Everyone wants to see inside Warren Buffett's head. One of the world's most successful investors, the CEO of Berkshire Hathaway is a rock star among those who check the markets before their breakfast. His annual shareholder letters are famous, generating the kind of hoopla among his followers as a just-released Harry Potter novel does among children. Even U.S. President Barack Obama listens to Buffett, or at least he quotes him often. In fact, headline writers have come to call Buffett the 'Oracle of Obama', a play on the Nebraska native's nickname of the 'Oracle of Omaha'.
What's the best way to gain insight into Buffett's thinking? Probably by watching his companies. And now, among his big insurance, chemical and utility holdings is a renewable energy company that is making some eye-catching moves. In its first 12 months in business, MidAmerican Renewables has acquired some of the largest solar projects in the world.
What do these aggressive moves by a Buffett-backed business say about the solar market? Will others follow? And why did MidAmerican Renewables choose these particular projects?
First, Some History
When MidAmerican Renewables entered the market in 2012, it came with significant financial backing. Its parent is Berkshire Hathaway's MidAmerican Energy Holdings Company, a company with US$11.2 billion in annual revenue and $48 billion in assets. The enterprise includes a natural gas pipeline venture, U.S. and U.K. electric utilities and an international energy development firm. MidAmerican's utilities own and operate generation, including renewables. But the company wanted to pursue solar, wind, geothermal, and hydroelectric projects through a non-utility, competitive business. Thus, MidAmerican Renewables was born.
MidAmerican Renewables quickly showed its financial heft in the solar marketplace, going from 'a non-player to one of the largest solar investors in a very short time frame', said Dan Bedell, an executive vice president of Principal Solar, a Texas company that also acquires large-scale solar.
MidAmerican Renewables has acquired three large solar photovoltaic projects:
Why Now, Why This?
Given Buffett's alliance with Obama, some critics say MidAmerican is pursuing renewables to boost the US President's green agenda and undo some of the tarnish caused by the Solyndra, the California thin-film solar manufacture that went bankrupt after receiving a $535 million US Energy Department loan guarantee. But Buffett doesn't mix politics and investment. His oft quoted investment doctrine is, 'Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.'
Berkshire Hathaway is motivated by the 'green you see on dollars, not the kind you see on projects', Bedell said. 'There very may well be beneficial political overtones, but without the financial analytics behind this move, it's a non-starter. Yes, Warren Buffett has been an outspoken supporter of the Obama administration. But at the same time he is a non-partisan investor'.
Indeed, when asked why MidAmerican bought the large solar projects, Paul Caudill, president of MidAmerican Renewables solar division, first talked about corporate commitment to reducing carbon footprint. 'One of our core principles is environmental respect', he said. But then Caudill quickly moved on to the business fundamentals of risk, capital and market dynamics.
'We see solar and wind assets as very, very solid long-term investments,' he said. Not risk free, he added, but good plays for MidAmerican in terms of managing risk and deploying capital.
Why is Solar a Good Risk Now?
First, the investments made by MidAmerican are backed by long-term utility contracts. 'The power purchase agreements provide us comfort. We are a long-term investors, so we like to have counterparties that have the same goals that we do,' he said.
Second, solar prices have dropped to the point where they are attractive 'just on their own merit,' Caudill said. MidAmerican Renewables focuses on states where energy prices are high. Right now gas prices are at a 'very, very low ' levels, he said. 'You can almost be assured energy prices will rise. When I say energy price I'm talking about electricity prices to consumers'. With electricity prices rising and solar prices falling, solar becomes an increasingly appealing proposition.
And last, 'we are starting to get enough operating experience with both thin-film and polycrystalline higher efficiency modules. We're comfortable that the risk is very manageable,' he said.
While the company has focused on the western U.S. so far, it is exploring several other markets, both domestic and international.
MidAmerican Renewables sees opportunity 'in a number of states that might not be traditionally the ones you think of in terms of solar, like California, Colorado and Arizona', he said. Caudill won't say exactly which states the company is eyeing. But he did cite the US Southeast as a possibility, and the US Northeast as less likely.
'The markets there (the US Northeast) are frankly not areas we have focused on heavily. The market for renewable energy credits has been somewhat up and down there, not very stable. That's been something that I've personally watched over the last few years,' Caudill said.
He sees future solar development shifting toward smaller projects and away from the mega-size of MidAmerican Renewables' first three solar projects. 'Land is just not available,' he said, adding that he sees some 'very exciting opportunities in the 20 MW-40 MW range. 'We're working on some. We are looking at grid tied and distributed generation projects of a much, much smaller scale and capacity than Topaz, Agua Caliente and Antelope Valley,' he said.