Can Yieldcos Reduce the Risk of Solar Financing?

With the cost of utility-scale solar power approaching grid parity in many parts of the United States, a key barrier to growth is cheap, easy access to capital. Yieldcos are poised to play a significant role in this growth over the coming years.

These publicly traded corporations allow everyone from mutual funds to individual investors the chance to own and earn a healthy return on power-producing assets such as solar plants. Furthermore, the funds generated by these yieldcos can be used to develop new solar projects.

While there have been a handful of purely renewable energy yieldcos launched to date, the most successful example is NRG Yield, which contains a blend of renewable and conventional assets.

SunEdison announced its intention to launch a yieldco in a public filing with the Securities and Exchange Commissionon Dec. 12. This offering will consist solely of solar assets, making it the first “pure-play” solar yieldco to hit the market. The solar industry is watching this closely to see whether other companies will adopt this model.

How Risky Is Solar Power?

In many respects, solar power is an incredibly safe investment. The amount of sunlight at a site from one year to the next is highly predictable. There is no risk of fuel price fluctuations. There are no moving parts in the equipment. And both the equipment and the purchase of power are typically guaranteed over very long time periods.

Yet the cost of capital for utility-scale solar projects remains stubbornly high. The large investors capable of financing these projects demand a high rate of return, largely because of a perception of risk due to the lack of historical data on these projects.

As McKinsey notes in its report, “The Disruptive Potential of Solar Energy,” there is a large, underutilized market of investors, both individuals and institutions, willing to buy into solar projects at lower rates of return and thereby drive the cost of financing down.

Companies like SolarCity and Solar Mosaic are successfully demonstrating this demand in small- and medium-scale projects. However, when it comes to large, utility-scale solar projects, there has, until recently, been no easy way for smaller institutional or individual investors to get involved.

Can Yieldcos Reduce Solar Industry Risk?

Yieldcos are a simple solution to the problem of solar industry risk.  These yield-oriented public corporations consist of a portfolio of power-generating assets that provide a steady stream of revenues to shareholders in the form of dividends. The Rocky Mountains Institute, in a recent report on yieldcos, noted that typical yields are between 5 and 7 percent. Companies can use the funds raised from issuing shares to expand the portfolios by developing or purchasing additional power sources.

In the last 12 months, this concept has taken off among producers of renewable energy. TransAlta Renewables and Pattern Energy Group launched “pure-play” renewables yieldcos, consisting of wind and hydro assets located across North and South America, in Aug. 2013 and Sept. 2013 respectively. SunEdison announced in a press release on Feb. 18 that it has submitted a proposal for a pure solar yieldco to the Securities and Exchange Commission.

Will NRG Yield’s Approach Succeed?

NRG, which launched NRG Yield in July 2013, has taken a different approach, creating a blended portfolio of approximately 30 percent renewable (solar) and 70 percent conventional (natural gas) power plants. While yieldcos are subject to corporate tax, Kirk Andrews, CFO of NRG, said in an interview that NRG Yield’sasset mix has been optimized to balance the tax credits generated by renewable assets with the tax appetite provided by the conventional assets.

Real estate investment trusts (REITs) and master limited partnerships (MLPs) are two other types of securities that have a similar structure to yieldcos, with the added benefit that they are exempt from corporate tax. Yet legislative action is necessary before these options can be made available to renewable energy. Such action seems increasingly unlikely given the gridlock in Washington.

Andrews said that NRG Yield has all the benefits of REITs or MLPs with none of the associated uncertainty. “We had immediate needs and we saw an opportunity. We didn’t feel the need to wait for legislative action.”

Press releases from NRG Yield show that NRG received net proceeds of $468 million from its initial public offering for investors. Since listing at $22 a share in July 2013, NRG Yield has shot up in price, hitting $42 a share on April 3. The relatively low current dividend of 3.4 percent is, Andrews said, indicative that “investors have a degree of confidence that we can grow that dividend on a more robust basis than our competitors.”

NRG Yield was created with an aggressive roadmap for growth that included the right of first offer for six large conventional and renewable power assets under development by NRG. It is in the process of purchasing three of these six assets, increasing its portfolio by over 50 percent. NRG's recent acquisition of Edison Mission Energy has opened up an additional 1.6 GW of wind and natural gas power for incorporation into NRG Yield.

Given the success of NRG Yield, Andrews said that it is little surprise that other major power producers such as NextEra are considering following similar models, blending renewable and conventional assets.

Will SunEdison’s Pure-Play Yieldco Appeal to Investors?

SunEdison filed its intention to create a pure-play solar yieldco with the Securities and Exchange Commission on Dec. 12. On April 2, SunEdison issued a press release announcing that it had secured $250 million in financing from Goldman Sachs to finance the initial public offering.

SunEdison CFO Brian Wuebbels, in recent interview with Reuters, indicated that the launch of SunEdison Yieldco is expected to take place in the second quarter of 2014 and could raise $300 million for SunEdison.

Other solar developers are certainly taking notice. SunPower’s CEO mentioned on his 2013 earnings call that they are considering launching their own yieldco in late 2015, while other companies including Canadian Solar, Jinko Solar, and First Solar have also announced that they are looking into this model.

The promise of solar yieldcos is that their stable returns and green credentials will create strong demand among investors and spur additional growth in the solar industry by delivering cheap and reliable funding to developers. As the first real test of this model, the stakes are high for SunEdison to prove its success.

Solar yieldcos lacks the tax-optimized characteristics of blended portfolios such as NRG Yield. As a result, they are inherently less efficient in financing new solar projects. On the other hand, much of NRG Yield’s growth comes in the form of non-renewable assets. It remains to be seen which model will prove more effective in spurring growth of solar power and to what extent other companies will follow the approach of NRG or SunEdison.

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