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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Buffet’s Solar “Insurance” Coup In Nevada

Warren Buffet is generally regarded as something of a demi-god in investing circles. Most of the praise comes for his stock picking abilities though, rather than for his ability to select good managers at good companies and give them the freedom to run those firms well. That acumen is a critical component of Berkshire’s success, as one of Buffet’s portfolio companies recently demonstrated.

Nevada utility company NV Energy is ideally positioned to benefit from solar power. Nevada is one of those states with a lot of sun, a lot of land, and not many people. The Nevada wilderness is a great place to economically develop large scale solar projects. The cheap cost of land, abundant sunshine, and lack of serious environmental obstacles are all a boon for NV Energy – so much so that the firm just signed a deal to buy solar power at an unbelievably cheap rate of less than 4 cent per kWh.

The deal was made possible by a more streamlined and efficient regulatory process, and in many respects it shows just how far neighboring California has deteriorated from an ease-of-business standpoint. The same project that NV Energy will now patronize in Nevada, could have been built in California, were it not for a series of perplexing road blocks to solar power in the Mojave Desert that apparently even have some environmentalists confused. Related: The Broken Payment Model That Costs The Oil Industry Millions

Overall NV Energy’s deal is heralding a new day in solar power. As industrial scale solar continues to become more and more efficient, the power source will likely become a bigger and bigger contributor to the overall needs of the U.S. energy grid. At $0.03-$0.04 per kilowatt hour, NV Energy’s solar generation cost is competitive with any other source of power on the market today. Forget about the environment here, the deal makes sense from a purely business point of view. This was a great move on the part of Buffet’s lieutenants.

But in addition to the profit value of generating power at this price point, the deal has another big benefit for NV Energy; it can be used to start squashing the complaints about NV Energy’s roof top solar program. The basic idea with roof top solar is that a solar panel is put on a person’s roof and then connected to the energy grid so that the individual has power when the sun is not shining. Under the policy of net metering, the utility company is forced to buy excess solar energy generated at a set price. Related: Is France Ready To Move Away From Nuclear Energy?

NV Energy has come under attack for being slow to let customers hook their solar panels to the grid. The company is obligated to buy power from customers at $0.06 per kWh. This new deal should let the company cut that price over time. NV Energy will now be able to point to this project and ask state regulators the natural question of why it should be forced to favor rooftop solar over large-scale solar. That disparity will likely be difficult for regulators to defend.

In addition, the new project should also help NV with another issue related to rooftop solar. Rooftop solar companies and residents have been complaining that NV Energy is looking at charging a grid connection fee to residents regardless of energy usage. SolarCity and others may not like the idea, but economically the principle is sound. Related: Greenpeace Going All Out To Stop Shell Drilling In The Arctic

NV Energy and other power companies provide utility lines and essentially a form of insurance to homeowners (if your power goes out you can draw from the grid). They have to be paid for this service even when the insurance is not used, otherwise they won’t supply it. With so much additional environmentally-friendly solar power on the books, NV should have an easier time asking regulators to allow such fees in the future on an economic basis without consideration of the irrelevant environmental issues.

Of course, all of these actions by NV Energy could have an unexpected beneficiary: Tesla, through its PowerWall system. That is an issue for another time though.

By Michael McDonald for Oilprice.com

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