Investing in Solar and other alternative energies has been a hazardous experience for investors for several reasons:
- Too much competition which results in price cutting and profit margin pressure which results in volatile earnings and significant stock volatility.
- Reliance on government subsidies in an era of budget restraints.
But these issues are the primary problems associated with investing in solar cell manufacturers.
What about investing in Solar Farms that have their infrastructure in place and long term selling agreements with credible utilities? This is an entirely different enterprise than just selling solar panels since this is really an issue of cash flow.
Warren Buffett’s MidAmerican Energy Holdings Co. agreed to buy the Topaz Solar Farm in California from First Solar Inc. on Dec. 7. The project’s development budget is estimated at $2.4 billion and it may generate a 16.3 percent return on investment by selling power to PG&E Corp. at about $150 a megawatt-hour, through a 25-year contract, according to New Energy Finance calculations.
“After tax, you’re looking at returns in the 10 percent to 15 percent range” for solar projects, said Dan Reicher, executive director of Stanford University’s center for energy policy and finance in California. “The beauty of solar is once you make the capital investment, you’ve got free fuel and very low operating costs.”
With Treasury yields in the 2% to 3% range solar farms offer a viable alternative to bonds. In my opinion its only a matter of time before solar farms are offered in either a REIT or MLP structure to the public, where the cash flow generated is passed on to shareholders with special tax considerations. Best of all, the cash flow comes without the risks and headaches of solar panel manufacturing and sales.
Now we’re finally getting somewhere.