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U.S. solar developers are luring cash at record rates from investors ranging from Warren Buffett to Google Inc. (GOOG) and KKR & Co. by offering returns on projects four times those available for Treasury securities.
Buffett’s Berkshire Hathaway Inc. (BRK/A) together with the biggest Internet search company, the private equity company and insurers MetLife Inc. (MET) 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.
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 LLP, which helped arrange a solar deal for Buffett. “It’s an attractive investment for any firm, not just those in energy.”
Jim Barry, the chief investment officer on Blackrock Inc.’s renewable energy team, joins Pensiondanmark A/S Managing Director Torben Moger Pedersen in assessing infrastructure finance in a panel discussion hosted by New Energy Finance in New York today.
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. (FSLR) 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 President Barack Obama’s administration suffered criticism for investing in Solyndra LLC (SOLY), 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 Corp. and Banco Santander SA 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 AG of Hamburg and Banco Bilbao Vizcaya Argentaria SA of Bilbao, Spain, New Energy Finance said.
That year, the U.S. 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 California, Arizona and Nevada have agreed to pay premiums for electricity generated by sunshine.
In California, where the largest plants are beginning to produce power, regulators approved contracts in 2010 for utilities to pay $161 to $232 a megawatt-hour for solar energy. That’s at least four times the $40 average wholesale price in Southern California at the time. Most such contracts are confidential to promote competition.
Solar investing isn’t just for specialist banks any more. MetLife on Feb. 29 said it purchased a stake in Texas’s largest photovoltaic project, a 30-megawatt plant with a contract to sell the output to Austin’s municipal utility for 25 years. The insurer has put more than $2.2 billion in clean power.
Google has allocated about $1 billion to renewable energy, including $94 million in December for a portion of four California solar farms and a 37.5 percent stake in a project to build a $5 billion transmission system for wind farms off the mid-Atlantic coast.
Google plans to invest in the wind project during the development phase, said Parag Chokshi, a spokesman for the company. He said the total renewable energy investment is likely to be short of $1 billion, though costs will fluctuate during the work.
KKR acquired the remainder through SunTap Energy, a fund it formed in December to invest in solar projects. It committed $95 million to the venture and will use some of that for its share of the four California projects.
KKR, Google, MetLife, John Hancock and MidAmerican each declined to comment on the returns from their renewable energy investments, citing company policies.
“We’re going to see more and more investors entering this sector,” said Todd Foley, senior vice president of the American Council on Renewable Energy in Washington. “There’s a great opportunity here for institutional investors, insurance companies and pension funds as an alternative to bonds.”
There’s a finite supply of solar projects that make for good investments, Harris said. Recurrent and other top developers have plans for about 5 gigawatts to 6 gigawatts of projects with power-purchase agreements that guarantee a long- term revenue stream. Smaller developers have another 4 gigawatts to 5 gigawatts of projects that may be traded, he estimated. A gigawatt is enough to power about 800,000 homes.
A solar farm is “a nice cash-flow instrument,” said Nat Kreamer, chief executive officer of Clean Power Finance in San Francisco, which bundles solar projects to create investment products. “Private equity firms are all over it but you’re also starting to see utilities and insurance companies that want to own the whole thing.”
Wal-Mart Inc. (WM) is the second-biggest buyer of electricity from renewable sources and is also considering buying projects. The steady returns from solar farms may meet the retailer’s threshold, said Greg Pool, Wal-Mart’s renewable energy director.
“There may come a time when Wal-Mart decides to enter the market as an investor on projects with returns in line with our return requirements,” he said.
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