Ignore the Solar Panel Makers, Look to Solar Energy Distributors for Equity Upside
The dwindling number of investors currently optimistic about solar energy stocks took heart earlier this month when a natural gas pipeline and electric utility company controlled by megabuck investor Warren Buffett’s Berkshire Hathaway (BRK.A) acquired a large solar energy farm in California under development by First Solar (FSLR).
But the Dec. 7 announcement, terms of which were not disclosed, did nothing for First Solar stock, which continued to sink along with most stocks in the solar technology sector. This trend reflects declining global prices for photovoltaic technology and the brutal reaction of congressional Republicans to the failure of federally financed Solyndra, a developer of rooftop solar power systems.
Solar energy is a growth business, especially in the western United States where consumers are widely interested in the concept and in emerging economies, notably China, where governments are adapting solar as part of their national energy infrastructures.
But what is the solar energy business? Investors losing money in small-cap solar energy stocks assumed the business was commercializing one of several technologies for converting sunlight into electricity or concentrating the sun’s heat to power steam generators. But, as Warren Buffett understands, the business is large-cap energy distribution, not energy generation.
It’s worth noting that Buffett’s two biggest non-financial operating companies are a railroad, BNSF, and an energy utility, MidAmerican Energy Holdings. Both are heavily regulated businesses requiring large, continuous capital investments to move a consumer good from one point to another. A few centuries ago, railroads and electric utilities began as entrepreneurial businesses with competing technologies. But investors who made (and make) long-term money in railroads and electricity own regulated distribution infrastructures, not gee-whiz inventions.
Venture capitalists and governments have stepped in to finance the risks of solar energy generation technologies. For value investors, the opportunity lies in the unique character of solar energy distribution. For these investors, declining prices for photovoltaic cells is good news.
Unlike traditional electric utilities, photovoltaic-based electricity distribution requires a partnership with consumers. The home, factory, office or retail establishment contributes power to the solar utility as well as acquiring power from the utility. So-called smart grids and smart meters allow both partners to measure their contributions, but the process is alien to most consumers in industrialized nations, even places where the sun shines a lot.
Individual investors who want to be equity investors in the next big thing in solar technology are free to place their bets on First Solar and its peer entrepreneurial companies. But another strategy is to allow established electric utility companies to pick the winners from among the solar energy innovators and, more important, to solve solar’s distribution problems. So far, the major U.S. utilities are proceeding slowly.
A ranking published last summer by the Solar Electric Power Association listed Pacific Gas & Electric (PCG) as the biggest producer of solar power, followed by Florida Power & Light, a unit of NextEra Energy (NEE), and Public Service Electric & Gas, a unit of Public Service Enterprise Group (PEG). Solar power capacity added in 2010 by the top 10 solar-producing utilities totaled 561 megawatts, slightly more than the 550-megaway capacity being acquired by Buffett’s MidAmerican Energy from First Solar.
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