, wind, geothermal, biomass, and lighting retrofits using Cree LED. Pennies today, dollars tomorrow. MKBY will be the green tech stock of the year. Keep an eye on it.

    • bussdriver78

      Xcel in MN is forced by the regulators; they were just fighting a solar plant decision — which MN made a court judge choose the contract trying to avoid a legal mess but because he picked solar (the only green option) Xcel was appealing the decision. Don’t know the outcome yet but if Xcel was so great they’d have gone with the judge’s decision for solar.

    • Larry

      “Correct” and “Right” never trumped Greed in corporate thinking

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