How Warren Buffett Milks Consumers & Taxpayers Through Wind Energy

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Warren Buffett photoIn my previous Special Report titled "The Carnahan Wind Deal," I documented that wind energy is highly inefficient and requires additional transmission lines and back-up gas generators when the wind doesn't blow. Yet, windmills keep getting built, thanks to government subsidies.

But it is very hard to trace these subsidies. Vague statements about "tax credits" and "mandates" give no hint of the magnitude of returns that these subsidies provide to crony windmillers. Indeed, in the Carnahan Special Report, we had to burrow into financial statements of a foreign company and its subsidiary to understand where all the money was going.  The principal information was buried in an arcane note to these financial statements.

I had heard that Warren Buffett was a fan of green energy, so when an associate of mine accidentally left a copy of Berkshire Hathaway Inc.'s 2013 Annual Report on my desk a few weeks ago, I could not resist taking a peek.

On page 11 we find that:

MidAmerican's utilities 89.8% owned by Berkshire Hathaway serve regulated retail customers in eleven states. No utility company stretches further. In addition, we are the leader in renewables: From a standing start nine years ago, MidAmerican now accounts for 7% of the country's wind generation capacity, with more on the way. Our share in solar-most of which is still in construction-is even larger.

This is no small business. Let's see how much 7% of the country's wind generation capacity is: "At the end of 2013 the capacity wind power in the United States is 61,108 MW."  This is called nameplate capacity, which is the total amount of electricity that would be produced if everything was working 100% of potential efficiency.

The actual production of electricity is expressed in megawatt hours, or how many hours one megawatt of electricity was produced.

In one year, a nameplate capacity of 61,108 MW (megawatts) operating at 100% efficiency theoretically could produce 24 hours a day for 365 days a year. This would amount to (24x365x61,108 MWH) = 535,306,080 megawatt hours, or 535.306 terawatt hours.

Unfortunately, for wind power users there is a fatal flaw. The wind hardly ever blows enough to achieve anything like 100% efficiency. We know that "for the 12 months through 2014, the electricity produced from wind power in the United States amounted to 171.02 terawatt hours."

Using this data we can calculate the overall efficiency rate: (171.020 / 535.306) = 31.9%. We will round this to 32% for the interpolated overall efficiency in the United States in making subsequent calculations.

Berkshire's report states: "MidAmerican now accounts for 7% of the country's wind generation capacity..." So, 7% x 535,306,080 MWH = 37,471,420 MWH. And when we apply the 32% efficiency rate, we have a probable value for how much electricity MidAmerican might have produced in 2013, (37,471,420 x .32 =) 11,990,854 MWH. All of these calculations are necessary to approximate the electricity produced because Berkshire does not tell us how much electricity the company produced. This omission is deliberate. Its purpose is to make it very difficult for any outsider to discover how much money is flowing through Berkshire's windmills. Here is what Berkshire does tell us in its 1999 annual report:

Though there are many regulatory restraints in the utility industry, it's possible that we will make additional commitments in the field. If we do, the amounts involved could be large.

Amusingly, from this 1999 statement, Buffett seems to imply that regulatory restraints on the utility industry make it unattractive to investors. By this time in his career, Buffett could have invested in any or every electric utility in the country. So what unique opportunity was he seeing the in future? Could it have been renewable green energy electricity? In 2013 he wrote:

At MidAmerican, meanwhile, two factors ensure the company's ability to service its debt under all circumstances. The first is common to all utilities: recession-resistant earnings, which result from these companies exclusively offering an essential service. The second is enjoyed by few other utilities: a great diversity of earnings streams, which shield us from being seriously harmed by any single regulatory body. Now, with the acquisition of NV Energy, MidAmerican's earnings base has further broadened. This particular strength, supplemented by Berkshire's ownership, has enabled MidAmerican and its utility subsidiaries to significantly lower their cost of debt. This advantage benefits both us and our customers.

So here he must be talking at least somewhat about his 7% capacity of U.S. wind energy. The beginning point for windmill generated electricity is a state-imposed mandate on their hydrocarbon-fired electric utilities. The mandate requires such utilities to spend a specific percentage of their revenues on the purchase of renewable energy, which includes windmills.

