In his annual letter to investors, Warren Buffett identified the coming clash between traditional electric power suppliers and the burgeoning market of distributed energy sources like solar and wind. He describes utility dominance simply: Monopoly utilities are offering an essential service on an exclusive basis.
“In its electric utility business, our Berkshire Hathaway Energy (“BHE”) operates within a changing economic model. Historically, the survival of a local electric company did not depend on its efficiency. In fact, a ‘sloppy’ operation could do just fine financially,” Buffett said. “That’s because utilities were usually the sole supplier of a needed product and were allowed to price at a level that gave them a prescribed return upon the capital they employed.”
Nevada’s recent experience of this clash is a clear example of how so many homeowners can get flim-flammed as the roof-top solar business increased by 400% in the sunny desert between 2014 and 2015 alone. According to the utility, solar roof-top customers cheated the system to the tune of $16 million annually. The response by the monopoly utility and its former employee, Governor Sandoval, was to appoint a Public Utility Commission that would eliminate the competition. It worked!
By raising the monthly base service fee for solar roof-top customers from $12.75 (for all non-solar NVE customers) to $38.51, the monopoly can regain the profits they need to pay dividends to stockholders as required by state constitution. That $16 million annual loss of revenue reflects the investments of ~17,000 Nevada households that invested $40,000 each in solar panels to generate their own electricity during those 335 sunny days in the desert. The average roof-top solar array, as viewed by the utility, deprived the monopoly of the revenue amounting to ~$1000 per household. They want the money.
Claiming a ‘Bait and Switch’, many solar roof-top owners and companies are fighting back with legal challenges and suits. Nevada homeowners invested in the solar arrays and wind generators and received subsidies amounting to ~ 30% of their investment. Since the ruling in December by the PUC, applications for connecting these electricity generation suppliers to the grid owned by NVE have dropped more than 90%. The ruling has effectively snuffed out the competition.
As Buffett sees the shifting from a centralized energy model to a more distributed sourcing through solar and wind, he writes: “Today, society has decided that federally-subsidized wind and solar generation is in our country’s long-term interest. Federal tax credits are used to implement this policy, support that makes renewables price-competitive in certain geographies. Those tax credits, or other government-mandated help for renewables, may eventually erode the economics of the incumbent utility, particularly if it is a high-cost operator.”
Just as efficiency measures such as insulation and better windows can reduce the energy required and sold, so also do the solar units that generate electricity for the homeowners and their neighbors when net-metering allows homeowners with roof-top solar to sell their excess at retail rates. The Nevada PUC eliminated this benefit for solar roof-top. Going forward, excess solar roof-top electricity will be priced at a wholesale rate ($.03) far below the retail rate ($.11) which had been the standard nationally until the recent proliferation of efficient and low-cost solar units.
As the Oracle of Omaha has pointed out, our solar improvements have identified sloppy utilities, those dumping massive amounts of fossil wastes in order to maximize profits even when more efficient and less polluting sources are brought online. Although ~17,000 of Nevada’s solar families have taken a needless hit to their investments and most of the solar companies in Nevada have shuttered their doors and moved out, the profiteering by big investors appears to hold legal dominion over climate-based concerns and most certainly over the micro-economies like Nevada where families’ investments in their own energy futures are now worthless and 6,000 solar workers look for some way to feed their families.