on February 27, 2017 11:52 am in Value Investing
Get The Full Warren Buffett Series in PDF
Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.
Solar in Omaha?
Warren Buffett has lived at the same house in Omaha for more than 50 years, which he bought in 1957 for $31,500.
We looked up the house on Google’s Project Sunroof, which analyzes a home’s rooftop for solar production potential and estimates savings based on utility costs in that area….ouch! The return on rooftop solar for Buffett is actually negative, which is primarily driven by the low cost of retail energy in Nebraska, which ranks #7 in the U.S. for the lowest cost of energy. Nebraska’s Solar Report Card shows a D with an internal rate of return of 4.4% due to low retail electricity rates and a lack of incentives. So the answer to our original question is a clear “No”, but are there lessons we can apply from Buffett’s investing philosophy to investing in solar energy?
Applying Buffett’s Investing Principles to the Solar Decision
Buffett has generated returns of 20.8% since 1965 for Berkshire compared to the S&P of 9.7% (that’s the difference between 127x and 8,884x), so there is a lot to learn from his investing style. Here are a few Buffett investment tips that we think apply to a homeowners decision to go solar.
Pay a Fair Price
“For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”
Solar can make a great investment in some states, such as New York, California and Massachusetts, where cash returns on solar can be greater than 15%, which compares favorably to the S&P. But these returns assume homeowners pay market prices and will decrease significantly if consumers overpay for solar. So it is important that consumers know how much solar costs and pay a fair price. Our review Q4 review of solar in California indicates that the median price per watt is just under $4.50.
Focus on Cash Flow and Use Conservative Assumptions
“In order to calculate intrinsic value, you take those cash flows that you expect to be generated and you discount them back to their present value – in our case, at the long-term Treasury rate.”
There is a lot of research on how solar panels increases home values, which should provide a homeowner comfort that they will recoup the costs of their solar panels if the decide to sell their home. However, the best approach to evaluate solar is to understand the cash utility savings and how those compare to your cash investment, loan or PPA payments. Furthermore, it is best to use very conservative assumptions regarding future utility rates – don’t buy solar panels if you will only start to realize savings in 5 years assuming utility rates increase at 10% a year. Focus on year one savings and assume 2%-3% utility rate increases.