In Nevada, a state where MidAmerican does business, in 2009, 9% of revenues had to be spent on renewable energy. This will increase to 25% of revenues by 2025. And for these purchases and resales to qualify as renewable energy the non-renewable hydrocarbon-fueled utilities must pay for both electricity and a Renewable Energy Credit. Remember this, it is very important.

This requirement results in the renewable energy supplier having access to one of the strongest income streams in American commerce, a part of every customer's remittance when they pay their monthly electricity bills. This is why Buffett will be able to borrow more money at lower rates than most businesses. Thus, he won't need as much equity.

However, renewable energy providers and windmillers will do everything possible to avoid revealing to you how much the hydrocarbon-fired utility is paying for both the cost of electricity and the cost of the Renewable Energy Credits (RECS).  If the electric consumers of America ever find out how much money renewable energy providers are making from artificially increased prices, they might come out and tear down the windmills.

So, let's dig into the Berkshire Annual report and see how all the electricity users help Warren Buffett's principal wealth making machine, Berkshire Hathaway, and its stockholders become the beneficiaries of a transfer of wealth from all electricity users to the people who own windmills.

We will start with our interpolated annual production of electricity by MidAmerican of 11,990,854 MWH. A 2012 report by a clean energy consulting group disclosed that new wind farms can produce electricity in the range of 5-8¢ per kilowatt hour.  The average of these two values is 6.5¢ per kilowatt hour. We will take 6.5¢/kwh as the cost of windmill electricity for our calculations.

11,990,854 MWH x 1,000 equals 11,990,854,000 kilowatt hours. Multiplying this by 6.5¢ gives $779,405,510 in probable revenue.

But this does not include the revenue from the sale of the renewable energy credits to hydrocarbon-fueled utilities. In our earlier publication "The Carnahan Wind Deal" we discovered that if the price of the Renewable Energy Credit was exactly the same as the price of the electricity, all of the production tax credit could be applied to the pretax income.

So, in Berkshire's case, if we assume that the price of the renewable energy credit is equal to the price of electricity, another revenue stream would be credited equal to 6.5¢ multiplied by 11,990,854,000 kilowatt hours or $779,405,510. And this, of course, would double the total revenue of Berkshire's utility sector to (2 x $779,405,510) or = 1,558,811,020.

Page 12 of Berkshire's annual report has the most detailed information about the MidAmerican utility sector of Berkshire Hathaway:

Berkshire chartThe first thing that stands out is that there is no mention of either revenues or costs. This is part of the determination to hide revealing information about wind energy. And since taxes are applied to determine net earnings, we are dealing with only the values of pretax earnings. Therefore, we must make a key assumption that the UK, Iowa, and Western utilities are the only electricity generators. Thus, we must divide the data into two segments: electricity generators and non-electricity generators:

Segregating Electric and Non-Electric Bonuses

Electric Generators 

 

     U.K. Utilities

$362,000,000

     Iowa Utilities

$230,000,000

     Western Utilities

982,000,000

            Total pre-tax

1,574,000,000

Non-Electric Generators

 

      Pipelines

385,000,000

      Home Services

139,000,000

     Other

4,000,000

            Total Pre-tax 

528,000,000

Total Operating Earnings

2,102,000,000

     Interest (expense)

296,000,000

     Taxable income

1,806,000,000

     Taxes

170,000,000

After Tax Income

1,636,000,000

 

 

The first striking fact is that the effective tax rate on all these segments is just (170÷1636) = 10.4%. This is a very low tax rate! By examining p. 29 of Berkshire's annual report we found that: Consolidated earnings before income taxes are $28.796 billion, income tax is $8.951 billion, and net earnings are $19.476 billion. Therefore, the effective tax rate of all the combined companies of Berkshire is ($8.951÷ 28.796) which equals 31%. This is quite a bit different than 10.4%.

Now, let's see what we can discover by applying this tax rate of 31%, separately to the utility segment and non-utility segment:

Total utilities pre-tax income   1,574,000,000 x .31 = $487,940,000

Total non-utilities   528,000,000 x .31 = 163,680,000

Total proforma taxes for both sectors   $651,620,000

What have we got here? The non-utility segment tax is $163,680,000, or only $6.32 million dollars, 4% less than the $170,000,000 actual amount. It looks like the non-utility sector must pay the normal 31% tax rate on the non-utility sector businesses! This is a very probable conclusion.

