Why Is Buffett Investing in Solar Power When China is Selling?

Marcus is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As the largest consumer of imported energy in the world with catastrophic environmental problems, the People’s Republic of China has quite naturally targeted solar energy as a major power source to develop.  But due to market difficulties, Beijing is now engineering a major consolidation of the solar power sector.    As China is pulling back from solar power, however, legendary investor Warren Buffett is doubling down, funneling billions more in the industry’s assets.

Over the last month, MidAmerican Energy Holdings, a power company controlled by Buffett’s Berkshire Hathaway (NYSE: BRK-A), reached an agreement to pay $2 billion to $2.5 billion to SunPower Corp (NASDAQ: SPWR) for two California solar projects.  That increases Buffett’s solar power holdings in California, as earlier a solar farm in San Luis Obispo was purchased by Berkshire Hathaway for $2 billion.  MidAmerican Energy Holdings also owns 49% of an Arizona solar point in a venture with NRG Energy and First Solar.

Like everything in life, investing and trading is a matter of timing.  While it is true that you cannot time the market, you can certainly wait for someone else to make most of the mistakes and profit from their experience.  That is why Buffett is expanding in solar power now as Beijing is being compelled by the forces of the market to contract.

Buffett is bullish on solar power.  So is the People’s Republic of China.  But each has fundamentally contrasting investing objectives.  Buffett wants to profit from solar power.  Beijing wants to dominate the market for energy derived from the sun.

That allows for Buffett to pick and choose from the best offerings, after the dust has settled in the sector.  For Beijing, it has to raise the winner from the ground up to full bloom.  There is a huge difference between the two: Buffett gets to select what he wants to buy to eat from the buffet of solar power companies that China helped put on the table.

The mere fact alone that Buffett is buying is bullish for solar power.  “The Oracle of Omaha” invests in companies that have solid cash flows in industries with wide economic moats.  An economic moat is the array of features for a company that shields its franchise (and profits) from the competition.  It can range from the power of a brand for a company such as Coca-Cola, Buffett’s largest stock position for Berkshire Hathaway, to the daunting regulatory and financial hurdles that protect a utility such as MidAmerican Energy Holdings.

Thanks to the oversupply in solar power panels due in large part to overproduction from Chinese companies as a result of the largesse of Beijing, many companies have now gone bankrupt or drastically curtailed operations.  As a result, inefficiencies in the industry are being competed away. The excess capacity in the industry is expected to be gone by the middle of the year, however.  

The timing for that is appealing as the demand for solar power is projected to increase.  There are six utility-projects underway in the sun-drenched Western region of the United States.  Incentives for consumers have also increased.

As a result of the glut in the industry, solar power is now a very competitive source of alternative energy.  According to the Solar Energy Industries Association (SEIA), growth in the United States from 2011 to 2012 for solar power usage was over 50%, from 1.9 gigawatts to 3.2 gigawatts.  By 2016, SEIA estimates it will more than double to 8 gigawatts.

For investors, the pullback by China is good news.  From that, supply and demand will prevail due to the reduced numbers of solar panels.  Greater demand from around the world will soak up that supply, raising prices in the industry.  With Warren Buffett buying, investors should be able to expect that to happen to the share prices for solar power companies, too.


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