Buffett's Green Sure Thing - Topaz

In December of 2011, MidAmerica Energy Holdings, a subsidiary of Berkshire Hathaway purchased a large solar PV project called Topaz from First Solar.  The project is a 550 megawatt solar farm being built in California with an estimated completion date of 2015.  First Solar work included an approved EIS and a 25 year PPA (purchase power agreement) with PG&E. The price of the transaction was not disclosed.  In my opinion, the price was likely quite low.  First Solar was unable to finance the project itself, however, First Solar will benefit handsomely from the sale because of its Engineering and Construction Contract and its Operating and Maintenance Contract with MidAmerica.  In addition, it is likely that the solar panels used in the project will be First Solar products.  MidAmerica is financing 50% of the project through bonds.  I have researched the project and it appears that Buffett made a very good deal (Bruce Krasting wrote a very interesting blog about this project in December of 2011.  See the link http://brucekrasting.blogspot.com/2011/12/another-sweet-deal-for-buffett-who-pays.html ).


I have run the project economics using public information available.  For the Low Case, I calculated an IRR of 9.21%. For my Base Case, I calculated an IRR of 10.66% (Below is a list of my assumptions and data sources).  I believe the project has substantial upside potential and little downside risk.

• The 2.4 billion project cost may be high.  Some sources have reported only $2 billion  (Just for the heck of it I ran the economics at 2 Billion instead of my assumption of 2.4 billion and got an IRR of almost 15%).
• The PPA is reported at $.015 per kilowatt hour.  Most of these PPAs have escalators associated with them.  If MidAmerica was able to negotiate a PPA in which the spread between PPA revenue and O&M cost increases over time, the project will return a higher IRR than I have calculated
• It quite possible that the efficiency factor is greater than the 20-25% that I have assumed.  Again this produces upside potential 
• I have assumed an effective tax rate of 45% which may be high  

The only downside to the project that I can see is the life of the solar panels.  It is unclear whether the panels are warranted for the life of the project under the O&M contract or by another agreement.

The reasons that the economics work for this project are:

• 30% tax credit for MidAmerica when the project begins operations
• The PPA with PG&E that assures:
• A home for the energy produced for the life of the project
• A price for the energy which could only be achieved with the help of the State of California's Renewable Portfolio Standards law (Watch for an upcoming blog that describes in detail RPS which is in essence a back door method to achieve the goals of Cap and Trade).

In summary this project will result in a lot of "green" for MidAmerica.  In my opinion, unfortunately, the taxpayer and rate payer will help fund a project that would otherwise not have been built.

Assumptions

• Total Project Cost 2.4 Billion
• Source: Topaz Solar Farm Revised CUP – website as follows:

 http://www.slocounty.ca.gov/Assets/PL/Optisolar-Topaz+Solar+Farm/Documents/Application+Resubmittal+06-09/03-Topaz+Revised+CUP+-+Project+Description.pdf

• 1.2 Billion Financed at 5.75 %
• Loan amortized over 25 years
• Level payments of 91.69 per year (my assumption, actual may be different)

Source: NREL article – website https://financere.nrel.gov/finance/content/midamerican-solar-thin-film-utility-scale-project-Topaz-550-MW-megawatt-bond-financing

Note Details of finance not fully described

• PPA
• Done deal with PG&E
• $150/MegawattHr -  (.015/kwh)
• 25 Years

Source: NREL article

Note: PPAs generally have an escalator based upon inflation.  I have chosen to ignore the escalator and ignore the escalator in O&M costs shown below 

• O&M Costs
• Contract caps at $16.5 million/yr with escalator for inflation

Note: this figure is far below O&M costs estimated for solar PV projects estimated by DOE in its Renewable LEV Report

Construction risk low because of E&C contract – NREL article

• Efficiency Factor
• Revised CUP document pegs at 20.76% (page 12 “project will deliver on average over 1 million megawatt hours/yr).  I have used this efficiency factor for the low case
• DOE report on renewable LEV indicates a 25% factor.  I have used this in the base case scenario
• I have assumed that for tax purposes the entire project is written off on a 5 year basis from time of start up
• I have assumed a 45% effective tax rate (35 Fed, 10 California).  I am not at tax expert, so I assumed the worst case scenario.  The actual effective tax rate may be lower.
• 30% federal tax credit taken in year of start up (based on 2.4 Billion Investment)