QuickTake Q&A: Yieldcos, Fuel for Energy Projects, Draw Scrutiny

Clean-power developers need a constant flow of money to build wind and solar farms and meet surging demand for renewables. Their traditional business model relies on borrowing capital for new power plants, selling them when they’re done or almost done, then using the proceeds to help fund the next one. Investors poured $329 billion into renewables worldwide last year, according to Bloomberg New Energy Finance. Growing clean-power investment got Wall Street’s attention, and investment banks saw an opportunity to create a cheaper and more efficient vehicle to finance that growth. The result was the yieldco.

1. How does a yieldco work?

An energy developer creates a public holding company -- the yieldco -- to own and operate cash-generating power plants. With steady revenue, the yieldco pays out much of its available cash as quarterly dividends to shareholders. While publicly traded, yieldcos typically remain in the control of the developer and provide a ready buyer for its wind and solar farms. That makes it faster, and cheaper, for the developer to recycle capital as it finishes one project, sells it and moves on to the next.

2. What’s in it for investors?

Wind and solar farms generate modest, but steady, revenue streams for their yieldco owners. The more power plants a yieldco buys, from both their corporate parents and other companies, the more revenue comes in. That translates into higher dividends. This is appealing to investors who need to earn a yield, especially when interest rates are so low.

3. Who’s involved?

NRG Energy Inc., the biggest U.S. independent power producer, brought the first yieldco -- NRG Yield Inc. -- to the U.S. market in 2013. By August 2015, there were eight publicly traded yieldcos in North America, including one formed jointly by First Solar Inc. and SunPower Corp., the two biggest U.S. solar-panel makers. SunEdison Inc., the world’s biggest developer and the company most-associated with the yieldco, created two of them. By November 2015, yieldcos controlled 15 gigawatts of power-producing assets worth more than $35 billion.

4. What’s the worry?

Investors started raising questions about the yieldco model in 2015. The structure demands continuous growth, and the increasing number of yieldcos led to greater competition for power plants, driving up prices for wind and solar farms and eating into potential returns. The prospect of higher interest rates may make yieldco shares less attractive than guaranteed government debt. 

SunEdison’s April 2016 bankruptcy also has raised concerns about the independence of yieldcos. Multiple lawsuits alleged that the developer arranged deals that were more beneficial to the parent company than to its yieldcos, or their shareholders.

The Reference Shelf

  • A Bloomberg article on SunEdison’s “Friday Night Massacre.”
  • A Bloomberg article on the yieldco stock swoon.
  • A Bloomberg article on SunEdison’s buying binge.
  • The Bloomberg New Energy Finance website.
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