Warren Buffett is backing solar power – and so should you

I’m writing this sitting on the deck of the Crystal Serenity, the rather wonderful cruise ship hosting the very first MoneyWeek cruise.

We’ve been at sea since Saturday, and it’s been a lot of fun so far. Great company, great food, great weather – not to mention the opportunity to discuss investment with the likes of Tim Price, Merryn and James Ferguson.

I’d thoroughly recommend it – we’ll let you know details of any repeat events as soon as we have them.

Anyway, maybe it’s all this sun – or maybe it’s the fact that Warren Buffett is threatening to invest $15bn in the sector – but this morning I want to spend a bit of time looking at the solar power industry.

The days of the traditional utility are numbered

Warren Buffett has already invested $15bn in solar and wind technology, according to Bloomberg. And at the Edison Electric Institute’s annual convention in Las Vegas last week, he suggested that he plans to invest $15bn more.

Now, whatever your opinion of Buffett, you’ve got to admit that he’s a smart investor – he’s more than willing to acknowledge that government subsidies are one of the things that make the renewable energy sector attractive to him, but he clearly believes that those subsidies will continue to make the sector worthwhile.

Last month, meanwhile, analysts at Barclays went as far as to downgrade the entire traditional utilities sector in the US. The bank believes that there’s a serious long-term threat to their business models from the burgeoning solar power business.

This threat boils down to two things: improvements in solar efficiency itself, and improvements in energy storage technology.

If consumers can get energy from solar panels on their roofs, and also store it for when it’s not sunny, then they don’t need to get it from the traditional providers pumping it down a grid to them.

As Rob Wile notes on Business Insider, “what if you could truly power up your home through a solar-charged battery and only have to buy utility electricity in an emergency?”

The big issue here, of course, is cost: solar power is expensive; battery storage is expensive. But the costs are coming down all the time. Solar panels keep getting cheaper and more efficient, and as more and more are installed, and demand keeps growing, that will just continue.

Homeowners and property developers in the US installed around 1.33 gigawatts of solar panels in the first three months of the year. That was up nearly 80% year-on-year, according to the Solar Energy Industries Association. It was also the first time that residential installation had exceeded installations by government and businesses.

Storage is getting cheaper too. Barclays reckons the cost of a battery has fallen from around $17,000 in 2009 to just $3,700 now. And with electric vehicles becoming more popular, there’s the potential for a battery that will run your car while you’re on the road, and double up as a charging station for your house when it’s not.

According to Barclays: “the cost of solar plus storage for residential consumers of electricity is already competitive with the price of utility grid power in Hawaii”.

To be fair, this is because Hawaii has the most expensive electricity in the US, and plenty of sunshine. But the point is, none of that is going to change. Around 10% of Hawaiians are using solar power, according to Jeremy Hobson of Here and Now (a Boston radio show). That’s already starting to make life tricky for local utilities.

Barclays reckons that California could reach the same point by 2017, with New York and Arizona following in 2018 “and many other states soon after”.

A huge vote of confidence for solar power

The problem for utilities – as Barclays puts it – is the risk of a ‘defection spiral’. As more people leave the grid, utilities’ costs will rise. They still have to maintain the grid, after all, but they’re not selling as much power via it. That’ll make power more expensive for existing grid users, which in turn will accelerate the point at which solar plus storage is more cost-effective than grid energy.

The team at Barclays is talking specifically about corporate bonds issued by US utility providers, and warning that the stable, monopoly-backed returns investors have come to expect from these companies are now under threat.

Now, I doubt that many of you have exposure to bonds issued by US utility companies, so this isn’t a ‘sell’ warning. To me, the interesting thing about this report is the fact that the Barclays team felt strongly enough to downgrade the entire sector. That’s a clear vote of confidence in the evolution of solar power.

So how could you profit from this?

Josh Brown of the Reformed Broker website likes First Solar (Nasdaq: FSLR) and SunPower (Nasdaq: SPWR), which he describes as “full-service construction and engineering firms that are selling into everything from consumer rooftop systems to massive electric utility projects”.

If you’re looking for more detailed ideas, we discuss solar stocks – and their disruptive power – in more detail in our most recent research report on ‘crowdpower’. Take a look at it here if you haven’t already.

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    The Trillion Fund (peer-to-project lending) looks interesting for those who are after income rather than capital gain.