2012: How do subsidies affect the wind and solar market?

AUDIENCE MEMBER: Good morning, Mr. Buffett, Mr. Munger. My name is Verne Fishenberry (PH), and I ask this question on behalf of a group of investors that made the trip up from Overland Park, Kansas.

MidAmerican has a large investment in wind and solar power. What effect do subsidies and incentives have on that business, and could you share your thoughts on a sustainable energy policy?

I gather we should be conserving our natural gas. What is the most appropriate use of that resource?

WARREN BUFFETT: Yeah. Well, I believe the — on wind — and we’re much bigger in wind than solar, although we’ve entered solar in the last six months or so. We’ve got two solar projects that we own about a half of each one of them.

But we’ve been doing wind for quite a while, and I think the subsidy is 2.2 cents for ten years per kilowatt hour, and that’s a federal subsidy.

And there’s no question that that makes wind projects — in areas where the wind blows fairly often — that makes wind projects work, whereas they wouldn’t work without that subsidy. The math just wouldn’t work out.

So the government, by putting in that 2.2 cents subsidy, has encouraged a lot of wind development. And I think if there had been none, my guess is there would have been no wind development. I don’t think any of our projects would make sense without that subsidy.

In the case of solar, the projects we have have got a commitment from Pacific Gas and Electric to a very long-term purchase commitment.

How that ties in with their particular obligations or anything, I mean, there may be some subsidy involved in why they wish to buy it at the price they do from us. I’m sure there is; I don’t know the specifics of it.

But neither one of those projects, neither solar nor wind — if Greg Abel is here and wants to go over to a microphone and correct me on this, it would be fine — but I don’t think any solar or wind would be working without subsidy.

And, of course, you can’t count on wind for your base load. I mean, it works and it’s clean, but if the wind isn’t blowing, you know, it does not mean that everybody wants to have their lights off.

So it’s a supplementary type of generation, but it can’t be part of your base generation.

Charlie, do you have any thoughts on that? And Greg, do we have Greg up here? Go ahead, Charlie.

CHARLIE MUNGER: Well, I think, of course, it — eventually we’re going to have to take a lot of power from these renewable sources and, of course, we’re going to have to help the process along with subsidies.

You know, I think it’s very wise that that’s what the various governments are doing.

WARREN BUFFETT: Yeah, you could say the future is subsidizing, you know, oil and natural gas now, in a sense.

Is Greg up there?

CHARLIE MUNGER: He needs a mic.

WARREN BUFFETT: He needs a mic.

GREG ABEL: Zone 7. Yeah.

WARREN BUFFETT: Yeah.

GREG ABEL: Just to touch on the — both the wind projects and the solar, Warren, you were exactly right. Obviously the subsidy associated with the wind has allowed us to build, now, 3,000 megawatts across our two utilities.

And you are absolutely correct, we would have not moved forward without that type of subsidy.

On the solar, there’s actually a couple other incentives that are in place. You get a very large incentive associated with constructing the assets.

We get — we recover 30 percent of the construction costs as we build it.

Significant advantage there, relative to Berkshire being a full taxpayer, where a lot of other entities in the U.S. are not — or the corporate entities that are competing for those projects relative to ourselves often don’t have the tax appetite for those type of assets.

So we do benefit from the ongoing tax structure, there’s no question, both in wind and in solar.

WARREN BUFFETT: Greg has hit on a point that people don’t — often don’t — understand about Berkshire.

We have a distinct competitive advantage. It’s not unique, but it’s a distinct competitive advantage in that Berkshire pays lots of federal income tax.

So when there are programs in the energy field, for example, that involve tax credits, we can use them because we have a lot of taxes that we’re going to pay, and therefore, we get a dollar-for-dollar benefit.

I don’t have the figures, but I would guess that perhaps 80 percent of the utilities in the United States cannot reap the full tax benefits, or maybe any tax benefits, from doing the things that we just talked about because they don’t pay any federal income taxes.

They’ve used bonus depreciation, which was enacted last year and where you get 100 percent write-off in the first year. They wipe out their taxable income.

And if they’ve wiped out their taxable income through such things as bonus depreciation, they do not — they cannot — have any appetite for wind projects where they get a tax credit or — in the solar arrangement.

So, by being part of Berkshire Hathaway, which is a huge taxpayer, MidAmerican has extra abilities to go out and do a lot of projects without worrying about whether they sort of exhausted their tax capacity. It’s an advantage we have.