Yieldcos are a recent financial innovation in the United States, and for much of their track record (a little over two years, as of this writing), they have proven effective in drawing low-cost capital to term-finance operating renewable energy assets. These vehicles are built around some unique features of the U.S. tax code, its corporate laws and its robust capital markets, and accordingly they may be difficult to execute in other countries. That said, some North American-based yieldcos do purchase assets outside of their home markets, and this could create opportunities for turnkey developers in other countries.
A yieldco is a corporate entity (a limited liability corporation, limited liability partnership, or joint venture) that aggregates a portfolio of energy assets against which ownership shares—i.e., stock—are sold. Yieldcos are commonly “spun off” from larger developers (e.g., NRG, SunEdison, Abengoa) to hold and generate additional value from operating assets (Lowder et al. 2015). Yieldcos feature only one layer of taxation because the accelerated depreciation benefits of the renewable energy assets in the portfolio generate enough tax “shield” to offset corporate-level tax (leaving only the tax on distributions to shareholders) (Urdanick 2014). This structure is partly modeled after real estate investment trusts REITs and master limited partnerships (MLPs), two investment vehicles that are responsible for the financing of a significant portion of real property and fossil infrastructure, respectively, in the United States.
As successful as yieldcos have proven in a short span of time, the summer of 2015 saw a dramatic downturn in the yieldco market as investors signaled skepticism about the model (along with a general sell-off in both energy related assets and yield based investments). Concerns about the long-term viability of these vehicles when they must continually add assets to meet growth targets, and their exposure to rising interest rates, among other things have initiated a negative market correction. At least two companies (NRG and SunEdison Power) have announced they will halt sales to their yieldcos for an extended period of time until the market conditions improve. It remains to be seen where these developments will lead and what it could imply for the long-term viability of the yieldco model as a vehicle for financing renewable energy.
Yieldcos require large portfolios to make efficient use of capital, attract investors and benefit from portfolio diversification. Only eight yieldcos are in operation in North America as of this writing, and among them they own over 16.5 gigawatts (GW) of generation (wind, solar, and fossil plants) (Bloomberg New Energy Finance).
Access to Projects for Acquisition
Not only is size important, but access to a pipeline of new projects also plays a key role. Yieldcos that have this access (whether from their parent company or third-party project developers) are better positioned than those without it. Yieldcos generally hold what are often called “de-risked” operating assets leaving the development and construction risk associated with new projects to the parent company. This need for a constant pipeline of new assets is relevant to next section (Growth).
Part of the value of owning yieldco stock lies in its growth potential. Investors will earn dividends on their purchased ownership shares, but they will also expect that this dividend (e.g., cash distribution) will grow over time. This expectation of growth of the dividend leads to a higher stock price, which makes up the second part of their total return. To fulfill the promise of dividend growth—and to preserve the depreciation benefits to offset taxes—yieldcos must continually add assets to their portfolios. This can become challenging as the field of renewable energy projects is limited (though those limits have not been approached yet), and it requires significant amounts of capital, which is typically raised via stock and/or bond issuance at the yieldco level (yieldcos sometimes make use of financing facilities from their parent companies as well). In a down market, as was the case in the summer/fall of 2015, raising capital can be difficult and may impede the ability of the yieldco to add assets in line with its growth targets.
- Terraform Power (SunEdison Yieldco)
- NRG Yield (NRG Yieldco)
- NextEra Energy Partners (NextEra Yieldco)
Chadbourne & Parke. 2015. “Is Your Project Yieldco Ready?”
Lowder, Travis, Paul Schwabe, Ella Zhou, and Douglas J. Arent. 2015. “Historical and Current U.S. Strategies for Boosting Distributed Generation.” Golden, CO: National Renewable Energy Laboratory.
Martin, Ketih. 2013. “Yieldcos Compared.” Chadbourne & Parke.
Urdanick, Marley. 2015. “A Deeper Look into Yieldco Structuring.”
Clean Energy Retail Investing: The Rise of Bonds, REITs, Yield Cos and Other Investment Vehicles