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Warren Buffett's $8.3B plan to avert Texas blackouts raises eyebrows

Billionaire Warren Buffett's Berkshire Hathaway Energy is pitching Texas lawmakers on an $8.3 billion proposal to build 10 new gas-fired power plants across the state to help avert another energy crisis like the one last month that left millions of customers without electricity.

The Berkshire Hathaway Inc. subsidiary's proposal would require new legislation to create a regulated utility, the Texas Emergency Power Reserve, that would own 10 GW of new generating capacity and run that generation only when demand outstrips supply, according to Chris Brown, CEO of affiliate Berkshire Hathaway Energy Infrastructure.

The proposal comes as state lawmakers continue to seek answers amid a wave of resignations and an ongoing joint investigation by the Federal Energy Regulatory Commission and North American Electric Reliability Corp. into the root causes of the state's mid-February blackouts.

The $8.3 billion proposal would result in average monthly bill increases of $1.42 for residential customers, $9.61 for commercial customers, and $58.94 for industrial customers, according to a presentation shared with S&P Global Market Intelligence.

"Effectively, it's blackout insurance for all Texas consumers, including residential, commercial, and industrial," Brown said in an interview.

Under the plan, 10 weatherized gas plants would be located throughout the state in areas where load was shed in response to a rare blast of Arctic weather that caused gas plants' instrumentation to freeze and pipeline flows to ebb, among other systemic failures.

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State lawmakers have already advanced a bill that would establish mandatory weatherization standards for gas generators, but Brown suggested that may not be enough. "We don't have a beef with weatherization guidelines, we just think it's probably not sufficient to really protect Texans in the best way," Brown said.

News of the proposal was first reported by The Dallas Morning News and The Texas Tribune.

Because the deadline to file new bills in the Texas Legislature has already passed, Berkshire Hathaway Energy will seek to attach the proposal to an existing piece of legislation, Brown said. The state's current 140-day legislative session is scheduled to close May 31.

Berkshire Hathaway Energy's proposal includes a $4 billion performance guarantee that would leave the Texas Emergency Power Reserve liable for failure to perform as promised.

'A one-stop shop'

Industry experts' views were mixed on the plan, with some expressing cautious support tempered by calls to open the proposal to competitive bidding. Others argued the plan runs contrary to the competitive ethos of the state's wholesale power market, which aims to shield consumers from the risk associated with building new power generation.

"I don't think this is the worst idea I've ever heard," said Joshua Rhodes, a research fellow at the Webber Energy Group at the University of Texas at Austin and a founding partner of IdeaSmiths LLC. "It's basically an insurance policy."

Rhodes said simply winterizing power plants will not ensure reliability if Texas' sprawling natural gas infrastructure remains exposed to the risk of failure during a storm.

"If you don't winterize the gas and the electricity system at the same time, you can end up with the same problems," Rhodes said. "I don't understand what the alternative is in Texas. The governor has talked about compelling [winterization] and funding, but there is no current mechanism to do that. We would have to create one."

Berkshire Hathaway Energy's proposal has merits, Rhodes said, but he added that it would need to be opened to competition from other companies and resources.

Dennis Wamsted, an analyst at the Institute for Energy Economics and Financial Analysis, was less kind, calling the proposal a backdoor attempt at creating a monopoly capacity market.

Operated by the Electric Reliability Council Of Texas Inc., Texas' wholesale power market relies on sky-high scarcity pricing to ensure generators are online when they are needed instead of a mandatory capacity market such as those operated by the PJM Interconnection, ISO New England and New York ISO.

Wamsted said instead of creating a new capacity market, Texas should ensure that existing installed generating capacity can withstand the sporadic winter storms that roll through the state, including through mandatory weatherization standards currently under consideration by the state legislature. "Fix that, and you don't need this reserve," the analyst said.

Wamsted also questioned the timing of the proposal amid multiple ongoing inquiries.

"This is Mr. Buffett trying to get a deal done before Texas decides exactly what happened and exactly what they want to do to fix it," Wamsted asserted. "I think it's going to take a little more analysis."

If approved, the proposal could also cause independent power producers to lose faith in ERCOT's market, said Todd Snitchler, president and CEO of the Electric Power Supply Association.

"If you did this, you're undercutting any kind of investor confidence in the Texas marketplace," Snitchler said in an interview. "And if investors are not willing to spend money in a market like that to continue to operate, to build new, or to spend the money to upgrade the existing infrastructure, you run the risk of additional assets retiring, so it really would tip the scales and create a lot of unintended consequences that are very consequential to consumers."

Asked whether Berkshire Hathaway Energy's proposal should be open to competitive bidding, Brown said, "Look, what we're saying is this is a big problem that requires a big solution."

"Reliability requires accountability, and the reliability we're offering is a one-stop-shop," Brown said, citing the company's $4 billion performance guarantee. "That's a different scenario than you've ever seen by any of the generators."

Berkshire Hathaway Energy currently owns a combined 980 MW of generating capacity at six facilities in Texas: a gas-fired cogeneration plant, two wind farms, two solar farms and a 2-MW battery storage facility, according to S&P Global Market Intelligence data. The output of all the power plants is secured under long-term contracts.