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Another Sweet deal for Buffett – Who pays? You do!
Yesterday, First Solar (FSLR) announced that it had sold its interests in a big solar project called Topaz. The buyer was MidAmerican Energy Holdings, a subsidiary of Berkshire Hathaway. So Warren B. is behind the transaction. I think he got another sweetheart deal. This time, it’s the taxpayers who will be making Buffett richer.
The transaction is between two companies. As a result there has been little disclosure of the actual terms and conditions. The following is my thinking on what is behind the transaction. If I have it wrong, the nice folks from Omaha can send me a note and I’ll publish their response.
There are a number of angles to consider in this story. I’ll outline a few and try to tie them together.
The Topaz solar project is in San Lois Obispo, California. Construction began a month ago, and will not be completed until 2015. The facility is designed to produce 550MW of energy. The cost per MW of these types of facilities is between $3mm and $4mm per MW. Using the mid point of $3.5mm you get an estimated cost of construction of $1.925 billion. Add in another $75mm of soft costs and the total should come to $2 billion.
Bloomberg confirms my estimate on the completion costs of Topaz with this headline.
Buffett has purchased the rights to build a solar farm. The money he is putting up will be the construction costs over the next four years. First Solar will get some consideration as it has absorbed all the front-end costs, but it would be a mistake to assume that FSLR is getting anything close to $2B from Buffet. (Neither of the press releases from the companies mentions cash consideration.)
Buffett’s only condition to the deal is that the Power Purchase Agreement ("PPA") that Topaz has previously entered into is affirmed to Berkshire’s lawyer’s satisfaction. This is a critical part of the deal.
California’s monster electric utility, Pacific Gas & Electric (PGE), has entered into a 25 year PPA with Topaz. With PGE taking all of the power from Topaz, the risks in the deal fall sharply. The output of Topaz has already been successfully monetized. All that needs be done is complete the construction and then let the sun shine.
It’s important to understand that Uncle Warren has a seat at this table because the Department of Energy failed to approve a big loan to Topaz prior to 9/30/2011 (the deadline to get federal subsidies). The DOE did substantial work before nixing the deal. This PDF link to the DOE shows just how much had been accomplished prior to 9/30. (How much did this report cost the DOE/us? Many millions.) All of the necessary approvals and engineering work had been completed. Construction of these solar farms is not all that complicated once the approvals and site work has been signed off on. Buffet got a deal that was teed up and ready to go. Construction commenced a month ago. Warren bought into a deal in the 11th hour. He got a shovel ready investment. He has very little risk at this point.
When Topaz is completed, energy will be produced. Pursuant to the PPA Topaz/Buffet will receive checks monthly from PGE for the next 25 years. That stream of revenue is assured. PGE is a single A. Its long-term debt yields are in the mid 4% range. I’m certain that Buffet got a better yield than that. But the yield is not what brought Buffet into the deal. It was taxes and his desire to avoid them that got this deal inked. Again, that Bloomberg Headline:
It's clear that as part of the deal, Buffett got the tax breaks associated with Topaz. The federal tax subsidies for solar construction belong to Buffett. The numbers are huge.
Once completed, the owners of a solar farm get one of two massive incentive payments:
1) The owner gets a cash grant equal to 30% of the construction cost, or;
2) The owner gets a break on their federal taxes equal to (get this) 100% of the cost of the project. This “Bonus tax deduction” can be used to reduce federal taxes in the year that that the project is first completed.
Berkshire Hathaway paid 29% taxes in 2010. This would imply that it would opt for the cash payment of 30% ($600MM!). But BRK is actually faced with a statutory tax rate of 35%. Therefore the value of the tax reduction could be as high as $700mm. (Warren can engineer any income necessary to max out the tax deduction.)
The PPA with PGE will return all of Buffett’s $2B of investment plus a return of at least 5%. But when you add into the calculation that in four years Buffett gets a mega tax-break the implied returns soar. I did an IRR assuming a 2015 construction completion, $2b cost and a 25-year payback. It comes to a return of 15 -17% pa.
This monster result is exclusively the result of the tax breaks Buffet will enjoy. In other words, “you” are making Warren richer.
