Warren Buffett is famous for a number of bright ideas on investing, but this may be the brightest.
Just how bright? About 579 megawatts' worth of solar-generated power from a single facility. Financed by BHE Renewables, a wholly owned subsidiary of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), Solar Star is the world's largest solar project to date, and it began contributing power to the California grid on June 19. Consisting of about 1.7 million SunPower (NASDAQ: SPWR) solar panels, the facility will produce enough power to annually supply approximately 255,000 homes with electricity. BHE Renewables will sell the electricity to Southern California Edison under a long-term power purchase agreement.
The deal is the latest example of the company's commitment to acquiring renewable energy assets, and it demonstrates Berkshire's belief that these assets can drive long-term growth as they have done in the past. Investors should anticipate more renewable energy deals like this in the future and be glad that the company is so forward-looking.
Here comes the sun
BHE Renewables has wind, geothermal, hydro, and natural gas assets in its 3,470 MW portfolio, but solar, at 1,271 MW, represents the largest portion. When it became operational, the Solar Star projects, two separate farms located in Kern and Los Angeles counties, supplanted another BHE Renewables-owned project as the largest in the world. Located in San Obispo County, Calif., Topaz Solar Farms is a 550 MW facility consisting of over 8 million First Solar (NASDAQ: FSLR) photovoltaic modules. Pacific Gas and Electric, a subsidiary of PG&E Corp (NYSE: PCG), will purchase the electricity under a 25-year power purchase agreement. Rounding out its solar projects is Agua Caliente, a 290 MW facility -- also supplied with First Solar PV modules -- in which BHE Renewables has a 49% interest. The facility is located in Yuma County, Ariz.
Forever and ever
There are many reasons why Fools hold Buffett in such high esteem. Among those reasons is Buffett's perspective on holding periods: Put simply, his favorite holding period is forever. With eternity as his point of reference, it's clear why Buffett is so enthusiastic about investing in renewable energy. Coal, oil, and natural gas are finite resources that are subject to significant price volatility -- solar and wind, not so much. Berkshire Hathaway, in its 2014 annual report, explained the value of spending billions to build its renewable-energy portfolio: "Our confidence is justified both by our past experience and by the knowledge that society will forever need massive investments in both transportation and energy."
The investments in renewable energy so far have clearly paid off:
Identified under "other energy businesses," solar and wind projects greatly contributed to revenue and earnings growth. Berkshire Hathaway found that the $81 million in revenue growth from 2012 to 2013 was "primarily attributable to revenues from the new solar and wind-powered facilities." However, growth didn't translate across the board -- there was a $87 million drop in operating earnings before corporate interest and taxes, or EBIT, for the same period due to losses from geothermal assets, NV Energy acquisition costs, and one-time customer refunds. The company also found that solar power facilities continued to positively affect revenue and earnings in the following year, helping to grow revenues by $408 million, an increase of 159% (the largest percentage increase for any , and EBIT by $232 million.
Granted, the development of renewable energy projects is capital intensive, but Berkshire Hathaway feels that it has a "major advantage over most public-utility companies in developing wind and solar projects" because of available tax credits -- credits which are "currently realizable only because we [Berkshire Hathaway] generate huge amounts of taxable income at other Berkshire operations."
Although most of the attention the solar industry receives is based on residential systems, the utility market is a significant source of installed capacity. According to GTM Research and the Solar Energy Industries Association, the utility-scale sector grew 38% over its 2013 level to reach a cumulative level of nearly 4 GW. Many analysts expect the growth to continue. Among them, Cory Honeyman, senior solar analyst at GTM Research, argues that the future remains bright, suggesting that there are "a number of reasons to remain bullish on the long-term growth trajectory of utility-scale solar in the U.S., fueled by incremental cost reductions that are sufficient to capitalize on new EPA carbon regulations and natural-gas price volatility."
A Foolish forecast
Clouds may pass through, but all signs indicate that the solar industry will be basking in the sun for a while. Analysts suggest that extremely large utility-scale projects such as Solar Star won't be the norm, but that doesn't take away from the fact that the utility-scale market will continue to grow. In addition to the $17 billion that Berkshire Hathaway has already invested in renewable energy, Buffet has said that he is prepared to invest billions more in solar and wind projects, and, as he does, investors are bound to profit.