Not sure about where to invest in green energy? I’m trusting Warren Buffett

Renewable energy could be the newest gold rush sector as countries and companies around the world rush to develop net-zero solutions. But how do we mitigate risk when anyone could come out on top? Our writer looks at Warren Buffett’s own Berkshire Hathaway.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Windmills for electric power production.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I believe that the move to green energy is unavoidable and that this opens up investment opportunities that will help to create positive change as well as profit. Warren Buffett’s own Berkshire Hathaway (NYSE: BRK.B) shares seem like a great way for me to participate in the green revolution.

Berkshire Hathaway is a conglomerate that generates money from a variety of sources. Berkshire Hathaway Energy (BHE), the company’s electric utility arm, is one of them. At first glance, it’s easy to dismiss Berkshire Hathaway as a renewable energy investment option. BHE only accounts for around 9% of Berkshire Hathaway’s income, while renewable energy accounts for a little under half of the company’s overall energy output. However, I believe that BHE’s location inside Berkshire Hathaway provides it with a significant competitive edge over other electric utilities. I also believe it reduces some of the big risks that come with investing in the renewable energy transition

A significant advantage

Warren Buffett identified a fundamental advantage that BHE has over other power companies in his 2020 letter to shareholders. The majority of electric utility businesses pay out around 60% of their profits as dividends to income-seeking shareholders. This makes it much harder for them to invest in renewable energy infrastructure. Instead, they must finance their investments through debt or the issuance of stock, diluting the value of current owners’ shares.

BHE, on the other hand, does not pay a dividend. This may make it less appealing to those of us who appreciate passive income. But it means it may use the money it makes to invest in renewable energy projects without taking on debt or issuing stock to do so.

BHE has already been able to make significant renewable energy investments. It has spent more than $35bn on a variety of renewable energy initiatives while cutting back on fossil fuels. Coal-fired energy generation accounted for 74% of BHE’s total energy generation in 2006. By the end of 2020, the percentage had dropped to 33%. BHE was also able to spend $18bn on the transmission infrastructure needed for the renewable energy transition. All because of its access to capital.

Green energy investing risks

Over-optimism is the biggest danger I see with investing in green energy firms. While I believe that the transition to renewable energy is unavoidable, businesses must remain disciplined in their investments in this area. Making investments that don’t pay off can be costly, and it might even lead to bankruptcy. In 2016, SunEdison provided an excellent illustration of this.

However, I believe that BHE’s position inside Berkshire Hathaway mitigates this risk. This is due to two factors. The first is the capacity to invest in renewable energy with its funds rather than borrowing. The second is BHE’s position inside the larger conglomerate, which gives it access to $150bn in capital. Warren Buffett oversees the company’s investments as part of Berkshire Hathaway. When it comes to discovering good value assets, I can’t think of anybody better.

As a result, I believe that owning Berkshire Hathaway stock is a great way to participate in the renewable energy revolution.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Reynolds owns Berkshire Hathaway (B shares). The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young happy white woman loading groceries into the back of her car
Investing Articles

Should I buy, as the Ocado share price perks up on FY results?

The Ocado share price is steady, as the online retail giant reports a big fall in 2023 losses. Is it…

Read more »

Illustration of flames over a black background
Investing Articles

Here’s another top buy from the FTSE 250 I’m considering

Oliver Rodzianko considers this FTSE 250 company a stellar choice for his portfolio. It's on his growth watchlist; so let's…

Read more »

A young Asian woman holding up her index finger
Investing Articles

A “once in a lifetime” opportunity for Rolls-Royce shares?

One firm is hoping now is a “once in a lifetime” opportunity for UK nuclear companies. Our writer reveals whether…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

The IAG share price is dirt cheap and profits are flying. So why am I worried?

After today's positive full-year results, I expected the International Consolidated Airlines Group (IAG) share price to be doing better than…

Read more »

Investing Articles

Is Tesla stock a steal below $200?

Tesla stock has fallen 19% so far in 2024. Currently hovering around $200, this Fool checks if now is the…

Read more »

Investing Articles

3 high-yield dividend stocks to consider for my passive income portfolio in 2024

I want to build a portfolio of dividend stocks that pay enough passive income to retire comfortably. Here are my…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Direct Line shares soar 25% on takeover bid!

Direct Line shares surged by a quarter on Wednesday, after receiving a takeover bid from a Belgian rival. But the…

Read more »

Investing Articles

Will it be too late to buy Nvidia stock in March?

NVIDIA stock is up more than 60% since the start of 2024. Our writer considers whether it might still be…

Read more »