Don't bet on Warren Buffett's solar gamble

Then again, you might not want to bet against it, either.

By InvestorPlace Jan 4, 2013 12:36PM

Solar energy copyright Mick Roessler, CorbisBy Lawrence Meyers


Before you go bonkers over solar stocks, there are some important concepts to understand regarding the purchase of two SunPower (SPWR) solar photovoltaic power plant projects by MidAmerican Energy, a subsidiary of Warren Buffett's Berkshire Hathaway (BRK.A, BRK.B).


The first concept has to do with physics and the overall foolishness of buying solar power for your home or business. I sat down with a materials and electrical engineer a few weeks ago, and he explained that only the tiniest-spectrum frequencies of sunlight are actually convertible to energy by a solar cell. As I've written before on InvestorPlace, there's a reason it's called a semiconductor and not just a conductor.


That's why, even if you have photovoltaic cells sitting in direct sunlight for decades, they might not end up generating enough energy to have recouped your cost. The cells also degrade under UV rays, which are always being received by the cells (courtesy of the sun). So the cells degrade from the first second they are hit by the sun and decline in efficiency until they die.


Solar simply does not pay for itself, except possibly over 20 or 30 years. So if you want to feel good about saving the environment, ignore the enormous energy used to mine for silicon (and then melt it!), and pretend you are doing good. Otherwise, you are a sucker because solar is not -- nor will it ever be -- as efficient as fossil fuels.


That, however, does not mean Buffett is a sucker.


Let's look at SunPower more closely. It's possible that because of the company's position in California -- where the government spends money on all kinds of lunatic ideas, such as a bullet train nobody will use, as reported in the Sacramento Bee -- combined with government incentives, Buffett might actually make money on this specific deal, regardless of the physics. In fact, I'm willing to bet that the dirty little secret of this deal involves politics, crony capitalism, and insiders getting rich at shareholder and taxpayer expense (see HumanEvents story). Warren Buffett is an adviser to Obama. There's too much going on in the background to make me comfortable that this deal is solely because SunPower was involved in a great business.


SunPower was not a great business. It lost more than $600 million in 2011, and it has lost money every quarter this year ... though it squeezed out a $22 million operational profit after adding back in $70 million in non-recurring charges, bringing the total of non-recurring charges over the past two years to half a billion dollars. Free cash flow has been negative $200 million in the trailing 12 months, and SPWR sits on half a billion dollars in debt.


Tell me, how exactly is this a robust business of the type Buffett usually deals with?


It doesn't look like it to me. If anything, it gives even more credence to my thesis that this deal was done for reasons other than it being a cash cow. One wonders if the $1.2 billion loan guarantee comes attached to the deal.


The question is: Does it matter?


The Barnum Effect says that as long as people believe what they want to believe, there will always be suckers. I think you're a sucker to get involved in solar in any way. But as we've seen with other Buffett deals, when he buys an asset, similar assets with equity in the public markets soar. In Thursday's case, we saw other solar companies like LDK Solar (LDK) and Yingli Green (YGE) propelled by double digits.


That doesn't mean they are great companies, although it might.


That doesn't mean the government won't keep throwing money at solar (and it probably will), which helps blunt potential risk.


That doesn't mean enough suckers won't buy solar panels for their home or business.

That doesn't even mean the sector Buffett buys into is actually a good sector to be in. (I think he was dumb to buy newspapers, as I wrote on InvestorPlace.)  


Which is why the physics might say to short SunPower and every other solar stock ... but the irrationality of people that make up the stock market might actually say to buy.


As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets @ichabodscranium.


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12Comments
Jan 4, 2013 1:57PM
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Yeah, investing in trains was a bad idea too, how did that turn out Oracle Meyers?  Buffett has been doing this longer and better than just about anyone else in the world, and I'm supposed to believe a guy with a blog.  Ha!
Jan 4, 2013 5:04PM
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The 2nd and 3rd paras seem to insinuate that semiconductors are inferior to conductors. Either it's poorly written or the author did not understand the physics and why the well defined bandgap of semiconductors (which is much smaller or continuous in conductors) is what is required for energy conversion. Yes, I read the InvestorPlace article and it spouts the same nonsense. The issue is not whether the solar cell can trap only a few of the photons. The issue is that photons are free and if you can increase the efficiency of the solar cell it COULD pay off. And oh by the way, all machinery degrades from the moment it is commissioned.
I would suggest focusing on the financials where the concerns may be genuine without introducing a scientific perspective where you don't seem to have a great grasp of the issues.
Jan 4, 2013 4:03PM
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there may be some truth in this article, but  only a fool would make this commnet: "because solar is not -- nor will it ever be -- as efficient as fossil fuels"
Jan 4, 2013 5:26PM
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Some of us who buy solar actually know there is a long payback and still do it. Because we know the market is financially skewed towards polluting fossil fuels that don't have to pay for the effects of carbon emissions, so it's not a fair playing field. In addition, I'd rather have my money making a steady and reliable 5-10% return each year than giving it to business and the banks to invest or squander it, and I get to help the environment. Make people pay the true cost for their energy (maybe a carbon tax), and solar will be a no-brainer. 
Jan 4, 2013 5:10PM
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Be aware    Within 2- 3 years a major breakthrough in non silicone based chip tehcnology manufacturing will turn the panels into a gold mine and these will replace the current panels already out in the field.

