Could Warren Buffett's Utility Empire Be in Trouble?

Warren Buffett loves owning big solar installations like this one, but smaller solar projects could threaten his utilities. Image source: SunPower.

Warren Buffett has made no qualms about his love for utilities, especially utilities in regulated markets. The companies usually provide a guaranteed rate of return and Buffett loves the consistency that provides him as an investor.

But he's getting a challenge from two unlikely sources and it could spell trouble for the utilities long term.

Steve Wynn and MGM Resorts goes after NV Energy A little-known rule in Nevada that allows customers buying 1 MW of energy or more to leave the utility is being invoked by Wynn Resorts , MGM Resorts, and Las Vegas Sands to potentially leave Berkshire Hathaway's NV Energy. The first to propose an exit fee, a major step in the process, was Wynn Resorts, which has offered to pay $15 million to leave the utility to take advantage of low natural gas prices.

Other companies have said they want to leave the utility to buy energy from renewable energy projects, but no matter the reason, this is a big deal to NV Energy. Wynn, Las Vegas Sands, and MGM Resorts account for 7% of its energy sales, and if they're all allowed to lead, it'll likely lead to higher costs for all other customers, who would have to pay for existing infrastructure. That leads us to the second problem Buffett's utilities are facing -- the boom in distributed energy.

Buffett's utilities have been fighting rooftop solar because it takes away potential revenue. Image source: SunPower.

Buffett doesn't like all renewable energy Over the past decade, Buffett has been one of the biggest renewable energy investors in the world. He's put $15 billion to work buying renewable energy projects and has committed another $15 billion for future renewable development, but to him, not all renewable energy is created equal.

What Buffett has been buying are large renewable energy projects with agreements to sell energy to utilities over a long period of time. He gets a virtually guaranteed rate of return and in many cases has gotten tax benefits as well. As a buyer of renewable energy projects, he's seeing them as a positive investment.

But the utility businesses he owns are actively fighting customers putting renewable energy -- particularly solar energy -- on their own roofs. To Buffett, if customers begin generating their own electricity, it takes potential sales away from the utility and could lead to higher costs for the energy it does sell, leading to a slippery slope of customers looking to leave to find lower costs.

Buffett loves owning renewable energy projects where he can sell the energy, but when it comes to customers owning their own renewable energy generation, he's not such a big fan.

Utilities losing the fight in a changing energy world No matter where you look, particularly in Nevada, utilities are under serious pressure from customers looking to find lower-cost and cleaner energy elsewhere. Now that Buffett is one of the largest utility owners in the country, he's directly at odds with some of these trends.

Wynn Resorts is offering $15 million to break ties with NV Energy, and if it weren't for a limit on distributed solar in Nevada, there would be thousands of customers putting up their own generation systems.

The dual threat shows the challenge utilities are facing as the energy industry evolves. Electricity has long been a monopoly business in the U.S., but renewable energy levels the playing field, at least a little bit, and Nevada's rule allowing big customers to negotiate their own energy contracts gives big buyers of power a way out of the monopoly. Both could be bad for Warren Buffett's utilities long term.

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Travis Hoium owns shares of Berkshire Hathaway and Wynn Resorts, Limited. The Motley Fool owns and recommends Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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