Bet against Warren Buffett on energy at your peril

Many Australian investors are blind to the energy revolution that is taking place.

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In his latest letter to shareholders of Berkshire Hathaway Inc (NYSE: BRK-A, BRK-B), legendary investor Warren Buffett continued to shed light on his view of long-term energy generation trends. Regarding the $5.6 billion purchase of NV Energy, Buffett noted that the acquisition “offers many possibilities for large investments in renewable energy.” Here, he hints at an ongoing transformation of the way humans generate electricity that is sure to have profound effects on most Australian share portfolios.

If Warren Buffett thinks the future is in renewable energy, investors in Aurizon Holdings Ltd (ASX: AZJ) and Whitehaven Coal Limited (ASX: WHC) are betting against him. Aurizon would be a reasonable investment if it were simply milking existing assets for all they are worth, but the company’s expansion plans present a major risk to shareholders. Whitehaven Coal is betting a lot on a coal mine expansion that may not be attractive economically, nor capable of proceeding unhampered by litigation or direct action.

Just in case you’re in any doubt about what the world’s best investor thinks, forgive me for quoting Mr Buffett at greater length:

“MidAmerican’s utilities serve regulated retail customers in eleven states. No utility company stretches further. In addition, we are the leader in renewables: From a standing start nine years ago, MidAmerican now accounts for 7% of the country’s wind generation capacity, with more on the way. Our share in solar – most of which is still in construction – is even larger.”

Warren Buffett is taking a leading role investing in renewable technologies. Readers with an understanding of technology learning curves will be under no doubt as to how this will impact the world: it will lead to lower costs for renewable energy. However, such investments are not risk-free, because certain governments, influenced by powerful players with vested interests in burning coal, threaten to harm the renewable energy industry.

Such a scenario may play out in Australia; former Caltex chairman Dick Warburton, is heading up another review of our Renewable Energy Target. The Sydney Morning Herald reports that “Warburton has made public his doubts that rising carbon dioxide levels are linked to climate change, a view at odds with the vast majority of climate scientists.” Buffett alludes to the risk that governments could move against renewable energy when he says, regarding Berkshire’s renewable energy investments that, “we put a large amount of trust in future regulation.”

Australian renewable energy companies such as Infigen Energy Ltd (ASX: IFN), which own plenty of wind farms, therefore face a risk that government policies may change. That’s because the continual uncertainty over the legislation reduces the price received for renewable energy certificates. The worst result for renewable energy developers would be if the government actually reduced the target. Infigen carries too much debt for my liking, but has recently invested further in US wind farms, which may be a wise move (depending on the quality of the assets and price paid).

The more important implication for Australian investors is the long-term impact that cheaper renewable energy will have on demand for coal. Put simply, humans are increasingly dropping the cost of transitioning away from fossil fuels, particularly coal, the burning of which benefits coalminers at great cost to future generations. All that remains is for the global myriad of indirect subsidies to the coal-burning industry to be gradually scaled back. It’s clear that the long-term trend will be away from using the 18th-Century technology, towards 21st-Century technology.

While this is obvious to many, a number of Australian companies seem to have not received the memo. RenewEconomy quoted Tim Buckley, a former Citigroup chief analyst in Australia, as saying:

“We are investing tens of billions of dollars building new assets to promote fossil fuels… [Regarding] the Galilee in particular, [Aurizon’s] Abbot Point port infrastructure… is huge and I think it is going to end up leaving us with stranded assets because we are missing the point that China, India, America and Germany are moving full steam towards a low-carbon economy.”

Foolish takeaway

Thea Ormerod has eloquently stated the risky nature of coal expansions such as Whitehaven’s Maules Creek project thus: “The movement to wind down coalmining in Australia may be counter-cultural but it is the truly conservative one. Its aim is to keep the Earth’s ecosystems more or less intact for those who suffer the impact of climate change in developing countries, for our own young people here and for future generations.”

Long-term investors would do better to avoid overly exposing themselves to losses resulting from the likely reality that over the next 30 years, the world is going to want less of our coal. Why not invest in safe blue-chip stocks, or established superstars, or growing companies that can export Aussie ingenuity all over the world?

Motley Fool contributor Claude Walker (@claudedwalker) does not directly own shares in any of the companies mentioned in this article, but does have a interest in Infigen through a managed fund. 

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