Buffett’s $26 Billion Power Bet in West Seen Paying Off

Warren Buffett’s $26 billion bet on western U.S. power plants, transmission lines and wind farms is poised to pay off.

The energy unit of Buffett’s Berkshire Hathaway Inc. (BRK/B), with the help of California’s grid operator, is moving to unite the holdings under a single market capable of dispatching power across seven states every five minutes. The system, designed to handle sudden swings in supply and demand, would revolutionize the markets from Oregon to Nevada, where 38 transmission operators manually balance their territories on an hourly basis.

The move would be a game-changer for the renewables that Berkshire Hathaway Energy Co. has accumulated over the past decade, including two of the world’s largest solar farms, and for other clean-power producers, according to those who trade in the region’s markets. Berkshire’s plants stand to run for longer periods of time, and its NV Energy Inc. and PacifiCorp utilities will save as much as $63.9 million annually by 2017, Energy and Environmental Economics Inc. reports show.

“It would be huge if all 38 balancing authorities joined,” Sean Breiner, a market design analyst for San Ramon, California-based energy trader Viasyn, said by telephone June 2. “Instead of having these balkanized regions, you’d have resources from Idaho to Wyoming all flowing into one kind of large spot market.”

Photographer: Daniel Acker/Bloomberg

Warren Buffett’s Berkshire Hathaway Inc., with the help of California’s grid operator, is moving to unite the holdings under a single market capable of dispatching power across seven states every five minutes. Close

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Photographer: Daniel Acker/Bloomberg

Warren Buffett’s Berkshire Hathaway Inc., with the help of California’s grid operator, is moving to unite the holdings under a single market capable of dispatching power across seven states every five minutes.

Green Power

Transmission operators across the U.S. are struggling to manage record volumes of variable resources such as wind and solar coming online to meet state renewables mandates. Power prices, already weighed down by a 66 percent drop in natural gas since July 2008, can slide to zero or negative at times when output unexpectedly surges, pressuring profits for gas, nuclear and coal generators.

Natural gas futures rose 1.1 cents, or 0.2 percent, to settle at $4.64 per million British thermal units today on the New York Mercantile Exchange.

California has a goal of securing 33 percent of power from clean energy by 2020. By next year, the California Independent System Operator Corp. expects renewables to meet almost a quarter of demand. In the Northwest, renewables are nearly 7 percent of total supply, excluding hydropower.

Hourly Bids

The market, scheduled to start Oct. 1 pending approval from the Federal Energy Regulatory Commission, would use hourly bids from generators to match the cheapest resources with supply, demand and transmission changes every five minutes. It would initially include the territories of the California ISO and PacifiCorp -- spanning 42,200 miles of transmission lines in six states from California to Wyoming, extend to NV Energy’s Nevada network a year later and could accommodate all operators in the region.

Photographer: Natalie Behring/Bloomberg

Mark Sampson, vice president of system operations at PacifiCorp, interprets data from a graph at the Transmissions Grid Operations center in Portland, Oregon, U.S., on Tuesday, May 27, 2014. Close

Mark Sampson, vice president of system operations at PacifiCorp, interprets data from a... Read More

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Photographer: Natalie Behring/Bloomberg

Mark Sampson, vice president of system operations at PacifiCorp, interprets data from a graph at the Transmissions Grid Operations center in Portland, Oregon, U.S., on Tuesday, May 27, 2014.

Those who join would be trading in a “Model T for a Ferrari,” Stefan Bird, senior vice president of PacifiCorp’s commercial and trading operations, said in a May 27 interview at one of the company’s wind farms in Washington. “A human, even a really good one, can’t handle so many plants.”

Public power agencies have opposed a western-wide system since the energy crisis a decade ago that left thousands without power and caused prices to surge to record.

Their hesitation also stems from an age-old “fear” of the FERC, Jon Wellinghoff, who joined the law firm Stoel Rives after resigning as the longest-serving chairman of FERC last year, said at a conference in San Francisco on May 29. “It will give FERC some authority and power over their operations.”

Not Joining

Bonneville Power Administration, an agency that markets hydropower for the federal government and operates transmission ties between California and Oregon, has no intention of joining and is involved in an effort to improve markets in the Northwest alone, Doug Johnson, a BPA spokesman in Portland, said by telephone May 28.

Iberdrola SA’s U.S. renewables unit would need BPA to join the market or become its own balancing authority if it wants to participate in the trades, said Laura Beane, director of market structure for Iberdrola Renewables LLC, the second-largest wind power developer in the U.S.

“Iberdrola is continually evaluating its option to ensure it can optimize its asset portfolio,” Beane said by e-mail from Portland. The market “can create efficiencies that will benefit Iberdrola and its customers through lower integration costs for renewable resources,” she said.

Separate Decisions

Bob Gravely, a spokesman for PacifiCorp in Portland, and Shawn Elicegui, NV’s vice president of regulatory affairs in Reno, Nevada, said their decisions to join the market were made individually.

Berkshire’s acquisition of NV last year didn’t “seal the deal,” Elicegui said by telephone May 29.

On a recent morning, PacifiCorp dispatcher David Landis’s eyes darted between seven computer screens, a half-eaten meal shoved aside, as he worked to balance fluctuations across the utility’s six-state system. A screen at his desk in Portland flashed wind forecasts.

“You can only put so much weight on them,” he said, pointing to a chart showing wind output fell 150 megawatts below forecast. “That’s enough to light a lot of Portland.”

The balancing system would take those fluctuations off Landis’s hands so he could focus on more forward-looking markets, Bird said.

Berkshire Investment

Berkshire Hathaway Energy’s spending in the western states included $10.7 billion to acquire PacifiCorp and NV Energy, $8.7 billion in renewable investments, a $6 billion Northwest transmission project and at least $568 million on the Lake Side natural gas-fired power plant being completed this year in Utah, according to company filings.

Class A (BRK/A) shares of Berkshire Hathaway climbed today as much as $940, or 0.5 percent, to $191,357. The stock has risen 7.2 percent this year.

Power generators and transmission operators in other parts of the U.S. already participate in real-time markets run by grid operators from the Northeast to Texas. California runs a five-minute market within its own territory. Should all the authorities in the western U.S. join the new system, it would become the nation’s largest geographically.

Cost Savings

Analyses prepared by San Francisco-based Energy and Environmental Economics show the real-time market would save the California ISO area as much as $74.3 million, PacifiCorp $54.4 million and NV $9.5 million in the year 2017.

More than half of Berkshire Hathaway Energy’s revenue is generated from assets in the western U.S., its website shows. The company is spending $5.2 billion to build the world’s two largest solar farms in California.

To bring this growing collection of renewables onto the grid, “you really need to have better tools -- situational awareness, speed and wide areas of diversity,” PacifiCorp’s Bird said. “The West lacks that, and this, from our point of view, is critical.”

To contact the reporters on this story: Lynn Doan in San Francisco at ldoan6@bloomberg.net; Naureen S. Malik in New York at nmalik28@bloomberg.net

To contact the editors responsible for this story: Dan Stets at dstets@bloomberg.net Bill Banker

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