Why Buffett Invested in Solar
With oil prices down so much over the last year, you have to wonder why someone as smart as Warren Buffett would make a large investment in solar energy. But the fact is he has. Berkshire Hathaway has spent more than $1 billion on developing solar farms, including building a huge array at Agua Caliente in Yuma, Arizona.
The question is why.
Let’s start by looking at electric vehicles
Despite the recent fall in global crude oil prices, gasoline in America is still expensive – and it’s even more expensive in overseas markets such as Europe. Let’s assume that you have an incredibly efficient car with a regular internal combustion engine that runs on gasoline. If you do, you’ll probably get around 35 miles per gallon. At current gas prices in the United States, that means that you are still paying in the region of 10 cents for every mile that you drive. In comparison, utilities in Southwestern United States are purchasing electricity from solar farms at around seven cents a kilowatt hour. For a good electric vehicle, that equates to a cost of about two cents a mile – or 20% of the cost of gasoline.
More efficient than biofuels
Another way of looking at this is to consider how much energy you can generate from an acre of land. The amount it can produce varies widely depending on what you do. For example, an acre in a sunny climate can probably produce around 500 gallons of ethanol if you grow corn on it. That’s about as much energy as you would find in 350 gallons of gasoline. So, an acre will get you enough energy to travel a little more than 12,000 miles – or about 33 miles a day, just enough for a short commute. On the other hand, if you look at Buffett’s Agua Caliente facility, it’s generating about 100 times as much energy per acre. In other words, if you assume that the electric car is as efficient as a gas-powered car – and it’s actually more efficient – then one acre is going to let you drive for 1.2 million miles. That’s about 50 times around the earth.
Solar costs are still coming down
One of the big issues in the past with solar power was that solar panels where incredibly expensive. They still aren’t cheap, but the truth is that prices have been falling significantly and relatively steadily since 1985. There are also new technologies on the horizon that promise to reduce that cost even further – by as much as 90%. Even now, the cost of solar energy is starting to approach the wholesale cost of electricity generated from natural gas. In some areas in the United States, solar energy is even cheaper than electricity from gas. This means that even big power companies are going to start to vastly increase their investment in solar over the next few years, either by building their own arrays, or by entering into power purchase agreements with other companies – such as Buffett’s.
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