Notes:
As I indicated, the PPA with PGE is central to Buffett’s investment. It’s important to understand why PGE has stepped up to facilitate Topaz. California (and 30 other states) have passed laws that mandate that electric utilities MUST produce or acquire a percentage of their electricity from alternative sources. In California. Executive order S-14-08 mandates that 30% of all power sold in California must come from alternative sources by the years 2020. This means that PGE is in a bind. It HAS to have alternative energy or it can’t grow. So PGE came into the Topaz deal desperate for a supply of power that did not come from fossil fuels. Topaz solved (in part) PGE’s problems.
There is one technical aspect to the Buffet/Topaz deal that I don’t quite understand. The rules on the tax breaks/rebate are very clear. Not less than 5% of construction must have been completed by 9/30/2011 in order to qualify for the subsidies. As I have indicated, construction of Topaz did not commence until November. It would appear that the requirements for the subsidies has not been met. The possibility exists that the DOE agreed to allow for the subsidy and waived the 9/30 deadline. Another possibility is that the DOE gave credit toward the 5% completion by allowing for the pre-construction soft costs of the project. If it's the latter, I’m confused. Other projects that I’m aware of did not get credit for pre-construction soft costs. One additional possibility is a waiver of the completion requirements was granted, AKA "Side Deal".
When the DOE money did not come through, it must have been a big blow to the White House. Topaz was a big prize for them. I wonder if Obama called his pal Buffett and asked for a "fix". Warren B. delivered. But, as usual, he charged a pound of flesh. Obama got what he wanted. He avoided another solar disaster when WB stepped in.
Summary:
-Buffett gets another sweetheart deal that makes him richer.
-PGE gets a long-term supply of alternative energy that allows them to grow for a few more decades.
-First Solar gets out of a huge headache. It gets get to sell solar panels to Topaz.
-The citizens of California that will use this power will get nothing. They will continue to pay the highest rates for electricity in the country.
-The US tax payers foot the bill for another $600 - $700mm. That's the "Vig" for Warren. Those taxpayers also get nothing in return.
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The early 70's was the worst time in the U.S. for smog. One of the (many) really annoying things about organized environmentalism is that it's allergic to admitting that anything is getting better or works, even when they had a hand in it!
In fact, Enron had only a tiny piece of the market and had little effect on power rates.
The proper term would be "fast fiat currency". If it were gold and silver coin, Warren Buffett probably wouldn't be so generous. Since the currency is not money, he is providing borrowed debt. Back when this was a nation of laws, that was called Felony Fraud.
http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/
This is just same old, same old (ulter-rich man gets sweetheart gov't deal. Who woulda thunk?). The more important issue is this:
"The facility is designed to produce 550MW of energy" (Which is probably max designed production, which it will never achieve, certainly not when it's night over over cast).
"California uses 265,000 Gigawatt-hours of electricity per year" (Which is current usage, not 2015 projections).
Any subsidies of solarpower are money pissed down the drain. Until there is a workable solution for intermittancy, every dollar in "renewables" is a dollar wasted. And that's not even considering the hysterical notion of moving to an all-electric vehicle fleet.
See my comment above. Intermittancy is not the issue. Peak power is. Because peak electricity demands occur in the summer when solar is also at peak power, the installation of solar plants and residential roof solar has much more value than simply replacing the price per kw of fossile sources. It eliminates the need to build new plants, all of which generate power at much higher cost than legacy plants do with their sunk costs.
"Intermittancy is not the issue"
Sure it is. When a cloud formation rolls over the solar farm the power output takes a dive. They need to have gas fired Generators spooled up to deal with this issue. unless they can put in a significant solid state power storage system to address this issue.
" It eliminates the need to build new plants"
No, it just eliminates the Green lobbiest from causing propblems for the power companies. Its just money poured into a PR campaign and nothing to do with real savings.
The US tax payers foot the bill for another $600 - $700mm...
The citizens of California that will use this power will get nothing. They will continue to pay the highest rates for electricity in the country.
Bingo. You've nailed the business model of ALL public-private partnerships there Brucie Babe
Consumers: Losers
Taxpayers: Losers
Private interests: Fat monopolist Winners
Politicians: Brown Envelopes for Life
Govt : the Biggest criminal racket in History
As I always say, "government" is the most organized form of crime, but with cheaper suits.
