Utilities used to offer predictable returns. Now you need to tread carefully, says Rupert Hargreaves
“It’s not a way to get real rich, but it’s a way to stay real rich,” Warren Buffett said in 2020 at the annual general meeting of his conglomerate Berkshire Hathaway. Buffett was talking about the utility and energy sector. In particular, he was referring to Berkshire’s division, Berkshire Hathaway Energy (BHE).
Berkshire entered the energy supply and distribution business in 1999, when it bought a controlling stake in MidAmerican Energy Company for $2bn. The group expanded rapidly, buying stakes in other operators in the US, Canada, the UK and Australia. Today, BHE operates across 28 US states, transports 15% of America’s natural gas and serves more than 13 million customers. The $2bn initial investment has grown into a giant with $138bn of assets.
However, ferocious headwinds have started building against the utility giant in recent years. These trends, which seem to have forced Buffett to reconsider his stance as an advocate of the industry, aren’t limited to North America, and BHE isn’t the only company struggling. Worldwide, the entire utility sector is grappling with what can only be described as a once-in-a-generation period of change that threatens to upend the once reliable industry.
Headwinds gather strength
In Warren Buffett’s 2023 letter to the investors of Berkshire Hathaway, the billionaire cast doubt over the future of the group’s energy business, which he had praised only a few years previously. “Berkshire can sustain financial surprises, but we will not knowingly throw good money after bad,” he noted in his annual letter to shareholders in February, warning of the “spectre of zero-profitability or even bankruptcy” across the industry.
The root cause of this change of heart is climate change. PacifiCorp, the largest electric utility owned by Berkshire, has been found liable for a series of deadly wildfires in 2020. The company has been blamed for failing to shut off some of its power lines, which ignited vegetation that had been dried to a crisp by the hot weather. The scale of the potential liability isn’t yet clear, but analysts have suggested the bill could be as high as $45bn.
At the same time, BHE is spending tens of billions of dollars rebuilding its electricity network to cope with the surge in demand for green power and associated transition systems. Meanwhile, in 2019, Pacific Gas & Electric, California’s la
