Investors Turning to Solar for High Returns

We’ve been writing about this a lot lately – it’s a really important development for renewable energy.

Investors are figuring out they can get safe, reliable returns and get four times what they can earn on US Treasuries when they put their money into solar plants.

When a solar plant signs a Power Purchase Agreement to sell the power produced by the plant that’s like gold to investors. Those agreements lock in the sale of electricity for 20-plus years, which means investors can rely on safe, guaranteed returns for a long time.

"A solar power project with a long-term sales agreement could be viewed as a machine that generates revenue," Marty Klepper, an attorney at Skadden Arps Slate Meagher & Flom LLP, told Bloomberg. "It’s an attractive investment for any firm, not just those in energy."

Until recently, investors viewed these projects as too risky without government backing, but now they see they can earn returns of 15% and are eager to jump in.

And with the price of solar panels dropping so sharply – 50% last year – returns are getting even more lucrative. Once the capital investment is made, solar electricity is free with very low operating costs.

Those high returns, calculated by Stanford University’s Center for Energy Policy and Finance, are higher than those for infrastructure projects from toll roads to pipelines. And they sure beat 30-year Treasuries at 3.4% returns.

Buffet’s entree into solar is a great example. His energy arm, MidAmerican Energy, bought one of the world’s largest solar plants, the Topaz Solar Farm in California last December.

The over-subscribed bond to finance the $2.4 billion project is expected to generate a 16.3% return on investment for selling the electricity to utility PG&E for $150 per megawatt-hour for 25 years, according to New Energy Finance calculations.

Google’s been investing in solar plants for years, and took a stake in the mid-Atlantic offshore wind transmission system, and Walmart’s looking at buying plants too.

Last year, MetLife and John Hancock Life Insurance invested over $500 million in renewable energy, the most spent yet by companies outside the small group of specialist lenders that traditionally back solar energy, says Bloomberg New Energy Finance.

Once a project starts producing power, investors can earn a return that’s higher than most bonds. But in terms of bonds, investors are getting more choices now that Climate Bonds are hitting their stride.

Interestingly, we reported last week that tax professionals lag in their knowledge of clean energy investment opportunities and aren’t guiding their clients to them.

Putting it in Perspective

It wasn’t very long ago that solar technology was unfamiliar and considered to be very risky. Even in 2009, few banks would back projects – they required billions in upfront investment and wouldn’t produce revenue for years.

The US Department of Energy (DOE) has been providing loan guarantees for renewable energy projects for exactly that reason – so that projects that find it hard to attract financing would have an easier time because of government backing. It supported almost $35 billion in financing before the program ended last September.

The DOE is still being pummeled by the GOP for these activities. They are now moving beyond Solyndra to question whether the agency should have supported First Solar’s plants because they aren’t "unique."

Last year, the U.S. Treasury’s Federal Financing Bank was the biggest asset-finance lender for renewable energy companies, arranging 12 deals worth $11.2 billion, according to New Energy Finance. It was followed by BNDES, Brazil’s development bank, and Bank of America and Banco Santander SA.

This is just the beginning. Institutional investors such as pension funds, insurance companies, corporations, utilities are all seeing the benefits.

Investors also benefit from the renewable energy Production Tax Credit (PTC), which expires at the end of this year for all renewable energies other than solar. The Senate voted down an amendment to the Transportation bill which would have extended the PTC for another year, and it will come again for a vote.

The boom and bust cycle for the PTC, approved for several years and then allowed to expire, has been holding back growth of the US renewable energy industry.

President Obama includes a permanent renewable energy PTC in his corporate tax reform plan.

Of course, all the benefits for investors also apply to other kinds of renewable energy, particularly wind.

Banks would rather lend to wind projects that can be built in 12-18 months than to nuclear plants, which take 10-15 years to build. And wind plants don’t have the very real long term safety issues that nuclear plants do.