Berkshire solar buy draws attention

Warren Buffett's Berkshire Hathaway Inc. plans to buy a $2 billion solar energy farm being built in San Luis Obispo County, Calif., just as the industry is coming of age as a profitable business, an industry observer says.

This would be Omaha-based Berkshire's first foray into solar energy, and solar advocates saw the move as a good sign for the industry.

"This is an excellent deal for everybody," said David Hardee, president and CEO of Electricity Capital, a solar energy development company from Santa Barbara, Calif. "You have no investment risk. ... I would not be surprised to see them making similar investments in this space."

Now under construction in a valley north of Los Angeles, the solar energy plant would generate enough electricity for about 160,000 homes.

If the sale goes through, the plant would become part of Mid-American Energy Holdings Co. of Des Moines under an agreement signed Wednesday. MidAmerican, Berkshire's utility division, generates electricity from coal, natural gas and wind.

MidAmerican said it would buy the 550-megawatt Topaz Solar Farm from First Solar Inc. The purchase price was not disclosed. Hardee said the price is likely several hundred million dollars, with the rest of the construction cost to be paid by revenue from the electricity the plant will generate as it is completed through 2015.

First Solar would continue building the plant and operate it for MidAmerican. Topaz is one of the two largest such projects in the world.

Greg Abel, chairman, president and CEO of MidAmerican, said the purchase would add solar energy to the company's collection of renewable energy resources. The company also owns a stake in BYD Inc., a Chinese company that makes electric- and gas-powered automobiles and batteries. Abel said MidAmerican is No. 1 in wind-power energy generation among U.S. utilities whose rates are regulated by the states.

"As energy needs continue to increase, the Topaz project will allow MidAmerican to produce renewable energy for thousands of Californians," Abel said. "This project also demonstrates that solar energy is a commercially viable technology without the support of governmental loan guarantees."

He added that the deal "reflects the type of solar and other renewable generation that MidAmerican will continue to seek to add to its unregulated portfolio."

First Solar was unable to get federal loan guarantees for the project, which might be a factor in the decision to sell the project, said Hardee, who also is a Berkshire shareholder.

But First Solar is considered the leader in solar energy using "thin film" photovoltaic panels, which will work well in the region where the Topaz plant is under construction, Hardee said.

The project likely will provide a return of 10 percent to 12 percent a year on its cost, a "decent return," Hardee said. He noted that Buffett has said in the past that owning regulated utilities such as MidAmerican is not the way to get rich but "a way to stay rich."

MidAmerican said electricity from the plant will be sold to Pacific Gas & Energy under a 25-year contract, which would be the minimum life of the Topaz plant. But Hardee said the plant will continue operating indefinitely, with upgrades as new technology is developed.

"It's as good a spot as any in the world for sunshine," he said.

MidAmerican is partnering with the leading solar energy developer, he said, a dominant player in its business. Hardee said the plant likely will qualify for federal tax credits as each phase is completed, as well as other tax benefits such as accelerated depreciation on the cost of the plant.

But solar projects will become economical even without tax subsidies, Hardee said, and by 2015 a solar energy plant should be competitive with a natural gas plant "with no subsidies of any sort." Solar technology is improving, thanks in part to the "kick-start" the industry has received from government policies that encourage alternative energy development, he said.

Tom Lewandowski, an analyst with Edward Jones in St. Louis, said the acquisition makes sense for MidAmerican but is "inconsequential" for Berkshire's bottom line and likely went ahead without much direct involvement by Buffett, chairman and CEO of Berkshire. "It's not a huge game change by any means," Lewandowski said, noting that MidAmerican's power plants have a capacity of 22,000 megawatts.

"It's a movement toward renewable energy, but natural gas, coal, that's still driving the utility production of MidAmerican's business," he said. "We don't know the purchase price, but it will be less than the $2 billion cost of the project. First Solar might be in a position where it needed to raise some cash."

Nevertheless, the purchase was praised as a symbolic move in the right direction by Bruce Herbert, chief executive of Newground Social Investment in Seattle. The investment advisory firm owns Berkshire shares and encourages publicly traded companies to adopt socially responsible policies.

Still, Herbert said, coal-fired power plants are "long-term liabilities" for MidAmerican, and the Topaz investment is relatively small. "If they were installing these (solar panels) and taking coal off-line, that could be a cause for cheering."

Larry Dohrs, vice president of Newground, said the solar energy business has been unpopular with investors. "My guess is that you're going to see a lot of headlines that say, 'Does this mean that the solar sector is back in play?' We're going to see a lot of people responding to this by taking another look at this sector."

Construction on the California solar farm began last month and will create about 400 construction jobs.

"This demonstrates solar is an important part of a renewable generation portfolio," said Frank De Rosa, a First Solar senior vice president.

The plant's solar panels will use First Solar's thin-film photovoltaic modules to generate electricity with no emissions, waste or water use. Generating the same power from a coal plant would produce about 377,000 metric tons of carbon dioxide a year, the equivalent of emissions from 73,000 automobiles, First Solar said.

MidAmerican sells electricity to 2.4 million customers and is the largest electric utility in Iowa, Wyoming and Utah. It also transports 8 percent of the country's natural gas through pipelines and is exploring the development of a nuclear power plant.

Berkshire earned $888 million from its utilities businesses in the first nine months of 2011, up 13 percent from a year earlier.

Contact the writer:

402-444-1080, steve.jordon@owh.com

twitter.com/buffettOWH

« Money

Share