Buffett-First Solar Deal Extremely Bullish For Solar Sector

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by Clean Energy Intel

Nellis Solar Power Plant in the US. Source: Wikimedia Commons

The Solar Industry this week received significant support in the purchase by Warren Buffett-controlled MidAmerican Energy Holdings of First Solar’s (FSLR) $2bn Topaz Solar Farm in San Luis Obispo County, California. This is a significant show of confidence in the industry from Mr Buffett.

Of course, we do not know exactly what Warren Buffett´s utility holding company has paid for the solar project. However, the deal is unquestionably significant in size and scope. What we do know is the following –

  • The Topaz Solar Farm is a $2bn, 550 MW project
  • It is expected to supply the energy needs of 160,000 California homes
  • As such, it is one of the two largest solar projects in the world
  • It is slated to be finished in 2015
  • First Solar will remain in place to construct, operate and maintain the solar farm for MidAmerican
  • Once the project is operational, the electricity generated will be purchased by Pacific Gas and Electric (PG&E) under a 25-year power purchase agreement (PPA)
  • Mr Buffett is therefore effectively purchasing the future income stream which will accrue from the PPA with PG&E.

This infusion of capital is obviously good news for both First Solar and the industry as a whole. Coincidentally, it comes a matter of only two days following our recommendation to buy First Solar. However, the deal has a significance that goes beyond the usual sunshine effect that any M&A activity in a sector usually has.

As is well known, one of the bullish factors facing the solar industry has been the 24 GW pipeline in the US utility-scale sector. However, in the post-Solyndra environment there have been concerns that it may be difficult to finance such a large slate of projects – and this has been particularly true following the end of the DoE´s Loan Guarantee Program and given the coming expiry of the 1603 Treasury Grant Program at year end.

Indeed, the Topaz project was specifically one of those to be affected in the post-Solyndra environment, with First Solar announcing on the 21st of October that their application for a $1.9bn DoE loan guarantee for the project would not complete the application process in time to beat the deadline before the closure of the program. As we argued was also the case with SolarCity´s deal with Bank of America, this latest Buffett-First Solar deal shows that the private sector has the capacity to finance such large-scale projects.

Moreover, this latest bullish news follows a series of bullish factors that have led us to recommend long solar positions again after having been flat for many months:

  • The latest data points to blistering demand in the US – more detail here
  • Likewise, China and Asia are showing extremely strong demand growth – see our article on this from last week here
  • The major Chinese players have drawn a halt to their excessively aggressive capacity expansion plans – more detail here
Taken together, these factors should allow the supply-demand imbalance currently facing the industry to be eroded as 2012 progresses. Since late November we have been recommending specifically being long a basket of Suntech Power (STP), Yingli Green Energy (YGE) and Trina Solar (TSL). Those stocks are now up 14.6%, 14.2% and 10.4% respectively. Three days ago, we also recommended adding First Solar (FSLR) to that basket. We continue to recommend remaining long all four stocks for what should be a solid rally into 2012.

Disclosure: I have no positions in the stocks discussed.

About the Author: Clean Energy Intel is a free investment advisory service (available at www.cleanenergyintel.com), produced by a retired hedge fund strategist who also manages his own money inside a clean energy investment fund.


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