They say money is power. If that's true, then the world's most powerful people can all be found in one place: the Forbes billionaires list.
Utility Dive parsed through this year's rundown of the world's 500 richest people to bring you the four whose money really matters. Whether that's investing in early stage startups or funding special interest groups, these four billionaires are helping define the future of the electric utility sector.
1. Warren Buffett
Net worth: $58.2 billion
Notable endeavors: MidAmerican Energy, PacifiCorp, NV Energy
The Oracle of Omaha is arguably the most successful investor in American history.
Buffett started out buying his first shares in utility operations and oil and gas holding company Cities Services Preferred at age 11 — and now he's the fourth-richest person in the world. The secret to success? "The stock market is a no-called-strike game," Buffett says. "You don't have to swing at everything — you can wait for your pitch."
So why is Buffett investing in utilities? The much-ballyhooed utility death spiral has investors worried that the $1.5 trillion electric utility industry is stagnating — or, worse, going extinct. But where others see death spiral, Buffett sees opportunity.
In a letter to Berkshire Hathaway shareholders, Buffett explained why he believes utility holding company MidAmerican Energy is a good investment.
For starters, the books look good: MidAmerican's earnings rose from $1.19 billion in 2009 to $1.68 billion in 2013. At the same time, the value of its assets increased from $45 billion to $70 billion.
MidAmerican also has a very low risk profile — even for a utility. Buffett's utilities all operate in traditionally regulated markets. They have a diversity of revenue streams and largely recession-resistant earnings, which gives MidAmerican a low cost of debt.
Uniquely, MidAmerican has also invested a whopping $15 billion in renewable energy projects. When all is said and done, the company will possess a grand total of 6,316 MW in renewable capacity.
“MidAmerican can make these investments because it retains all of its earnings,” Buffett said. “Here’s a little known fact: Last year MidAmerican retained more dollars of earnings — by far — than any other American electric utility. We and our regulators see this as an important advantage — one almost certain to exist five, ten and twenty years from now.”
Not only is Buffett invested in utilities, the Oracle has been on a bit of spending spree lately. Utility holding company MidAmerican Energy acquired PacifiCorp in 2006 and NV Energy in 2013. And Buffett just announced: "NV Energy will not be MidAmerican's last major acquisition." These 19 companies fit the bill, according to Bloomberg.
“We put a large amount of trust in future regulation,” Buffett said in the letter. “Our confidence is justified both by our past experience and by the knowledge that society will forever need massive investments in both transportation and energy. It is in the self-interest of governments to treat capital providers in a manner that will ensure the continued flow of funds to essential projects.”
As the industry addresses its uncertain future, utilities may be wise to look at Buffett's MidAmerican. It's not only dealing with transformational changes; it's paving the way for them — and earning good returns to boot.
2. Charles and David Koch
Net worth: $40 billion
Notable endeavors: Koch Industries, Americans for Prosperity, American Legislative Exchange Council
They are not the only Kochs, but David and Charles are the most infamous by far.
The two brothers run Koch Industries, a multinational conglomerate whose main businesses include oil refineries, oil and gas pipelines, coal, fertilizer and industrial equipment. They also own one power plant — the 1,055 MW natural-gas fired Odessa Power plant in Texas — through subsidiary Koch Energy Services.
But while the Koch brothers' investments in the utility sector are minimal, their influence is not. The Koch brothers are the money behind Americans for Prosperity (AFP). They are also key sponsors of the American Legislative Exchange Council (ALEC).
ALEC is effectively a dating service for state lawmakers and corporate interests. The organization turns "ALEC's lawmaker members into stealth lobbyists, providing them with talking points, signaling how they should vote" and even writing model bills, according to the New York Times.
AFP, on the other hand, is the political money machine behind some of the most vicious attack ads, misinformation campaigns and special interest-driven policy positions this country has ever seen. (That sounds hyperbolic. It's not.)
Both groups have been very active in energy policy. ALEC has helped introduce bills in state legislatures to gut climate regulation, renewable portfolio standards, renewable tax credits, energy efficiency programs and net metering. ALEC's plans for 2014 include much of the same.
While ALEC focuses on state policies, AFP plays on the national stage. AFP opposes greenhouse gas emissions regulations (particularly EPA's standards for new and existing power plants), renewable portofolio standards and carbon pricing. The group also helped defeat Ron Binz's nomination to the Federal Energy Regulatory Commission.
But the Kochs' money isn't limited to AFP and ALEC. Just check out this advertisement from the Koch-backed 60 Plus Association, which ran during the recent battle royale over rooftop solar in Arizona:
It's safe to say that if the Koch brothers get their way, government subsidies and regulation would go the way of the dinosaur. No doubt that would have a massive impact on the electric utility sector, which is highly regulated.
3. Elon Musk
Net worth: $8.4 billion
Notable endeavors: SolarCity, Tesla Motors
No one ever said Elon Musk lacked ambition.
Amongst other endeavors, the serial entrepreneur is co-founder and chairman of solar leasing company SolarCity (his cousin Lyndon Rive is the CEO) and the founder, CEO and chairman of electric vehicle company Tesla Motors. But those descriptors do neither company justice: SolarCity and Tesla are so much more than your run-of-the-mill cleantech startups.
