Investors pour more funds into solar projects


NEW YORK -- U.S. solar developers are luring cash at record rates from investors ranging from Warren Buffett to Google and KKR by offering returns on projects four times those available for Treasury securities.

Buffett's Berkshire Hathaway Inc. together with the biggest Internet search company, the private equity company and insurers MetLife Inc. and John Hancock Life Insurance Co. poured more than $500 million into renewable energy in the last year. That's the most ever for companies outside the club of banks and specialist lenders that traditionally back solar energy, according to Bloomberg New Energy Finance data.

Today, President Barack Obama is expected to use the Copper Mountain Solar plant near Boulder City to highlight his administration's efforts to expand energy from renewable sources. The government gave Sempra Generation about $42 million in federal tax credits that helped build the 48-megawatt plant.

Once so risky that only government backing could draw private capital, solar projects now are making returns of about 15 percent, according to Stanford University's center for energy policy and finance. That has attracted a wider community of investors eager to cash in on earnings stronger than those for infrastructure projects from toll roads to pipelines.

"A solar power project with a long-term sales agreement could be viewed as a machine that generates revenue," said Marty Klepper, an attorney at Skadden Arps Slate Meagher & Flom, which helped arrange a solar deal for Buffett. "It's an attractive investment for any firm, not just those in energy."

With 30-year Treasuries yielding about 3.4 percent, investors are seeking safe places to park their money for years at a higher return. Solar energy fits the bill, with predictable cash flows guaranteed by contract for two decades or more. Those deals may be even more lucrative because many were signed before the cost of solar panels plunged 50 percent last year.

Buffett's MidAmerican Energy Holdings Co. agreed to buy the Topaz Solar Farm in California from First Solar Inc. on Dec. 7. The project's development budget is estimated at $2.4 billion and it may generate a 16.3 percent return on investment by selling power to PG&E Corp. at about $150 a megawatt-hour, through a 25-year contract, according to New Energy Finance calculations. It will have 550 megawatts of capacity and is expected to go into operation in 2015, making it one of the world's biggest photovoltaic plants.

"After tax, you're looking at returns in the 10 percent to 15 percent range" for solar projects, said Dan Reicher, executive director of Stanford University's center for energy policy and finance in California. "The beauty of solar is once you make the capital investment, you've got free fuel and very low operating costs."

The long-term nature of solar power-purchase deals make them similar to some bonds. And because a solar farm is a tangible asset, these investments also function much like those for infrastructure projects, with cash flows comparable to toll roads, bridges or pipelines, said Stefan Heck, a director at McKinsey & Co. in New York who leads their clean-tech work.

Once a project starts producing power, investors can earn a return that's "higher than most bonds," he said. "There are a lot of pension funds with long-term horizons that are very interested in this space."

Governments remain the biggest backers of the solar industry, and Obama's administration suffered criticism for investing in Solyndra, a solar manufacturer that went bankrupt last year.

Worldwide, the U.S. Treasury's Federal Financing Bank was the biggest asset-finance lender for renewable energy companies in the past year, arranging 12 deals worth $11.2 billion, according to New Energy Finance. The Brazilian development bank BNDES, Bank of America and Banco Santander followed.

In 2009, solar technology was so unfamiliar that few banks would back projects that required billions in upfront investment and wouldn't begin producing revenue for years, Klepper said. The biggest financiers for the industry that year were Madrid-based Santander, HSH Nordbank of Hamburg and Banco Bilbao Vizcaya Argentaria of Bilbao, Spain, New Energy Finance said.

That year, the Energy Department began funding a program to guarantee loans for solar farms and other renewable energy projects that supported almost $35 billion in financing before winding down in September.

The government's endorsement assuaged investors' concerns and built up a bigger community of people who understand how to make money from solar deals, said Arno Harris, chief executive officer of Sharp Corp.'s renewable power development unit Recurrent Energy.

"Solar is now bankable," Harris said. "When solar was perceived as more risky it required a premium," and now it's "becoming part of a much broader capital market."

Long-term power-purchase contracts are the key to making solar a reliable investment, Harris said. Utilities in sunny states such as Nevada, California and Arizona have agreed to pay premiums for electricity generated by sunshine.

Thanks to an aggressive renewable portfolio standard that requires Nevada utilities to obtain 25 percent of their electricity from green power by 2025, local power utility NV energy has built a sizable stable of solar projects.

NV Energy has agreed to buy power from 12 solar projects totaling 334.5 megawatts. Larger projects in operation include Acciona Solar Power's Nevada Solar One, a 69-megawatt plant in the Eldorado Valley near Boulder City, and Fotowatio's 13.2-megawatt Solar Star project at Nellis Air Force Base. In planning or under construction are Silver State Solar, a 50-megawatt plant that First Solar is developing near Primm, and Crescent Dunes, a 110-megawatt thermal-storage plant that SolarReserve is building outside Tonopah.

NV Energy's power-purchase agreements with the plants range from 20 to 25 years, though short-term agreements of one to three years are allowed to make up short-term portfolio deficiencies. Power prices on some of the plants cost around 13 cents per kilowatt hour. That compares with about 4 cents per kilowatt hour the company pays for purchased power from fossil fuels such as natural gas.

So far, many of Nevada's power plants have required federal aid to get off the ground. Nevada Solar One received nearly $3 million in federal grants. Crescent Dunes obtained $737 million in loan guarantees from the U.S. Department of Energy; equity investors are set to put $260 million into the plant.

Not all solar plants built in Nevada serve Nevadans.

The plant Obama plans to visit serves customers of Pacific Gas & Electric in San Francisco.

Las Vegas Review-Journal writer Jennifer Robison contributed to this report.

 

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