Then the next conclusion would be that applying the overall tax rate of 31% to the utility sector results in a pro forma tax expense of $487,740,000. But, as we see from the report itself, the actual taxes on both sectors together is just $170,000,000. What happened to all the other $487,740,000,000 in taxes? Where did they go?

Welcome to the financial Wonderland of Green Energy Tax Credits and the huge amounts of money that consumers are compelled to pay for Renewable Energy Credits (RECS) in addition to the cost of electricity.

Here is what the tax code says about tax credits:

Extension of Renewable Energy Production Tax Credit (Section 1101): The new law generally extends the "eligibility dates" of a tax credit for facilities producing electricity from wind, closed-loop biomass, open-loop biomass, geothermal energy, municipal solid waste, qualified hydropower and marine and hydrokinetic renewable energy. The new law extends the "placed in service date" for wind facilities to Dec. 31, 2012. For the other facilities, the placed-in-service date was extended from December 31, 2010 (December 31, 2011 in the case of marine and hydrokinetic renewable energy facilities) to Dec. 31, 2013.

Election of Investment Credit in Lieu of Production Credit (Section 1102): Businesses who place in service facilities that produce electricity from wind and some other renewable resources after Dec 31, 2008 can choose either the energy investment tax credit, which generally provides a 30 percent tax credit for investments in energy projects or the production tax credit, which can provide a credit of up to 2.1¢ per kilowatt-hour for electricity produced from renewable sources.  A business may not claim both credits for the same facility.

First we will apply the production tax credit to our pro forma model. Previously, we interpolated that Berkshire's utilities produced 11,990,854,000 kilowatt hours of electricity. If the tax credit is 2.1¢ per kilowatt hour, the tax credit would equal (.021 x 11,990,854,000) = $251,807,930. Divide this by 31% (.31) and you will determine the pre-tax income that could be sheltered by the $251,807,930 total production tax credit. The result is $812,283,645. If we then look at the pretax income for the utility sector of 1,574,000,000 and deduct the $812,283,645 from it, we get $761,716,355 of income sheltered by something other than production tax credit.

Let's attempt to reconstitute what is going on above the total operating income of 1,574,000,000 to isolate exactly what is going on:

Total Proforma Tax Free Income                 

1,574,000,000

Less Income Sheltered  by Production Tax Credit

-812,283,645

Other Income that Needs a Tax Shelter

761,716,355

Thus, the $761,716,355 must at least be accounted for by this income. We assumed earlier that the electricity would be sold for 6.5¢ per kilowatt hour and that the renewable energy credit would also be sold for 6.5¢ per kilowatt hour.

Pro forma Electricity Revenues $779,405,510

Proforma Renewable Energy Revenues  $779,405,510

Total           $1,558,811,020

But, since Berkshire gives no revenue or expenses about the "operating earnings" we cannot tell exactly what is going on. What we do know is that we need a tax credit for the $761,716,355 is not sheltered by the production tax credit. It is no accident that the $761,716,355 is almost exactly equal to the Renewable Energy Credit income of $779,405,510.

Pretax Wind Generated Electricity

812,283,645

        Taxes due @ .31%

                                                        <251,807,930>

        Tax Credit @ 2.1 KWH

251,807,930

Pretax Renewable Energy Income

761,716,355

        Taxes due @ .31 %

236,132,079

        Other Tax Credit

                                                                      ?

Total Taxes

                                                                      ?

To produce a tax-exempt $1,574,000,000 income stream we need another tax credit of $236,132,070. Is there any way to get such a large tax credit?

Go back and look at the preceding IRS regulations on tax credits. Read about the Election of Investment Credit in Lieu of Production Credit. "The energy investment tax credit which generally provides a 30% tax credit for investments in energy projects."

Combine this fact with more information from Berkshire's annual reports' page 11:

  • In addition, we are the leader in renewables: From a standing start nine years ago, MidAmerican now accounts for 7% of the country's wind generation capacity, with more on the way. Our share in solar - most of which is still in construction - is even larger.

When our current projects are completed, MidAmerican's renewables portfolio will have cost $15 billion.

It is quite clear that MidAmerican has been spending a lot of money in recent construction of solar renewable energy facilities.

The key information here is, "our share in solar-most of which is still in construction-is even larger" and "when our current projects are completed, Mid American's renewable portfolio will have cost $15 billion."