Warren knows this and who is on the brink of manufacturing these panels so that profit is possible.  Do your homework 

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hmmm oil is cheaper until it runs out then solar will look totally cheap when the price of the last barrel of oil in the world is around $54,000,000,000,000,000,000,000,000,000 LOL
Jan 4, 2013 9:43PM
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The picture attached to this article is about Solar Thermal and does not use PV cells, so it is inappropriate and does not reflect the business of SPWR involved into making those PV cells.

 

There is a common confusion between PhotoVoltaic Solar (based on silicon) and Solar Thermal (based on concentration of the sun's rays with parabolic mirrors onto tubes where a liquid is heated up and is transfered to some facilities where it turns classic turbines to produce electricity like in any power plants). Solar Thermal can also use flat black panels  with internal tubing where water running into it collects calories.

 

Or we could say the picture is perfectly appropriate to reflect that large scale power utilities utilise (and should) Thermal Solar rather than PV cells.

 

Solar thermal collectors are different from solar photovoltaic collectors in that they translate the sun's energy into a heated liquid instead of electricity. A big difference is that solar thermal collectors are much less costly (you can even make them yourself as a DIY project), but they are 3 to 4 times as efficient... an 80% efficiency versus 15 to 20% for photovoltaic. 

 

Also heated liquide can be stored into large insulated tanks (a no brainer) for overnight use. On the other hand, electricity from PV cells would have to be stored in large batteries (be aware of hazard and environment problems with large scale application).

 

If you need to heat your home or your water with solar energy, you simply use flat thermal solar panels on your roof or outside walls, and surely not PV Cells (what a waste!), or simply design your home with large solar windows facing south, with interior thermal shutter to close on cold nights.

 

If you need large amount of electricity (Utility scale) Thermal Solar still need to convert the heated liquide into steam to turn turbines like in any thermal power plant and the 80% efficiency is reduced somewhat, but you have quite some margin here to stay ahead of the PV cells.

 

If only the money spent to build PV cells factory had been spent into the construction of even cheaper and even more efficient Thermal panels factories

 

I believe that companie involved in Solar Thermal are mostly private and you cannot invest in it

What a shame !!!

 

On the other hand the PV Cells technology is sexy, and there are tons of companies to invest in.

Because of an over capacity of production world wide now, the PV cells manufacturers are trying to add their cells to power plants, when PV Cells should belong to roof tops.

 

Even though the physics says that PV Cells are a lot less efficient, I guess that PV Cells manufacturers can only compete with Thermal because they have already invested huge amount of moneys (Billions of dollars in debt) into their large scale operation and factories, because the installation of panels is easy (set and plug) and low maintenance (no moving parts or running heated liquid) and because it is easy to make up for the inferior efficiency by expending the acreage of your installation when you work in vast deserts.

 

So the deserts are going to be gobbled up at 2 to 3 times the normal pace for Solar Plants, but who cares ?

 

How did we come to that ?

The market is supposed to favor the most efficient and cheapest solutions, right ?

 

Nope. Companies are created on some ideas or new technologies and the more "new tech" or "new market" appeal it has the more money it gets from investors. At some point, the new market runs ahead of itself and face over supplies/capacity. The suppliers then look for new markets even where they are not really adapted to, and can succeed there simply because they are the stronger players, in term of production capacity, readiness, inventory ... and the most desperate too.

 

Thermal Solar is old tech and a private yard.  Too bad.

 

What a waste!.

 

Jan 4, 2013 8:00PM
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Hold on to your hats everyone,  the author talked to an electrical engineer a few weeks ago!  Now he's an expert in all things solar.  Last summer he walked on his roof, ever since he has been a master carpenter / roofer; the other week he studied his teeth in the mirror, now he does his own dental work.  So my only question is; now that i sold all my solar stock where should i invest my money?
Jan 7, 2013 6:58PM
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Note that Buffett's company is not buying Sunpower stock, rather a revenue-producing power plant. Their investment is probably very good indeed. If you think it means you should buy Sunpower stock, you should think more carefully about it. However several of the technical interpretations, opinions and stated implications in this article are just plain wrong. Thus the characterization "Warren Buffett's solar gamble," is in my opinion a deceiving misnomer.
Jan 6, 2013 1:17PM
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Whether Warren or Berk likes Solar or not makes little diff to me....

 

We got stung on the last solar investments....About 3 different ones, even on 1, losses on 2....

It is going to have to show me something, before going back in and it won't be Buffet and gang that does; I cannot make deals like they can...

 

Thanks Jack ala....For some of your insight....

Jan 4, 2013 6:56PM
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They may not seem practical right now, but in Empirical Magazine's January 2013 issue, contributor Hugh Mercer Curtler states "Solar panels are improving in efficiency and becoming less expensive and more readily available." Looking at the bigger picture, Curtler goes on to state that "The proposed Topaz solar farm planned in San Louis Obispo County, Calif., will produce 550 megawatts of electricity that will benefit 160,000 homes in the state and will also produce an estimated $417 million in positive benefits to the region in forms of new jobs and savings to homeowners." to read an excerpt of the article, follow our link:
Jan 4, 2013 6:55PM
avatar
They may not seem practical right now, but in Empirical Magazine's January 2013 issue, contributor Hugh Mercer Curtler states "Solar panels are improving in efficiency and becoming less expensive and more readily available." Looking at the bigger picture, Curtler goes on to state that "The proposed Topaz solar farm planned in San Louis Obispo County, Calif., will produce 550 megawatts of electricity that will benefit 160,000 homes in the state and will also produce an estimated $417 million in positive benefits to the region in forms of new jobs and savings to homeowners." to read an excerpt of the article, follow our link:
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