5 Lessons from Warren Buffett's $2 Billion Solar Farm Purchase

Last week the solar industry finally generated good news. Warren Buffett’s MidAmerican Energy Holdings agreed to buy First Solar’s Topaz solar farm, a 550-megawatt photovoltaic solar farm currently being built in Southern California (construction began last month and is set to finish by early 2015). The financial details of the purchase of the plant were not publicly disclosed, but estimates are that Buffett is paying First Solar $2 billion for the solar farm.

God knows the solar industry needs good news given what it went through ever since Solyndra and Evergreen have gone bankrupt. Yet, what do this deal and the fact it involves Warren Buffett actually mean for the solar industry? Here are five lessons we can learn from it:

1. No matter what they tell you, the government still makes a difference

Interestingly, the deal took place after First Solar failed to get a  $1.9 billion loan from the US Department of Energy to cover part of the financing. This detail was actually emphasized by both parties - The deal "demonstrates that solar energy is a commercially viable technology without the support of governmental loan guarantees," Greg Abel, chairman, president and CEO of MidAmerican, said in a statement, and Frank DeRosa, Senior VP of First Solar said that "the fact that Topaz was financed without a DOE loan guarantee is a major milestone in the industry's maturity and evolution.”

What these gentlemen don’t tell you is that The Topaz plant will probably qualify for a cash grant totaling 30 percent of its construction costs under the Treasury Department’s 1603 program, which will expire by the end of 2011. The owner of the plant will get this amount regardless of their earnings and tax bill. Now, I didn’t see the spreadsheets Buffett’s team prepared for him, but I guarantee you that these government incentives played an important role in Buffett’s decision to buy the plant. Without this grant I doubt if he would see the deal as worthwhile.

So even if both First Solar and MidAmerican tell you that this deal is an example of the business viability of the solar sector, remember that the government still plays an important role here, no matter how much the parties involved don’t like to admit it.

2. The states also have an important role in the evolution of the solar industry

Not only that the government plays an important role in this deal, but the state of California is also a major factor here - PG&E Corp.’s San Francisco-based utility agreed in 2008 to buy Topaz’s power for 25 years because they need to procure a lot of renewable energy to meet state requirements. A guaranteed cash-flow for a long period of time, at very favorable terms, reduced risk in the deal and certainly increased the financial appeal of the deal. It only shows you how important the role of renewable energy state mandates is in the absence of a federal one.

3. This deal is not necessarily a vote of confidence in the future of the solar industry

"Let's be clear, this is not Warren Buffett taking a bet on solar technology," said Michael Horwitz, solar analyst at Robert W Baird. "This is Warren Buffett investing in a power plant that is guaranteed to yield large cash flows for at least 20 to 25 years," he added. "The power plant just happens to be solar powered."

I agree with Horwitz. It’s true that Buffett is no stranger to renewable energy and has invested in wind energy as well as in the Chinese electric car maker BYD, but at the same time he’s not shy of investing in coal. The bottom line is that Buffett knows how to identify a good deal. Here it happened to be a solar energy deal. It’s true that this deal will probably increase the level of confidence the markets has in solar, but we have to be realistic – this deal is not a big statement about solar, it’s just a good deal for both sides that took place because of favorable terms. This is why you won’t see Buffett buying more solar plants unless he’s got similar terms.

4. Much more solar, but only few more green jobs

Another interesting detail of the deal was that the 550-megawatt solar plant, which will be sufficient to power 160,000 homes in California, will create about 400 construction jobs and 15 ongoing operations and maintenance jobs. It’s amazing to see that so much power can be generated by so little manpower. There are probably some more jobs that will be created indirectly as a result of this deal, including at First Solar, but I believe the total number of jobs will still be very small.

In all, if only 15 people are needed to provide solar energy to 160,000 homes, it means that if the future of solar is based on these large solar farms, it is really doubtful that this industry will create many green jobs in the future (remember President Clinton’s prediction of 2.5 million jobs?).

5. The Halo Effect of the Oracle of Omaha

The involvement of the Oracle of Omaha, as Warren Buffett is called, will probably generate a halo effect, creating a positive impact on the perceptions of the solar industry. No matter what Buffett’s reasons were, this deal will help to ‘sell’ the solar industry as a mature and less risky industry. It will certainly help First Solar to sell other solar projects - “Selling Topaz to the smart financial guys at MidAmerican relieves uncertainty about some of their other projects,” Paul Clegg, an analyst at Mizuho Securities USA Inc. told Bloomberg in an interview. “I don’t doubt they will find buyers for more of their projects.”

Image credit: trackrecord, Flickr Creative Commons

Raz Godelnik is the co-founder of Eco-Libris, a green company working to green up the book industry in the digital age. He is also an adjunct professor in the University of Delaware’s Alfred Lerner College of Business and Economics.