Reading through Berkshire Hathaway (NYSE: BRK-B) CEO Warren Buffett’s more recent shareholder letters, I was struck by what he has to say about the role of energy companies in society. In the 2009 Letter to Shareholders, he wrote:
“We see a ‘social compact’ existing between the public and our railroad business, just as is the case with our utilities. If either side shirks its obligations, both sides will inevitably suffer… both parties should… understand the benefit of behaving in a way that encourages good behaviour by the other.”
As I have previously written, Origin Energy (ASX: ORG) under CEO Grant King has failed to invest sufficiently in renewable energy. King now claims that the renewable energy target is unrealistic, the implication being that it ought to be revised downward.
On the other hand, competitor AGL Energy (ASX: AGK), “got seriously into the renewable energy project development business,” to quote Tristan Edis of Business Spectator. AGL here has fulfilled its obligations to society and obeyed the law. Under the current laws, the tax effective penalty for failing to meet the target is almost $93 per Mwh. As Edis points out, the fact that Origin has not begun developing the required renewable energy generation indicates that either it is planning to pay a hefty penalty, or that it thinks the law will be changed to reduce its obligations.
Over the long term, AGL is likely to benefit from having developed renewable energy expertise. Indeed, Xcel Energy in the US is planning to build 170MW of solar capacity and 450MW of wind capacity. A spokeswoman for the company commented that, “Based on generation needs, the most reliable and most cost-effective resources happen to be solar and wind.” As these technologies continue to improve, they become ever more attractive investments for both utilities and society. The truth is that the wind and the sun are more predictable than commodity prices.
King’s public attempts to disparage the renewable energy target indicate that he wants the government to change the law. Few who do not have a vested interest favour the uncertainty this would create. Without the massive (indirect) subsidies of fossil fuels, renewable energy is already cost competitive for many applications. Laws such as the renewable energy target even the playing field and incentivise companies to invest in technology that will yield massive future dividends for society.
Indeed, in an interview with Giles Parkinson of RenewEconomy, King took a pot shot at those who quote Bloomberg New Energy Finance’s finding that renewable energy is more cost-effective than new coal and gas plants. He (incorrectly) claimed that that modelling was based on a carbon price of $60 per tonne. To quote Bloomberg: “even without a carbon price… wind energy is 14% cheaper than new coal and 18% cheaper than new gas.”
King’s attitude contrasts with Warren Buffett’s attitude to how a power utility should operate. Buffett’s utility, MidAmerican, contributes important earnings to Berkshire Hathaway . To quote from the 2010 Letter to Shareholders:
“MidAmerican will have 2,909 megawatts of wind generation in operation by the end of 2011, more than any other regulated electric utility in the country. The total amount that MidAmerican has invested or committed to wind is a staggering $5.4 billion… As you can tell by now, I am proud of what has been accomplished for our society by Matt Rose at BNSF and by David Sokol and Greg Abel at MidAmerican.”
BNSF is the aforementioned railroad business. Noting the comparative efficiency of rail over road transport, Buffett also comments that “our country gains because of reduced greenhouse emissions and a much smaller need for imported oil. When traffic travels by rail, society benefits.”
It’s clear that Warren Buffett understands that for an energy utility to prosper in the long term, it must do the right thing by society. It’s also clear that he considers a reduction of greenhouse emissions to be positive. To be fair, under King’s stewardship Origin Energy shares have thumped the S&P ASX 200 over the last 10 years. They have, however, significantly underperformed the index over the last five years.
Origin may or may not succeed in profiting at the expense of the renewable energy industry. Concerns that its investment in LNG will not pay off may or may not be well-founded. With this company, the potential rewards are great, but the risks substantial. In any event, investors must consider the culture of the company they invest in, as this is likely to have an impact on returns over the long term. To quote Buffett again, “In businesses, culture counts.”
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Motley Fool contributor Claude Walker does not hold shares in any of the companies mentioned in this article. Find him on Twitter @claudedwalker.