Solar Scores a Big Win Over Nuclear

This article originally appeared on April 29, 2013, on Real Money. To read more content like this + see inside Jim Cramer's multi-million dollar portfolio for FREE. Click Here NOW.

The debate over costs is over. Solar power won. Nuclear power lost. If your utility wants to own a new power plant, a utility-grade solar farm is a better deal than a new nuclear power plant. Perhaps that's why Warren Buffett's Berkshire Hathaway ( BRK.A) is building the world's largest solar farm and not a new nuclear power plant.

Berkshire is building a massive utility-grade solar power facility, using off-the-shelf photovoltaic (PV) technology. Berkshire subsidiary MidAmerican Solar will own the facility, which is called the Antelope Valley Solar Projects. SunPower ( SPWR) designed and developed the project and will provide operations and maintenance services for the plants via a multiyear services agreement. Antelope Valley will provide renewable energy to Edison International's ( EIX) Southern California Edison under two long-term power purchase contracts.

To put Berkshire's newest investment in perspective, Antelope Valley is bigger than some nuclear power plants. With a nameplate rating of 579-megawatts, Antelope Valley is larger than Omaha Public Power's Fort Calhoun Station, NextEra Energy's ( NEE) Point Beach Nuclear Plant (unit 1), Xcel Energy's ( XEL) Prairie Island Nuclear Generating units, Xcel's Monticello Nuclear Generating Plant and Dominion Resources' ( D) defunct Kewaunee Power Station. Antelope Valley is about the same size as NextEra's Point Beach (unit 2), Exelon's ( EXC) Oyster Creek Nuclear Generating Station and Entergy's ( ETR) Vermont Yankee Nuclear Power Station.

Berkshire's costs are striking. Compared with a new nuclear power plant, Antelope Valley is a bargain. On capital expense, operating costs and levelized costs, solar is a better investment. Here are the numbers:
  • Nuclear: capex, $6 million per megawatt; production costs, $22 per megawatt-hour.
  • Solar: capex, $4 million per megawatt; production costs, $0 per megawatt-hour.

There is growing evidence that new nuclear power's "all-in" costs will be greater than $6 million per megawatt. There is also evidence their production costs are lower than the Nuclear Energy Institute's $22 per megawatt-hour.

Others argue that solar's capex has fallen below $4 million per megawatt. They also may want to add a dollar or two for production costs.

Tax benefits are not a differentiating factor. Solar receives a one-time investment tax credit and no production tax credits. But new nuclear units can receive production tax credits, and they are eligible for Solyndra-type federal loan guarantees.

On the revenue side, solar facilities operating in market-based grids are natural peaking and distributed generation facilities. As such, they need no batteries, they capture the day's higher prices, they naturally cease production during hours of low demand, and they can be located near population centers.

New nuclear plants cannot be built near large population centers such as New York, Chicago or Los Angeles. To service their customers, developers must include additional capital expense for miles of new transmission lines and substations. They also incur huge expenditures to access cooling water and to dump trillions of British thermal units of waste heat.

Solar is different. Solar produces no waste heat. Solar farms can be located near population centers and customers. Most solar projects need not invest in new transmission lines.

Nuclear and solar power are both environmentally friendly. Both are carbon-free. Neither source produces any greenhouse gases. Nuclear power even pays for its own waste disposal and liability insurance as part of its production cost.

But unlike solar, nuclear power projects present unacceptably high financial risks. Federal loan guarantees help keep project financing costs low, but they do not protect shareholders. As construction schedules slip and project costs creep upward, shareholders are left holding the bag. The problem is that nobody knows what is inside the bag until it is too late.

Just ask Kansas Gas & Electric, Kansas City Power & Light, Texas Utilities, Public Service Indiana, Long Island Lighting and several other nuclear utilities that lost their bets on nuclear power. While their investments were partially hedged against state rate bases, their shareholders were ultimately forced to sell the utilities for pennies on their original dollar. Even the federal government lost when the Tennessee Valley Authority suspended construction on two of its nuclear units.

The Oracle of Omaha is teaching investors another lesson. Nuclear may be an answer for national policymakers who seek reliable sources of baseload power. But solar is a better financial deal for investors.

On May 4, Real Money Pro's Doug Kass will appear at Berkshire's annual shareholders meeting. As a Berkshire Bear, Doug Kass will participate in a panel to discuss the company's performance with Warren Buffett and Charlie Munger. While Berkshire's holdings in utility assets are substantial, they represent only a small portion their overall portfolio. Check back with Real Money to see if Kass discussed energy with the Oracle.

At the time of publication the author had no position in any of the stocks mentioned.

Glenn Williams has more than 30 years of experience in power and fuels, including design, engineering, construction, startup and operations of large-scale power projects. He has had direct involvement with coal plants, natural gas facilities, and approximately half of the nation's nuclear power facilities and designs energy strategies for regulated and unregulated energy organizations. He received a bachelor's degree in electrical engineering from Northeastern University and a master's degree in technology management from the University of Maryland.

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