Beware of anyone who demand PERCENTAGE of your earnings:
Churches, Government, Banks
In the spirit of regularly shooting itself in whichever foot is least lame, California just joined with the EU to label oil sands products "dirty fuel":
http://www.vancouversun.com/business/California+backs+plan+label+oilsands+products+dirty+fuel/5824529/story.html
In addition, a proposed state ballot initiative for 2012 would shut down the two nuclear plants that generate 16% of the state's electicity:
http://articles.latimes.com/2011/nov/26/local/la-me-nuclear-plants-20111126
But don't anyone dare suggest we go without a smartphone, iPad or use public transportation. This is California, after all. The land of sunshine and breezes.
Hahahaha ... if I was governor of CA, I would just tell the nuke plants to shut off all production. Just cut em off. Then, when a portion of the state has to throw out two weeks worth of spoiled food from fridges and can't surf the net, maybe they might realize keeping the nukes is a good idea.
CA is so fugged up.
Regards,
Cooter
How about some new slogans?
California! Cause and effect is for the little states!
California! Care enough to be oblivious!
California! We're dumb as posts but it's still sunnier here!
Until a major e-quake hits knocking out the nukes plant cooling system. The bad\good news is that spoiled food with be least of their problems.
Putting nuke planets on fault lines and too close to the sea with high tsunami risks is just plain stupid. Most of Calfornia's nuke plants have serious design issues and should have been rebuilt, fixed, or replaced decades ago, but there is no money for that. Now California lives under the sword with a frayed string. Prayer and Hope is the California way! What happen to Japan is comming to Calfornia when fault line in Los Angeles lets go.
"CA is so fugged up."
As a Californian, I agree.
I too hail from the People's Republic, the Winter Home of the Great Satan and heartily concurr with it being fucked up.
Unlike any other part of the US.
(Right)
But solace, for as goes California, so too goes the United States.
Adapt well....
:)
Unt Von Gunt Buffet scores again
Please DIE already!
Buffett, Obama and Corzine - Democrats.
Abramoff, Cheney, Bush, Nixon - Republicans.
Your point is what?
The brainless blundering fuck has no point. Any true partisan is a fucking lie.
LOL! Look at the Muslim giving evil Buffert his medal for being a top scum bag.
It's Cheney, posting from inside his iron lung. Not much to do in there.
er, both parties stink the country out?!!
My guess is that if you look at windmill subsidies to GE, taxpayers are getting equally screwed.
GE - another friend of the Democrat muslim. Democrats = Buffet, the muslim, Jon Corzine, Madoff, Jamie Dimon, Soros, and lots of other shit.
Here is the "Average Retail Price of Electricity to Residential Customers by State August 2011 (Cents per Kilowatthour)" for those interested from Table 5.6.A.
Washington 8.4
Idaho 8.64
Kentucky 9.13
Louisiana 9.42
Wyoming 9.47
Arkansas 9.54
Utah 9.58
West Virginia 9.7
South Dakota 9.81
Oklahoma 9.82
Oregon 9.82
North Dakota 10.07
Mississippi 10.1
Indiana 10.11
Tennessee 10.11
Montana 10.36
North Carolina 10.56
Nebraska 10.63
Kansas 11.16
South Carolina 11.27
Iowa 11.3
Mountain 11.33
Texas 11.33
Missouri 11.46
Virginia 11.46
Nevada 11.52
Alabama 11.56
Illinois 11.57
Minnesota 11.58
Arizona 11.67
Florida 11.85
Ohio 12.12
Georgia 12.2
Colorado 12.21
New Mexico 12.38
D. of Columbia 13.06
Wisconsin 13.14
Maryland 13.59
Pennsylvania 13.74
Delaware 13.76
Michigan 13.96
Rhode Island 14.27
Massachusetts 15.29
Maine 15.33
California 15.6
Vermont 16.34
New Hampshire 16.46
New Jersey 16.65
Connecticut 17.76
Alaska 18.67
New York 19.25
Hawaii 36.98
(SOURCE)
I was looking up my rate just a couple weeks ago, relative to other states, because I am 100% hydropower (very common in AK, see this) and I wanted to know how it compared. For the record, my rates are ~.09/KwHr in the summer and ~.11/KwHr in the winter. This is pretty good right now, but as fossil fuel sources are constrained (e.g. escalating coal costs, etc), it will begin to outperform since the costs are already sunk for energy production.
Regards,
Cooter
I wonder what the cost is to go off-grid? You might at least break even in Hawaii.
