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Buffett deal with First Solar signals low cost solar power is here to stay

BY JOEL MACDONALD

While green energy has become increasingly popular in the media, it has continued to lag far behind more traditional energy sources when it comes to actual usage. Perhaps this is because of inherently ephemeral nature of green energy sources like wind and sunlight, compared to the physical, weighty presence of the old energy standbys, such as coal and oil.

However, it’s more likely that the high cost of renewable energy has been to blame for its underutilisation, forcing advocates to largely base their arguments in support of green energy on environmental concerns and global responsibility. While many individuals, governments, and companies recognise that preserving the environment is critical, it can be a difficult sell for boardrooms and investors that are focused on the bottom line. The same is true for those who have to pay their power bills every month.

But now, none other than Warren Buffett — perhaps the most successful financial investor in history — is making it clear that saving the environment doesn’t have to come at the cost of turning a profit (or vice versa) and can save the end user money at the same time. On July 1st, the Berkshire Hathaway-owned NV Energy submitted a filing to state regulators in which it revealed it had agreed to pay 3.87 cents per kilowatt-hour for power produced by First Solar, Inc., a solar cell manufacturing company.

According to a utilities expert interviewed by Bloomberg Business, this may be the lowest American power purchase agreement (PPA) price for electricity derived from any source this year, and is almost certainly the lowest price ever paid for solar energy anywhere in the world. Only a year previously, NV Energy had struck a deal to pay 13.77 cents per kilowatt-hour of solar energy. The new deal represents a 1-year cost decline of 72%.

To draw a comparison between the newly negotiated rate of 3.87¢/kWh and the current price for energy from other sources, we can turn to data published in June of 2015 by the U.S. Energy Information Administration (EIA). In its publication, the EIA developed a forecast of the average American PPA rate for electricity produced in 2020 by new power plants, broken down according to energy source. The estimates for electricity derived from some of the most common energy sources are as follows (all prices are per kilowatt-hour):

  • Conventional coal - $0.0951
  • Coal plants with Carbon Capture and Storage (CCS) - $0.1444
  • Conventional natural gas - $0.0752
  • Natural gas plants with CCS - $0.1002
  • Nuclear - $0.0478

The data highlights an interesting point: as requirements for the clean production of energy become increasingly stringent in future decades, as they almost certainly will in most of the western world, the cost of producing energy from traditional non-renewable sources will likely climb (this assumes that advances in technologies like CCS will be outpaced by increasingly strict pollution requirements). In the meantime, green technologies will become cheaper and more efficient, dropping the cost of those energy sources. This is good news for companies like Buffett’s — as well as Google, which just pledged to triple its investments in green energy — that are investing billions in green technologies.

Solar is starting to stand out in a big way, even when compared to what has long been the cheapest green option: wind energy. A study cited in a New York Times article from last year, comparing solar and wind energy, reported wind energy was running as low as 1.4 cents per kWh with subsidies, and 3.7 cents without. At the time of the article (November 2014) solar electricity was averaging about 5.6 cents per kWh with subsidies, and 7.2 without.

According to the Institute for Local Self-Reliance, the cost of solar power has already surpassed parity with local utility energy rates in six of the 40 largest major American markets, without cost-incentives: Boston, Los Angeles, Riverside, San Diego, San Francisco, and San Jose, for a total of 30 million people. The same is expected to become true of New York City by next year, and for more than 109 million people by 2021.

With the cost of solar approaching parity with traditional power sources in more and more markets, solar may soon be taking much of the energy out of wind tech’s sails (and sales), due to the added benefit that the worldwide acreage suitable for solar panel installments far outstrips those that are windmill-friendly. So the fact that solar power is continuing to get major support from Warren Buffett — one of his companies purchased two solar power plant projects in 2013 for more than $2 billion — suggests that the weather for solar power’s future is looking quite clear. NV Energy’s deal with First Solar will almost certainly benefit the latter nicely, which had already been making fairly steady progress in recent years; after bottoming out at $11.77 per share in June 2012, First Solar’s stock price closed at 42.27 on July 27th.

While it’s easy to get lost in all of the complex figures and cost comparisons, the takeaway for consumers throughout the United States and the rest of the world is quite simple: soon they’ll have the option to save money on their monthly power bill by switching to solar power, while saving the planet at the same time. That’s an extremely attractive sales pitch. It’s no wonder that Mr. Buffett is so eager to spend his money in order to be the one making that pitch.

ABOUT THE AUTHOR

Joel MacDonald is an economist with more than 10 years of experience studying the energy sector. He is the founder of energyrates.ca, an energy provider review site, and is an expert in energy rate analysis and comparison.

FURTHER INFORMATION

http://energyrates.ca/
 

Posted 03/08/2015 by Libi Israeli

Tagged under: solar

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