Warren Buffett's annual letter was released on the weekend and what got my attention was how much of it he spent on energy, which is mentioned 163 times in the text.
One area he focuses on is Berkshire Hathaway Energy and losses in the electrical transmission space. He said the company was a "severe earnings disappointment" last year and blamed the regulatory climate.
He notes that utilities were once the most stable industries in the country based on a deal where companies would finance the huge build out of the grid in exchange for a promise of a fixed return from states. Because of the improved economics of doing so, companies overbuilt grids to satisfy future demand.
Under that system "the lights stayed on" but now some states are breaking that pact in a favor of a 'confiscatory' system that punishes companies for things like forest fires. Major events in Hawaii and California have underscored this. The result could only be gigantic investment in things like underground power lines instead, he says.
Berkshire has faced losses from fires and Buffett said he won't throw good money after bad.
These costs arose from forest fires, whose frequency and intensity have increased – and will likely continue to increase – if convective storms become more frequent
He warns that the whole power transmission model is in danger of breaking.
When the dust settles, America’s power needs and the consequent capital expenditure will be staggering. I did not anticipate or even consider the adverse developments in regulatory returns and, along with Berkshire’s two partners at BHE, I made a costly mistake in not doing so.
In the bigger picture, I think we've been lulled into a false sense of electricity security. Companies and smart people like Warren Buffett are no longer willing to invest at the same time as the green, EV and AI data center revolutions will all ramp up, stressing maxed out grids.
Utilities aren't sexy but whenever there is underinvestment in a necessity, there will be an opportunity. Or in the case of South Africa, there will be a calamity.