Let's start with SolarCity: It's arguably the most successful third-party solar leasing company to date -- SolarCity currently leads the U.S. residential PV market with 32% market share. Its leasing model -- customers put little or no money down and pay SolarCity for electricity used at prices below the incumbent utility -- has made rooftop solar a cost-effective option for homeowners.
Financial innovation is a big part of what makes SolarCity such a disruptive threat to utilities. It's not just their leasing model. SolarCity became the first distributed solar company to securitize its assets in a $54.4 million sale last year. It is considering offering up another $200 million of asset-backed debt in 2014.
"SolarCity is on the cusp of regularly converting the revenue streams from future lease and power purchase agreement payments for upfront cash to expand its rapidly growing business," Utility Dive wrote in its analysis of the move. "The increased access to the capital markets may also lower the cost to install rooftop systems, which will make SolarCity more competitive."
Pair that with SolarCity's successful IPO and the acquisition of Common Assets, and you've got an extremely ambitious company with the funds it needs to rapidly penetrate emerging markets. The scariest part: Other solar companies are following SolarCity's lead. That doesn't bode well for utilities.
On to Tesla: the car company that jumpstarted the electric vehicle market. Musk says he started Tesla because "it was clear that we were not going to see electric cars from major car manufacturers."
“The [automobile] industry was operating under two false premises," Musk said. "One, that you could not create a compelling electric car. And two, that no one would buy it."
Tesla's strategy "is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model," Musk wrote in The Secret Tesla Motors Master Plan (just between you and me).
That's working out pretty well so far. Tesla released the Roadster (a sports car) in 2010 for $109,000; it plans to release the Model X (a family car) in early 2015 for $40,000. "Now that we’ve become profitable, we expect that other manufacturers will get into the electric car market,” Musk said.
But Tesla isn't just a car company anymore. Musk recently announced plans to build a $5 billion Giga factory that will produce 35 gigawatt-hours of lithium-ion batteries per year. (That's more than the capacity of every single battery on the planet today.) While the plant will help Tesla ramp electric vehicle production up to 500,000 cars by 2020, the planned Giga factory will also "accelerate the pace of battery innovation," according to Tesla's most recent investor newsletter.
Batteries today cost around $400/kilowatt-hour. Due to its massive scale and vertical integration, Tesla says the Gigafactory will cut battery costs by 50% by 2020 — down to $200/kilowatt-hour. But Musk also says he hopes the plant will ultimately get costs down $100/kilowatt-hour — the threshold at which battery storage becomes economical, according to the U.S. Department of Energy.
The implications of SolarCity and Tesla's ambitious plans are not lost on Utility Dive. Bundled solar-and-storage systems, which SolarCity and Tesla are already rolling out, give end-users the opportunity to disconnect from the electrical grid (and have it be cost-effective to boot). While utility customers going off the grid is likely to remain an extreme scenario for the foreseeable future, such is the disruption that Tesla and SolarCity could wreak on the power and utilities sector.
Both companies are not just leaders in their markets; they are effectively creating new markets and pushing the boundaries of what's possible. Only time will tell whether Musk's companies live up to his ambitions.
4. Bill Gates
Net worth: $76 billion
Notable endeavors: Optim Energy, Otter Tail Power, TerraPower, Aquion Energy, LightSail Energy, Varentec, Urine-tricity
We all know who Bill Gates is.
But while the world's richest man is most famous for Microsoft and his philanthropic work, Gates is also influential in the energy sector. His investments there may pale in comparison to his vast fortune, but anything Gates does is bound to draw attention.
These investments generally fall into two buckets: low-risk investments and high-reward bets that could spark game-changing breakthroughs.
On the first note, Gates is invested in Minnesota utility Otter Tail Power and Texas power company Optim Energy (which just filed for bankruptcy). But Gates' most interesting energy investments are in early-stage startups with a lot of disruptive potential, such as grid monitoring and management company Varentec and energy storage hopefuls LightSail Energy and Aquion Energy.
The most interesting may be Aquion. With over $100 million in hand, Aquion is in production mode at its big Pennsylvania plant. It plans to deliver its sodium-ion batteries to customers in the first half of this year -- at a $250/kilowatt-hour price-point.
Gates also funded TerraPower, a company developing nuclear reactor technology that can run on depleted uranium, thereby reducing the threat of nuclear proliferation. And on a more lighthearted note, the Bill and Melinda Gates Foundation recently awarded $500,000 to a project that has developed technology to power microbial fuel cells with -- believe it or not -- human urine. (It's called "urine-tricity." No joke.)
The philosophy behind these investments? "It's crazy how little we're funding energy," Gates said in 2012. Despite their high failure rates, Gates has funded these early-stage startups because we need "crazy people" to come up with "energy miracles" to combat climate change.
"[We] literally need thousands of these companies to try this," Gates said. “Look at the battery companies [at ARPA-E], and if you can find the one out of ten that will breakthrough, then great, go invest in it.”
If even one of these startups takes off, it should have a big impact on the energy sector's future.