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March 20, 2019

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Buffett vs. Musk: The clash of old and new energy titans

Musk vs. Buffett

The effort to break up NV Energy

A group of undisclosed backers floated a ballot initiative in February that would effectively end NV Energy’s monopoly through a constitutional amendment. Dubbed the Energy Choice Initiative, it would create a competitive market for purchasing electricity.

If it were to be successful, NV Energy would still maintain the electricity grid but would no longer have the same control over Nevada’s energy supply that it does as a monopoly. Nevada would follow states like New York and California in deregulating.

Tesla and data company Switch are the initiative’s only public backers, though organizers have said they are working to build a broad coalition of technology and gaming interests.

It’s not the first time Nevada has flirted with deregulation. Nevada was poised to deregulate in the late ’90s, an effort that was largely reversed in the wake of the Western energy crisis.

But casino companies have long tried to source their own energy. Last year, Las Vegas Sands Corp., MGM Resorts International and Wynn Las Vegas applied to buy energy from a third party. Other gaming companies attempted to do the same in the 2000s.

The rooftop solar debate in 2015

Nevada was not the only state to reconsider how to price rooftop solar and integrate it with the existing grid in 2015. It was a debate playing out in states throughout the country:

• 27 states changed or considered changing policies

• 24 states decided to look at the value of customer-owned electricity resources like rooftop solar and energy storage

• 21 utilities proposed new charges for solar customers

• States to watch in 2016: California, Hawaii, Arizona, Wisconsin, Maine

A breakdown of the NV Energy-SolarCity battle

• SolarCity gets tax credits to open an office in Las Vegas, promising to bring hundreds of jobs to the state.

• Warren Buffett’s Berkshire hathaway buys NV Energy.

• SolarCity launches rooftop installations in Nevada.

• Lobbyists get involved. Heading into a legislative session, lobbyists for the utility and solar industry start laying out what they would like to see for the future of the industry here.

• Solar rates become a factor. Legislation passes tasking the Public Utilities Commission with determining long-term rooftop solar rates.

• Proposal wants solar customers to pay more. NV Energy finds that non-solar ratepayers are subsidizing solar customers and proposes a rate design that would increase utility bills for rooftop solar customers.

• Rooftop solar incentives decrease. The commission approves an order tripling a fixed fee for rooftop solar customers and slashing the value of credits customers can earn by selling excess energy.

• SolarCity drops out. SolarCity announces that it is ceasing new sales in the state because rooftop solar is no longer viable. The company backs a ballot measure to abolish the new rates.

• Customers seeking rooftop solar drop. NV Energy data show applications for new installations decrease 93 percent between December and January.

• Buffett under fire. Buffett defends the commission’s decision on CNBC, arguing that it is more beneficial to ratepayers.

• Musk looks to the future. Musk invites legislators and state officials to the Tesla Gigafactory to hear a presentation on the future of the grid.

When Warren Buffett came to Las Vegas in June 2014, a year after acquiring NV Energy, Elon Musk’s SolarCity had just started selling rooftop panels in Nevada. Buffett, the Nebraska billionaire and Berkshire Hathaway chairman who had become Nevada’s energy tycoon, had come to meet with NV Energy staff and host a reception with state officials, including regulators.

By the time Berkshire’s energy subsidiary purchased NV Energy, it owned several power companies in Oregon, Idaho, Washington and Utah. As regulated monopolies with guaranteed returns and virtually no competition, they were lucrative buys.

“It’s a way to stay rich,” Buffett once said of utilities.

But times were changing. Over the next several years, another billionaire was threatening that long-held assumption. Musk, the chairman of SolarCity and CEO of Tesla Motors, had entered the energy game, challenging NV Energy’s position as the primary energy player in the state.

The two had collided head-on in a battle over the future of electric power ­— how it’s generated and distributed, who controls it and how much it costs consumers. The two capitalists could hardly be more different.

Musk’s focus is on disruption, through his interests and investments in reusable rockets, electric cars, solar power and a transportation system that uses vacuum technology to shoot people and goods through enclosed tubes. Buffett, meanwhile, has a foot in stable 20th century investments as the architect of a portfolio with holdings that include railroads, small-town newspapers and power systems that largely rely on burning fossil fuels.

Two months ago, nearly two years after Buffett’s visit to Las Vegas, Musk welcomed a contingent of state lawmakers and government officials to Tesla’s massive battery plant near Reno to hear a pitch from SolarCity about the future of the electric grid and how utilities should change.

Musk was coming off of a defeat. In late December, the Public Utilities Commission of Nevada voted to increase bills for rooftop solar customers, which prompted SolarCity and other companies to stop new installations in Nevada.

