How To Play Alternative Energy The Warren Buffett Way
We’ve been looking for the best way to play one of the most important trends in the world.
We’ve been calling it the 10-year bull market in electricity prices for a long time now.
In this piece we show the bottom line impact of the aggressive shift to alternative energy on electricity prices.
The price rises are set to be substantial.
Here we showed how the electricity production mix could match that of Germany’s.
And there it cost 33 cents per kWH (before the Ukraine situation sent electricity prices there even higher) which is twice as high as the United States average price.
And, frankly, that’s where the current path is going to the U.S. electricity prices.
The way is how to invest in it.
Three Ways To Play Alternative Energy
(And The Only Good One)
Warren Buffett’s Berkshire Hathaway (BRK.A) has quietly built a portfolio of around $30 billion in alternative energy investments.
There are quite a few ways to invest in the rise of alternative energy…few of them are good.
Here are the three most direct ways to invest in alternative-energy driven electricity price climb:
Solar And Wind Stocks
History has shown that solar panel and wind turbine maker stocks are more cyclical stocks than any kind of long-term growth companies.
They have good runs, usually after a major jolt of government subsidies for their products, and then that fades.
Then there’s a push for higher subsidies and the process renews.
And there’s increasing foreign competition, steady technological advancements, and other margin-lowering problems these companies consistently face.
Look at it like the Internet.
After the initial buildout which made hardware companies like Cisco Systems (CSCO) megastars.
The huge gains came to the companies with the business models to truly make the most of it like Apple (AAPL) and Alphabet (GOOGL) that really became the mega-gainers of the sector.
These should, theoretically, be direct beneficiaries of the rise in electricity prices.
After all, they own most of the power plants.
As highly regulated companies, they have huge obligations other than just maximising shareholder value.
They are also responsible for huge costs including maintenance, staff, and replacing an entire grid network that’s going to be showing more and more cracks in the years ahead.
They won’t be hurting too much, but they won’t be big benefactors of the rise in electricity prices either.
Alternative Energy Plant Owners
This is the real sweet spot for the companies who are going to make a killing in this.
Take a look at a company like Brookfield Energy Partners (BEPC).
One of the company’s presentations gives away the goods.
It shows it has more than 17,000 megawatts of production capacity between hydro, wind, and solar.
How 63% is in North America.
And actually a huge portion of it’s power production – 52% – is from proven and ultra-reliable hydro power.
But the key is the Power Purchase Agreements (PPA).
These are the agreements that are complicated by combining the costs of initial capital, financing, and end power buyer and price all at or near the beginning of the project.
They can basically define the amount of profits to come.
We’ve seen some where the PPA allows the owner to buy electricity for 4 cents per kWh for at least the next 10 years in a market where it’s 16 cents.
That’s lucrative now, but in 10 years when electricity prices are higher, it will be even sweeter.
And it’s these structures in these companies that are going to be the real superstars in all this.
Their capital costs are already deployed, now they just have to watch the solar and wind power roll in for a predetermined below-market price and they sell it on for exponentially more.
This is the Warren Buffett way of investing in alternative energy, not utility stocks nor solar panel maker stocks either.