Over the last couple of years, investors who were hoping to do well by doing good have gotten bad sunburns. Since the start of 2011, the two ETFs which track the solar sector, Guggenheim Solar (NYSE:TAN) and Market Vectors Solar Energy (KWT) are down 74% and 75%, respectively, even after the large jumps up in the first week of the year.
That jump was in large part caused by the January 2nd purchase of two large solar projects by Warren Buffett controlled MidAmerican Solar from Sunpower Corporation (NASD:SPWR.)
You might wonder, Why would a famously cautious investor like Warren Buffett invest in a sector with such a lousy track record?
The Difference Between Solar Manufacturing and Solar Projects
The question is a bit of a red herring. As a value investor, Buffett often invests in companies that have had poor price performance: that’s where great values come from.
More importantly, MidAmerican Solar is not buying Sunpower the company (down 41% since January 2011), but two of Sunpower’s solar projects. The economics of solar manufacturers and solar projects could not be more different.
Solar manufacturers like Sunpower face fierce competition and have little pricing power for their mostly undifferentiated products (solar cells and modules.) Worse, the prices of these products have been declining rapidly, squeezing margins. They also have little control over the prices of their raw materials, which means they find it difficult to pass price declines on to suppliers. While offerend with the best intentions, changing incentive regimes lead to boom and bust cycles for panel sales.
Solar farms and developers face a much different pricing landscape. The price of solar panels (one of their largest costs) has been falling rapidly, and many governments are working to cut the balance of system and soft costs such as permitting which are becoming a relatively large part of their cost structure. More importantly, they almost always sell power under long term contracts, providing a predictable income stream. Incentive regimes are also more stable, with projects’ incentives often fixed when the project is built.
The better economics of solar development has not been lost on solar manufacturers, many of whom have been developing their own projects. It was two such projects that MidAmerican bought from Sunpower.
Invest in Solar Like Buffett
Until recently, small investors’ ability to invest in solar projects was limited to putting solar on the roof of their homes. And this was a viable option for only a few: they had to own a home with a suitable, un-shaded roof, live somewhere with a favorable incentive regime, and be able to come up with several thousand dollars (sometime tens of thousands of dollars) up front.
Fortunately, new options are rapidly becoming available.
- There are efforts on Capitol Hill to allow solar to owned in Master Limited Partnerships (MLPs), a tax structure long available to traditional energy sector.
- An IRS ruling could soon make solar PV a qualified investment class for REITs.
- Even without an IRS ruling, Power REIT (NYSE:PW) has found a way to invest in solar farms, and announced its first such investment last week.
- On Monday, Mosaic opened its platform for crowd-funding solar projects with five projects totaling 757 MW.
Mosaic allows small investors to invest in debt backed by revenues from solar projects. Mosaic acts much like a bank would, if many banks were interested in funding relatively small solar projects. It first conducts due diligence on a project to assure itself that project risks are acceptable. Such risks include the creditworthiness of the power buyer, site design, quality of the equipment, weather and insurance adequacy.
If a project passes muster, Mosaic offers a loan against the revenues from the solar PPA or solar lease. Mosaic then funds this loan by parceling it off to the small investors on its platform, with a minimum investment of only $25. Mosaic passes most of the interest on to the investors, and keeps a slice to pay for its costs. The five projects offered on Monday offered a 4.5% return to investors, with 1% retained by Mosaic out of a 5.5% loan, and had terms of between eight and ten years.
With long term CDs currently offering less than 2%, these investments are proving very popular. As I write, barely 24 hours after the projects were listed on Mosaic’s website, the ones open to small investors are almost fully subscribed, with only $12,475 left unallocated on the largest of the three projects, a 102 kW project on an affordable housing complex in San Bruno, CA.
Because the SEC has not finished writing the rules that would allow crowd-funding under the JOBS Act, these investments were only available to residents of California and New York state, when the Mosaic team has been working with state securities regulators. Mosaic chose to work with these states because that is where most of the investors who had signed up for their platform live.
Mosaic also launched two projects available nationwide to “accredited” (i.e. wealthy or high income) investors nationwide. Such investors are presumed to have the resources to better evaluate investments than small investors, and so Mosaic was able to offer them a wider range of projects.
On behalf of an accredited investor, I was able to review these two projects as well as the three open to small investors. One was very similar to the three projects available to small investors, with the exception of a slightly shorter duration of eight years, compared to nine years for the others. The final project stood out, in that it is larger than the other four projects combined, and is located in New Jersey, rather than in California. It also had the longest term, of twelve years for the loan.
As I write, the smaller of the two accredited-only projects is 96% funded, but the large project is only 15% funded. Nevertheless, I would be surprised if Mosaic fails to fully fund the large project as well. With more to choose from, accredited investors most likely did not need to rush to get in to projects, as smaller investors did. (UPDATE: At noon on Jan 8th, the day after launch, all of Mosaic’s offerings except except the large New Jersey project were fully funded.)
Risks and Rewards
The accredited investor I was working with eventually chose not to in
vest. While a 4.5% 10 year CD would be a very attractive investment, Mosaic’s offerings are not as low risk as CDs, which are FDIC insured against loss of principal. Although it appears that Mosaic does an excellent job managing risk, that is nothing like a guarantee. Since she is able to accept a high degree of risk, she has other attractive investment available. For example, Power REIT, mentioned above, isriskier than Mosaic’s offerings and currently yields only 4%, but has the potential of significant upside and tax advantages.
A small investor may also have more attractive options, the most common of which is paying off debt. While interest in a Mosaic solar investment will be taxable, the interest saved from paying of a car loan or credit card debt is saved from after-tax money, and so is essentially tax free, which makes paying down debt at interest rates of 4% more more clearly more attractive than the 4.5% on offer from Mosaic.
Yet Mosaic investments are less risky than most stocks and mutual funds, and provide relatively attractive returns in the current environment. For an individual without debt to pay off, these seem like attractive investments.
Mosaic President Billy Parish told me by email that the company is working on making its investments available in tax-sheltered accounts such as IRAs. That would make Mosaic’s offerings attractive to more people, including the accredited investor I was working with.
Not that I expect a Mosaic IRA offering any time soon. With these solar investments selling like hot cakes, Mosaic’s priority is almost certainly to bring more quality projects to its platform.
Finding more investors seems to be taking care of itself.
Disclosure: Long PW
This article was first published on the author’s Forbes.com blog, Green Stocks on January 8th.
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