NV Energy says it wants to build a carbon-free grid, as does Musk. But how to achieve that goal remains up for grabs, and each billionaire has his own vision for how to do it in ways that present lucrative opportunities for their companies. The fight is hardly over. On April 30, Buffett held a shareholders meeting for Berkshire Hathaway. Meanwhile a group funded by SolarCity has launched an online campaign to protest NV Energy’s increase in profits last year. Musk and Buffett are battling to bring their visions to life, leaving it largely up to policymakers and regulators to decide which approach they support.

Elon Musk’s not-so-secret weapon

NV Energy won the battle on the utilities commission’s decision, but some believe that was only a momentary setback for Musk. They believe Musk holds a long-term advantage because of his investment in energy-storage technology, a crucial need in creating a carbon-free grid. As renewable energy development grows increasingly attractive to politicians, environmental activists and utility executives, the storage solutions being developed by Musk’s Tesla are viewed as attractive.

Musk is using a two-pronged strategy to challenge the traditional utility model. One approach is to drive the proliferation of rooftop solar panels. The other is to create a consumer market for one of his newest products, the Tesla Powerwall, a battery that can store excess solar electricity from those panels.

Batteries would allow solar customers and utilities to use energy at night, when solar panels are no longer generating electricity.

The Powerwall is one of several resources that fit into a category known as distributed generation. It’s a fancy term to describe a simple concept: customer-owned resources at decentralized locations, such as a home or business.

But without NV Energy’s grid, these products are inefficient.

Using these resources in tandem with the grid is the best option for customers, said Jamie Mandel, an analyst at the Rocky Mountain Institute, a nonprofit that encourages renewables.

“Your costs are much lower if you can use both,” he said.

Some utilities feel threatened by energy-storage developments, but some see opportunities in new sources of revenue.

In a survey of 500 utility executives, 65 percent said their utilities should invest more in energy storage. The survey, conducted by the trade publication Utility Dive, said executives believed distributed generation, as a percentage of utility energy portfolios, would increase by about 90 percent in the next 20 years. That could be a boon for firms such as SolarCity and Tesla.

“We want to see storage solved,” said Kevin Geraghty, NV Energy’s vice president of energy supply, adding that the utility would consider purchasing it if it were the lowest-cost option.

Musk’s Tesla Powerwall could be used by utilities and might play a key role in such a future.

But when it comes to Musk’s other venture — rooftop solar — the utility’s position could be described, at best, as skeptical. A move toward rooftop solar is not always in a utility’s interest. And utilities are powerful. NV Energy views rooftop solar as inefficient, costly for customers and a strain on the grid.

The utility argues that past incentives for rooftop solar have been an impediment to lowering rates for customers, managing energy supply and maintaining the grid. NV Energy proposes this alternative: leave the grid centralized and get cheaper, renewable power by building large-scale plants. Eventually, energy storage could enable these plants to generate electricity all day. Rooftop solar could be integrated with the grid, it argues, but not subsidized.

And for now, NV Energy has emerged victorious.

A recent regulatory decision prompted SolarCity and its competitor Sunrun to pull sales operations from the state, torpedoing new solar panel installations. The decision by the utilities commission largely aligned with what NV Energy wanted: an end to incentivized rooftop solar.

Over the next 12 years, the new structure will triple a fixed fee for solar customers and slash the value of credits they earn for selling excess electricity back to NV Energy under a program known as net metering. Such credits are crucial for solar customers because those savings on their utility bills are used to offset their investment in solar panels and bills from solar firms.

Musk digs in with SolarCity and Tesla

In 2014, when asked to reflect on what Musk had done with SolarCity, Tesla and SpaceX, Berkshire Hathaway’s Vice Chairman Charles Munger responded with praise and trepidation.

“I think Elon Musk is a genius, and I don’t use that word lightly,” he told shareholders for one of his companies. “He’s also one of the boldest men who ever came down the pike. So put me down as saying I’ve always been afraid of the guy whose IQ is 190 and he thinks it’s 250.”

And in Nevada, Musk is giving Berkshire Hathaway a run for its money.

SolarCity has launched a public campaign seeking to overturn the rate ruling. Musk and SolarCity executives have lobbied Nevada officials. Buffett said Musk even went so far as to call him personally to say he was unhappy about the situation.

Since the PUC decision, SolarCity and Tesla have actively pushed state officials to advocate for a more distributed grid. SolarCity is funding an effort to reverse the commission’s decision through an alliance that boasts more than 100,000 members. Tesla is backing a Nevada ballot initiative that would effectively end NV Energy’s exclusive control of the energy supply.

Despite doubts about the long-term economic viability of Musk’s companies and the challenges of going up against a legacy industry, much of the momentum appears to work in his favor.

For one, utility customers are on his side. Surveys have shown customers want distributed generation. And SolarCity, despite running at a loss, continues to draw in funding. The company recently closed on $338 million in financing to support solar projects with several large financial firms, including Bank of America Merrill Lynch and Credit Suisse.

As a result, Nevada finds itself at the epicenter of a battle over the future of electricity. With Musk’s SolarCity and Buffett’s Berkshire operating in other states, Nevada has become a sort of blueprint for what should or should not happen next.

