As the fortunes of solar manufacturers and their investors were falling over the past year, several big companies with deep pockets found that power purchase agreements are the real sunny spots in solar energy investing.
Investment in solar farms by big names like Google
A recent report notes that the biggest investment in solar power was of this utility-grade type -- and for good reason. The scenario usually goes something like this: A solar company builds a solar farm, either with government backing or through private investment. The farm supplies power to the utility grid, a contract that often spans 20 to 25 years. Alternative energy usually commands a premium price from the utility, so the rates are better than if the power source were, say, a coal-fired plant. Once the plant is built, sunshine provides the fuel free of charge, and acres of panels need only the most minimal upkeep. The end result is a very nice return on investment for those who supported the venture.
Berkshire Hathaway's MidAmerican Energy section purchased the 550MW Topaz Solar farm from thin-film panel maker First Solar
Later in December, Google and KKR partnered to invest approximately $95 million apiece in four California-based solar farms built by Recurrent Energy, a subsidiary of Sharp. Google's alternative-energy investment portfolio has swelled to nearly $1 billion, and it includes money allocated for wind-farm development in the Atlantic Ocean. Although these two companies are closed-mouthed about their returns, it seems likely that they would be comparable to Buffett's.
These investments promote renewable energy use
While not every solar energy project is a good investment, the ones being built now are particularly lucrative because many were initiated before two key government incentive programs expired last year. First was the much-maligned loan guarantee program, without which private investors may never have developed the confidence in solar projects that's now driving these investment instruments. The other was the 1603 Treasury program, which made projects easier to get off the ground with upfront money rather than tax credits.
The end of those programs doesn't mean that investment in solar farms will diminish, however. A majority of U.S. states have established Renewable Portfolio Standards, which allow them to set up goals to encourage green energy production. For instance, California originally set its goal for 20% of its statewide energy production to be sourced from renewable sources. The standard has since been increased to 33% by the year 2020. Not only are Buffett and Google making some serious returns from solar energy, they are also helping California move closer to its clean-energy goals.
Can we play, too?
So, how do small investors like you and me get involved in this windfall? At the moment, it seems that only the big guys have what it takes to make these types of investments. We will have to be content with merely investing in the companies that do the investing, or entities like American Capital
What about the solar companies themselves? Well, there's nothing pretty about First Solar's performance over the past year, and other solar companies' profiles don't look much better right now. However, I can't believe these companies will continue to founder for much longer, particularly as these types of large-scale investments gain traction. After all, only two or three years ago, solar wasn't considered stable or valuable enough to sink private capital into, and look at it now. As the brilliance of these large-scale solar investments begins to rub off onto the major solar players themselves, small investors will once again be able to see the green side of solar energy.
Some of the companies listed above have made some excellent investments in the energy sector -- and so can you. If you would like to know their secrets for success, take a peek at our free report, available here.