The IRS code says:

The energy investment tax credit, which generally provided a 30% tax credit for investments in energy projects...

If MidAmerican had spent on qualified construction ($236,132,070 ÷ .30) or $787,106,900 during the 2013 fiscal year, they would have generated an investment tax credit of $236,132,070 and this would be in addition to the 2.1 c/KWH production tax credit. When you add these tax credits together they equal the taxes that would be otherwise due on $1,574,000,000. Then, this now would get a total tax-free income of $1,574,000,000.

Reporting Taxes Due, Then Applying Production and Investment Tax Credit

Pre-Tax Income Electricity

812,283,645

        Taxes @ 31%

-251,807,930

Net Income

560,475,715

 

 

Pre-Tax Income Renewable Energy Credits

761,716,355

       Taxes @ 31%

-236,132,070

Net Income

525,584,285

 

 

Net Income Electricity 

560,475,715

Net Income Renewable Energy Credits

                                                                                             +525,584,285

Total Net Income

1,086,060,000

 

 

Add Back Tax Credits

 

       Electricity Production

251,807,930

       Investment Solar Facility

236,132,070

 

487,940,000

Total Post Tax Income

$1,574,000,000

After a complicated struggle to extract enough data out of the obfuscated reporting of Berkshire Hathaway 2013 Annual Report, we can project data that is a probable or estimated summary of how Berkshire, Warren Buffett, and its other shareholders could make an enormous amount of money on green wind energy, $1,574,000,000 tax-free.

To illustrate exactly how excessive these profits are, let's compare them to Ameren, a Missouri utility we analyzed in "The Carnahan Wind Deal."

Economic Comparison of Hydrocarbon Electricity and Windmill Electricity

 

Ameren Missouri Hydrocarbon Electricity

Berkshire Hathaway MidAmerican's Wind Energy

Advantage?

Annual Electricity Production KWH

111,299,000,000

11,990,854,000

 

Electricity Income $/KWH

$0.0586

$0.065

MidAmerican is 11% more expensive

Renewable Energy Credit Income/KWH

0

$0.065

MidAmerican is infinitely more expensive

Production Tax Credit/ KWH

0

$263,300,000

If Ameren had a tax credit it would amount to:

2,448,580,000

Operating Income

810,000,000

1,574,000,000

MidAmerican is 2x greater!

Net Income

255,000,000

$1,574,000,000

MidAmerican is 6x greater!

Reliability

100%

36%

No contest: Ameren, hands down.

Net Income/ KWH

.00229

.13100

MidAmerican

57x Greater

MidAmerican appropriately makes post-tax profits of $1,574,000,000 for producing just 11% of the electricity that Ameren produces. And Ameren's net income after an assumed tax rate of 37% is just $255,000,000. So, in the end: 1 kilowatt of windmill electricity produces 57x the profit of 1 kilowatt of hydrocarbon fuel electricity.

The extraordinary and outsized economics of green energy are consistent with an arcane scheme. It is originated by government mandates forcing all electric customers to pay for nothing except for the transfer of wealth to the "chosen winners" of the high priests of Green Energy Ideology.  Getting chosen to own a windmill is an economic gift of unprecedented proportions. And it will last as long as the "wind blows"! The Green Energy elites are profiting at the expense of all electricity users. They must do everything possible to prevent "we the people" from ever discovering how they make all their money. 

And here is one of the most disingenuous comments that has ever been made:

When our current projects are completed, MidAmerican's renewables portfolio will have cost $15 billion. We relish making such commitments as long as they promise reasonable returns. And on that front, we put a large amount of trust in future regulation.

This is the so-called sage of Omaha, Warren Buffett. He clearly believes in getting his share of the redistribution of wealth from working people to the wealthiest of elites.

One last note, at a cost of $15 billion, the total probable investment tax credit would be (30% x $15 billion) = $5 billion. The $10 billion of cost most likely could be "borrowed money." Remember, Warren said:

MidAmerican's earnings base has further broadened. This particular strength, supplemented by Berkshire's ownerships, has enabled MidAmerican and its utility subsidiaries to significantly lower their cost of debt.

If they borrowed the $10 billion they would have no equity in the project-which would result in tax free income of $1.574 billion, an infinite return on investment.

Fred Sauer is an NLPC Associate Fellow