Buffett Makes a Big Bet on Solar

When Warren Buffett talks, investors listen.

And today's revelation that Berkshire Hathaway (NYSE: BRK-B  ) subsidiary MidAmerican Energy Holdings is buying the 550 MW solar power plant being built by First Solar (Nasdaq: FSLR  ) should have every energy investor's ears perking up. The project will cost over $2 billion, no chump change even for Buffett, and adds to MidAmerican's large portfolio of wind generation assets.

What this means
If you didn't believe in solar power until now, all you have to do is look at some of the major companies putting money into solar. NRG Energy has bought a number of solar plants to add to its generation portfolio, Total (NYSE: TOT  ) bought a majority stake in SunPower (Nasdaq: SPWR  ) earlier this year, and now Berkshire Hathaway is making a bet on solar.

What this means right now is that solar power-generating assets are providing attractive returns to investors. If they weren't, Buffett would have nixed the deal in a heartbeat. The only manufacturer investment above, SunPower, also comes with a large project pipeline, so the projects are what companies are after right now.

What this doesn't mean
Solar power plants are assets with a known cost and predictable cash flows, something investors can easily gauge the return on. What we haven't seen is companies going out and buying manufacturers in this environment.

So solar products themselves are attractive, but that doesn't necessarily mean the manufacturers that make them are. That shouldn't come as a major surprise to those who have watched LDK Solar (NYSE: LDK  ) , JA Solar (Nasdaq: JASO  ) , and ReneSola (NYSE: SOL  ) bludgeon one another for sales this past quarter. Right now there is a lot more risk in solar manufacturers than there is in solar power plants.

Foolish bottom line
If you're looking to get into solar, there are a few ways to do it. NRG Energy provides a growing exposure to solar power plants from the power generation side. But if you have an appetite for risk, SunPower and First Solar provide both manufacturing as well as power plant development and sales. My top pick is SunPower because of its industry-leading efficiency.

Are you surprised Buffett is making moves in solar? Leave your thoughts in our comments section below.

Fool contributor Travis Hoium owns shares of First Solar and SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of First Solar and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of First Solar, Berkshire Hathaway, and Total. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 07, 2011, at 4:04 PM, toisaiah wrote:

    I understand what you said above. As an individual investor on Solar stocks, what I really want to know about the prospect of several major solar stocks. I bought a lot of JASO. But it was bad in most of time of the last year. Can you give me some advice on this stock? Thanks.

  • Report this Comment On December 07, 2011, at 6:01 PM, DoctorLewis4 wrote:

    MidAmerican is not run by Warren Buffett. MidAmerican is in the Berkshire family and Buffett typically trusts his managers do what they want. That being said I think it's a smart move.

  • Report this Comment On December 07, 2011, at 7:01 PM, damastr wrote:

    The heading is misleading. MIdAmerican buying a solar plant to produce energy is not the same as Buffett making a bet on Solar. The headline itself would suggest that Buffett is making an investment of some kind in a solar manufacturer, which is not the case.

  • Report this Comment On December 07, 2011, at 7:28 PM, Regarded49 wrote:

    Buffett is off his solar rocking horse. maybe he wants to have some tax write offs since he went crazy telling everyone he wants to pay more taxes.

    Buffett has been a flop for a few years now....it's time for a fresh face.

    Even so, I do own berksh.hath.

  • Report this Comment On December 07, 2011, at 8:11 PM, TMFFlushDraw wrote:

    It's true that Buffett lets his managers run their companies. But in the case of large investments like this one he has been consulted like when MidAmerican wanted to make a big move into wind power.

    The thought that MidAmerican could make a $2 billion investment without even mentioning it to Buffett is a stretch.

    @tolsaiah

    I haven't been high on solar suppliers for some time now. For more detail on my view of JASO see the two articles below.

    http://www.fool.com/investing/general/2011/10/25/solars-impe...

    http://www.fool.com/investing/general/2011/08/19/solar-cell-...

    Travis Hoium

  • Report this Comment On December 08, 2011, at 11:08 AM, gregathome wrote:

    Seems to be a disconnect between expectation of sun to power solar and ambitious ongoing cloud seeding experiments to reduce sunlight to earth in efforts to reduce global warming. Depending upon weather for power (aka money) is like, well, depending upon weather for picnics, but far more costly. Smart in business hasn't always translated into smart in socio-economic, geo-politcal strategy.

    Gregathome

  • Report this Comment On December 08, 2011, at 2:03 PM, Brettze wrote:

    Travis, almost all solar companies only deal with photovoltaics that converts sunlight into electricity or converters that connects photovoltaics to your utility meters so that it can turn backwards. Now, Travis, the next solar frontier will be dealing with heating your whole homes that photovoltaics is not powerful enough to do the job ! What will they come up with, I dont know , but I think it will have to do with some kind of reflecting materials and heat absorbing materials that will sustain warmth throgh the night or things like that. Mirrors can be another big thing.. Automatic sun tracking devices is another possibility.. As far as I know, photovoltaics will never be able to solve global climate issues . Solar heat can. You need some ways to concentrate sunlight to heat your homes, etc. that will help reduce our consumptin of fossil fuels a great deal.. We are using too much fossil fuels already.. Despite recent discoveries, the fossil fuel stocks has no future growth because of global climate issues. Maybe you should dump fossil fuel stocks like oil, coal, natural gas .

  • Report this Comment On December 08, 2011, at 2:06 PM, Brettze wrote:

    people dont realize that home heating is the biggest component of your utiility costs.. about half or more. Your utiltiy has no interest in having you buy your own solar heater to heat your home without relying on utility service at all. If you dont want solar heater of your own, be my guest.

  • Report this Comment On December 08, 2011, at 2:12 PM, damastr wrote:

    Is there any evidence to suggest that Buffett was involved in the decision? Why make unsubstantiated claim? The contract was signed over 3 years ago. Both mid-american and BNSF have billions of dollars of capex each year which they make independent decisions for. Also, this is hardly and investment. It's more like a capital expenditure.

  • Report this Comment On December 08, 2011, at 2:34 PM, retired222 wrote:

    .

    With many solar stock priced so low, I will have to accumulate more on Buffett's "move."

    He is not a fool like 0whiner's team.

    .

  • Report this Comment On December 12, 2011, at 1:03 PM, sailrmac wrote:

    Regulated energy companies buy power and typically pass along at cost. They typically don't make there money due to a spread on power but rather are allowed to bill a return on investment on their capital expenditure. Also solar, while having declined considerably in price, is still the most expensive form of electricity generation for a utility out there and is not baseload (it only runs when the sun is out thus requiring back up generation form natural gas, coal etc. when it's not). Thus when utiliites buy solar power it is usually due more to a government mandate than economics (e.g. 5% of total energy purchased must be solar). The fact that this energy costs say 12¢ /kwh vs. maybe 4¢ / kwh for natural gas or coal is immaterial to the power company, the cost gets passed on to the consumer anyway and they are not allowed to make a profit on it.

    In other words, neither Buffett nor Berkshire nor MidAmerican Power for that matter just make a big bet on solar. They were required to buy solar and gauranteed that the costs will be passed on to consumers.

    By the way power companies make a great investment for Buffett because his cost of capital is so small. He's investing the insurance float, so when capital cost is close to 0, a steady payer that's going to pay out 4% growing at roughly the rate of inflation is sweet!

  • Report this Comment On December 15, 2011, at 7:48 PM, Tuxster12345 wrote:

    Solar??

    Hey, what's that sound?!

    Oh...just people losing their money investing in solar!

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