In the balance — caught between the two billionaires and the army of lobbyists, experts and public relations professionals — are millions of people. They’re the power consumers who will be left largely responsible for picking up the tab.

Cheaper vs. Cheaper

Buffett and Musk argue the same thing: Their vision is cheaper.

NV Energy’s calculation goes like this:

Under the old rules, NV Energy paid residential solar customers for excess energy at about 11 cents per kilowatt-hour, the amount that energy costs all residential customers.

That was a bad deal for NV Energy, considering Buffett has said the utility could buy power from large-scale solar plants for about 4.5 cents per kilowatt hour.

“We do not want our million-plus customers that do not have solar to be buying solar at 10.5 cents when we can turn it out for them at 4.5 cents or buy it for them at 4.5 cents,” Buffett said during a wide-ranging interview on CNBC in early March.

SolarCity CEO Lyndon Rive, though, calls Buffett’s claim misleading. NV Energy gets most of its large-scale energy through 20-year contracts with third-party providers. In these contracts, it regularly pays more for large-scale solar energy, an average of about 13 cents per kilowatt-hour. Many of its contracts were signed when solar was pricier, even though it is now around 5 cents.

Asked if Buffett had lied during the CNBC interview, Rive said: “He’s not a liar in that today if they buy new energy, they can pay 4 or 4.5 cents for it. He’s just not telling the entire story.”

The entire story, according to Rive, is that NV Energy must pay to transmit the power beyond the roughly 4-cent rate it could pay, whereas transmission for solar is far less costly because it is not transmitted as far. He also said NV Energy has a business incentive to reduce rooftop solar penetration and buy from utility-scale plants because it allows them to build transmission infrastructure on which, as a regulated monopoly, it is guaranteed a return on investment. In the coming weeks, SolarCity plans to release a study showing that rooftop solar, when more factors are considered, is a net benefit for all ratepayers.

So which side is getting the better deal from the government? Solar advocates say it’s traditional power companies and their protected profits. Utilities say the rooftop solar industry needs to survive in an open market without the benefit of tax credits or selling excess electricity to utilities at government-mandated, above-market prices.

Government incentives and backing from large banks have fueled SolarCity’s growth, but some question whether and when it will become profitable. Rive rejects the idea that his industry should operate with no incentives.

“As long as utilities can pollute for free, then they are going to keep on using the cheapest energy source,” Rive argued in March. “If there is a magic new thing we could burn and it was 10 times worse than coal in terms of air pollution but 100 times cheaper, we’d burn every shred of it. That’s the problem.”

A spokesperson for Buffett did not reply to requests for comment, and Musk, through a spokesperson, declined to comment.

Where the battle goes from here

Buffett and Musk have the same goal — to build a carbon-free grid. Buffett wants to do that mostly by buying power that is centralized at large-scale plants. Musk, with SolarCity, wants to integrate more decentralized rooftop solar and battery-storage technology with the grid.

All electrons are equal, utilities argue, so it is more cost-effective for ratepayers to go green relying on economies of scale rather than buying more costly energy from rooftop solar panels.

After an event in April, Geraghty cited MidAmerican Energy Co., another Buffett-owned company that recently announced its intention to source 85 percent of Iowa’s power from wind. Geraghty said that would be enough to provide roughly all of Iowa’s residential power supply.

“That’s the same goal we aspire to here at NV Energy,” he said.

SolarCity doesn’t want to leave it all up to the utility, especially in Nevada, where NV Energy still relies largely on fossil fuels. Instead, SolarCity and other rooftop solar firms want to play a part in creating a carbon-free grid, and they want to play a large role. For that to happen, they need to be able to compete with a monopoly — NV Energy.

At the Tesla Gigafactory in March, SolarCity presented its vision to Nevada government and legislative leaders. Rive made the case that rooftop solar and energy storage were no different from other technological disruptions. He cited Netflix disrupting cable and Uber disrupting taxis.

Rive says there are benefits to rooftop solar that the current utility business model and its regulators do not account for: choice, environmental benefits, reduced strain on the grid and more efficient energy management. “When you include all those things, solar is actually a net benefit to every ratepayer, not just a solar customer,” he said.

With Nevada’s abundance of sun, SolarCity, Tesla and NV Energy have said the state is poised to lead the way in creating a renewable grid. Whether it is Musk or Buffett whose vision prevails — or a combination of both — will largely depend on how Nevada’s energy policy is crafted in the years ahead, something that will be debated through the election and into the 2017 legislative session.

Leaders from Gov. Brian Sandoval to legislators will be forced to take positions. The governor has convened a New Energy Industry Task Force to investigate the issue, and the utilities commission recently started an investigation into the implications of battery storage.

“Nevada is at the forefront of the future of energy,” said the last slide in Rive’s presentation to legislators back in March. “But the future of energy will need leadership to enable change.”

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