Betting on Solar power?

Yesterday the news caught my eye that Warren Buffet is investing in solar power. Actually most sources indicate he is "betting" on solar power rather than investing [4].

To my opinion, would he be betting he would have bought Facebook shares last summer!

Here is why:

At the time Facebook published its prospects on the IPO, the development of the number of users of Facebook was pretty much represented by the following graph. Honestly, the last point on the graph was not yet available, though matches pretty accurately with the model being a fitted S-curve.

Investing in Facebook at the IPO means investing in a company that is in a phase where the growth diminishes and is closing in on saturation. So there is still growth, though not one justifying a market value representing a fivefold higher future profit than is generated at the moment. Deep respect for the Facebook team to have sold their company shares at such a good price!

Whereas Facebook as innovation is almost through the "late majority", Solar silicon PV cell power generation is in its "early adopter" stage, as can be seen from the following graphs [1]:

Here again an S-curve is fitted on the data available. The installed peak capacity at 2012 years end is about 200 GW,  around 2,5% of the total global electrical energy produced:

In this graph the S-curve is extrapolated beyond the point where peak capacity surpasses the electric power demand in around 2024.

Being the first does not really matters as long as the generated PV power more expensive than conventionally available power. Well here is the interesting part, these PV power prices have come down [2,3]:

In this graph, BOS indicates Balance of System, including wiring, switches, support racks, inverter, and batteries. The data represented in the above graph are up to 2000 based on BOS calculations, from 2000 onwards, they are calculated using LCOE, which indicates the Levelized Cost of Energy, in which capital investment write off is incorporated. 

Since the late 50ties till 2011 the PV solar generated price of a kWh came down from about 250 dollar to about 13 dollarcents. Because this drop in price is so huge, the above presented graph lacks the scale to see in detail what is happening in the last few years. In the graph below, last twelve years are presented in more detail.

The blue line represents the price of solar generated power on average throughout the USA, the red line represents the average tarifs (domestic, small and large scale industrial) on power supplied by San Diego Gas and Electric (California), a commercial electric power supplier.

In 2011, solar power could -USA wide- be produced at the same price as commercially available electricity in California. In 2012 it appears that solar power prices even push down commercial prices, which means that traditional power generation in California is facing a serious, game changing competitor.

Just to complete the math, what did Mr. Buffet get for his approximate 2.5 billion dollars:

A 597 MW power plant under construction, being bought for about 4.18 $ per W. This is a considerable sum of money, invested in a plant at the antelope valley, about 90 km north of Los Angeles. Here, it is not a coincidence, insolation is at its highest throughout the USA [image from NLRE]:

If we assume this plant on average during a full 24 hours produces 40% of its peak capacity, it can turn over about 272 million dollars a year at an energy price of 13 cents per kWh. If maintenance and operation of the system is estimated to be 10% of the income, than a yearly income of about 250 million dollars seems reasonable, generating a 10% return on investment. Should the price of a kWh drop another 50% than a return on investment of about 5% could still be feasible.

It is very likely that Warren Buffet has studied similar material and came to the following or similar conclusions:

- Solar power in California can now be generated at the same price as commercially available electric energy, grid parity has become a fact.

- Investing in Solar PV generation plant means investing in the "early adopter stage" of a potentially booming new industry.

- Solar power is not dependent on price fluctuations in oil, gas, coal or uranium which all tend to go up in longer perspective [5].

- A California based solar power plant can return between 5% and 10% on investment.

- Besides economic factors, ecological factors, like carbon dioxide taxation could further provide reasons to go solar.



If investing in this early stage, yet profitable industry is seen as betting, than boy, do I wish our European politicians and European central bankers were betting more!






Literature/sources of data:

[1] http://www.bp.com/sectionbodycopy.do?categoryId=7500&contentId=7068481

[2] http://www.cpuc.ca.gov/PUC/energy/Electric+Rates/ENGRD/ratesNCharts_elect.htm

[3] http://www.bnef.com/WhitePapers/download/82


[4] http://www.huffingtonpost.com/2013/01/03/warren-buffett-solar-power_n_2398816.html


[5] http://octrooifabriek.blogspot.nl/2012/11/energy-revolution.html