Buffett's solar advance

Warren Buffett is a legend in the investing world. A man who has built a fortune – at one point the world's largest – from ‘value' investing, he is now one of the most influential people on the planet.

The ‘Oracle of Omaha' is followed devoutly by a loyal – and large – core of fans. As such when his MidAmerican Energy Holdings inked a ~$US2.5 billion deal with SunPower to buy the world's largest solar power plant last week, it quickly was followed by a share price lift in not only SunPower, but also every major solar company publically listed in the US.

The deal represented just the latest in a series of recent forays into renewable energy by the Buffett-backed energy business.

Buffett interest

MidAmerican began investing in wind back in 2004 and is now America's biggest wind power owner, with over 3,000 MW of generation and just shy of a third of its total generation capacity powered by wind. It has spent close to $5 billion in developing its portfolio.

In late 2011 it made a strong move into solar and since that time MidAmerican has acquired major stakes in the three largest solar plants in the US, including the world's two largest. This includes its latest purchase – SunPower's $2.5 billion 579 megawatt Antelope Valley Solar development – as well as ownership of First Solar's $2 billion, 550 MW Topaz solar project and a 49 per cent stake in NRG Energy's $1.8 billion, 290 MW Agua Caliente solar project.

All-up, its stakes in the projects are valued at around $5.4 billion and, come their completion by 2015, MidAmerican will have one of the largest renewable portfolios in the world.

Solar surge

Buffett's multi-billion dollar deal with SunPower sees it acquire the project as well engage the solar group to design, install and construct the two plants on the site.

The news sent SunPower shares soaring 60 per cent in the three trading days following. But it also saw leading players in the sector – First Solar (up 16 per cent), Trina Solar (24 per cent), Suntech Power (29 per cent), LDK Solar (40 per cent) and Yingli Green Energy (27 per cent) – reclaim some of the heavy losses of last year.

It didn't last of course, with all of these stocks coming back to earth overnight – SunPower lost 12 per cent, while First Solar, Trina and Yingli gave up around 5 per cent. LDK and Suntech, two of the most troubled in the sector, saw the relief rally crumble, retreating 12 and 20 per cent, respectively.

Had Buffett actually bought stock in SunPower – which is majority owned by French oil giant Total – then the rally would likely be ongoing. That he didn't shows he understands where the value in the solar sector currently is: exclusively near the tail-end of the supply chain. It is not in the manufacture of solar panels, at least not for a few years yet.

So while investors blindly chucked their money at anything that had ‘solar' in its name, they didn't stop to think about the reasoning behind MidAmerican's move.

The story isn't that the world's greatest investor sees value in solar generally, it's that he sees value in solar plants. There is a difference, one the biggest US player – First Solar – has noted.

In late 2011, around the time of its deal with Buffett, First Solar took stock of the short to medium-term future for solar manufacturing and didn't like how it looked. As a result it shifted its focus to the design and construction of utility-scale solar developments.

Since then it has seen its share price rise, on the back of MidAmerican's investment, slump on soft results and general solar sector weakness and rise since the middle of last year as its strategy steadily began to bear fruit. It has risen from just above $11 in June to over $30 today. A long way off the heady days of 2008, when it cleared $300, but an improvement nonetheless.

And while First Solar and SunPower look to make money from the engineering side of large-scale developments, Buffett is keen to profit from the ownership of such projects. Together both parties stand to benefit. As for those exclusively focussed on making solar panels, red ink is likely to mar the balance sheet for some time yet.