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What Value Does Warren Buffett See in Solar?

By Travis Hoium - Apr 17, 2013 at 7:37AM

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Why is Warren Buffett putting billions of dollars into solar?

Solar power has a growing presence in the U.S., which can be a contentious topic after a few high-profile failures in the industry. But Warren Buffett, arguably the best investor of our time, had invested billions of dollars in the industry long before most investors started making such bets. Why is he investing in solar when others are questioning it? Here's a peak into what Buffett sees in solar.

On a quest for yield
Warren Buffett isn't making just any investment in solar. Berkshire Hathaway's (BRK.A 1.75%) subsidiary MidAmerican Energy is buying huge solar projects with long-term power purchase agreements. As these projects generate electricity the contracted utility pays a set rate per kilowatt hour, which is negotiated long before a project is ever built. Since the cost of the project is fixed when Buffett buys it and the cash flows are easily predictable, in essence, Buffett is buying an asset similar to a bond, something he is very comfortable with.

The size of the investments Buffett is making is what makes his fascination with solar astounding. He owns two projects built by First Solar (FSLR 0.44%), including 49% of Agua Caliente, which he co-owns with NRG Energy (NRG 1.01%), and a third project called Antelope Valley, the largest solar power plant in the world, which is currently under construction by SunPower (SPWR -0.12%).

 

Builder

Project Size

Cost

Ownership

Agua Caliente 

First Solar

290 MW

$1.8 billion

49%

Topaz 

First Solar

550 MW

$2 billion

100%

Antelope Valley 

SunPower

579 MW

$2.5 billion

100%

An investor as conservative as Warren Buffet wouldn't make $5.4 billion in total investments in solar if he couldn't reasonably predict the costs and revenue associated with such projects. That's the big development in solar over the past half-decade, the industry can now build predictable models for projects all around the world, making it an investment even Warren Buffett could love.

Tax benefits
Another thing Buffett likes about solar is the tax benefits that come with it. Once these solar projects are completed Berkshire Hathaway will be eligible for a 30% investment tax credit, which he can write off against profits elsewhere in the business.

Solar projects are also eligible to be written off more quickly than most capital investments. Under federal law, Berkshire Hathaway can depreciate these projects over just five years with what's called the Modified Accelerated Cost-Recovery System. This means that Buffett will save money on taxes in the first five years that the projects are on the books and, in turn, pay more in taxes later in the project's life. The amount of taxes paid won't change (assuming there is no change in policy), but for a business paying taxes later is always better than paying taxes earlier.  

Investments only Warren Buffett can make
The other big benefit Warren Buffett has over you and me is his ability to borrow money at extremely low rates. Many large buyers of solar projects will only put 20% of the project's cost down, borrowing the rest from debt investors. This gives leverage to the potential returns, and since Buffett can borrow money at lower interest than most, he can generate more leverage from a solar project.

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Stocks Mentioned

First Solar, Inc. Stock Quote
First Solar, Inc.
FSLR
$66.06 (0.44%) $0.29
SunPower Corporation Stock Quote
SunPower Corporation
SPWR
$16.58 (-0.12%) $0.02
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$464,510.00 (1.75%) $8,010.00
NRG Energy, Inc. Stock Quote
NRG Energy, Inc.
NRG
$46.18 (1.01%) $0.46

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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