The prices you list exclude pollution costs.
The prices you list exclude pollution costs.
As does all the Chinese shit you buy at Wallmart.
Cheap wages and pollute for free; that's why our Corporate Masters have abandoned us.
New York, that bastion of regulation, Law and socialist democracy the most expensive energy in America
What a 'shock-horror' surprise!
...and Washington, at half the price, the cheapest in America... Govt subsidies anyone?
The prices track pretty closely to the more densely populated areas. I suspect most of the variation is based on costs to maintain the infrastructure.
(Obviously HI is an outlier because they have fly or ship in all the kilowatt/hours.)
Why wouldn't they harness all that geothermal energy they're sitting on?
Really?
Because in the USA, you can't get financing for power plants. Coal's cheaper.
If you mean Washington state, its the cheap hydro-power. DC is in the middle of the pack.
Because of shipping costs in AK (remote areas), those that do not have hydro yet pay very high rates to bring in coal (or mine coal locally). Some places have NatGas near by, but those fields are mostly tapped out. They just found a big field near Anchorage, so that will help them a lot. Diesel generators for residential and commercial power is not uncommon in the smaller towns (Anchorage is 250k, Fairbanks is 30k, Juneau is 30k, and it gets very small very quick after that). That is why my hydro link had so many small MW projects listed, its for those small towns.
If any of you out there have big piles of money looking for a home, you might want to look at capital intensive projects for hydro power in small wealth producing towns in AK.
Regards,
Cooter
Corruption
And I pay MidAmerican Energy monthly. Ah Fuck! I hate Buffet and Obama. Come to think of it, I don't like Biden, Pelosi, Reid and Fienstein much either.
OOOOO Im so mad. Bombshell bitchezzzzz coming out of the woodwork. One question. You say "who pays? You do". Who the fuck is you? Is it me or is it you? Im me. Are you you? If im am you, Then you are me. But you are not me. You are you. That means you do. Not me.
Well, I'm kicking in a few bucks. I think most are.
And every buck you have kicked in has supported the system in the same way that even Ron Paul for all his best effort has too. Buffet is a looter like the rest of them, his total weight in slime is far greater for being integral to the system than for just making another morally corrupt deal on the back of the taxpayers.
Ok, then its we are, Not "you are.".. Now that sounds much better. Correct? . Remember what Mike Corleone said. " We are all part of the same hypocrisy"
We are all part of the same hypocrisy"....SENATOR...
Buffet is just a senile old man who got co-opted and abused unwillingly by the PigMen.
"I think that makes he's a predator."
I think it makes him a Capitalist.
Yes Hamy
we can see precisely how "co-opted unwillingly" Buffet is by the measure of the big cheesy Cheshire cat grin he can't wipe off his puffy face in the photo above receiving a medal from that Trotski Tosser, your President, Barack Obumma
no doubt he was forced at gunpoint to the ceremony too eh Hamy
Your are delusional. Buffett has always been a scumbag. His old man was a senator. Buffett loves the muslim.
LOL
Not often you see a troll fall for troll-bait. Good one, Hamy!
Another major player in the kleptocracy.
suprizingly nauesating.
covert3.wordpress.com
Luk 12:17 And he thought within himself, saying, What shall I do, because I have no room where to bestow my fruits?
Luk 12:18 And he said, This will I do: I will pull down my barns, and build greater; and there will I bestow all my fruits and my goods.
Luk 12:19 And I will say to my soul, Soul, thou hast much goods laid up for many years; take thine ease, eat, drink, [and] be merry.
Luk 12:20 But God said unto him, [Thou] fool, this night thy soul shall be required of thee: then whose shall those things be, which thou hast provided?
James 5: 1 Come now, you rich, weep and howl for your miseries that are coming upon you! 2 Your riches are corrupted, and your garments are moth-eaten. 3 Your gold and silver are corroded, and their corrosion will be a witness against you and will eat your flesh like fire. You have heaped up treasure in the last days. 4 Indeed the wages of the laborers who mowed your fields, which you kept back by fraud, cry out; and the cries of the reapers have reached the ears of the Lord of Sabaoth.5 You have lived on the earth in pleasure and luxury; you have fattened your hearts as in a day of slaughter. 6 You have condemned, you have murdered the just; he does not resist you.