News flash: Thanks to catastrophic climate change and fossil fuel divestment, Wall Street is zeroing in on renewable energy yieldcos. This is not necessarily news to those who have been paying attention and already buying into an evolving clean energy sector. Its asset class is shiny, after all. From solar panels and electric vehicles to wind farms and other emergent zero-emission solutions, renewable energy yieldcos can bank on future industries to accelerate today’s too-slow buildout.
“We are positive on the overall alternative energy and renewables space,” investment research firm Edison explained in a recent bullish yieldco report. “In shifting discussion away from preoccupation with the labyrinth that is global regulation,” the report added, yieldco companies “have enabled better visibility on underlying asset portfolios, which often generate cash flow secured by long-term power purchase agreements. As a result, they are able to pay dividends now, provide potential for capital appreciation in the future, and have simplified the investment thesis.”
Edison’s report [PDF] reminds investors early that “the use of fossil fuels is not going away anytime soon,” because the heavily subsidized industry still boasts significant natural and financial resources. So it’s not much of a surprise that Edison’s favored yieldcos are mostly oil and gas producers wisely moving into the renewable energy space. For example, NRG Yield recently added 285 megawatts of wind capacity (and 500MW of gas-fired capacity), but, as Edison notes, has also built the largest solar PV plant in America. Edison even uses a NRG yieldco infographic to illustrate to the investment vehicle’s “drop-down” structure, which it argues is “critical to the yieldco’s ability to retain its tax benefits and continuing dividend.”
Edison is also bullish on Spain’s Abengoa, despite concerns about its parent corporation’s debt levels, as well as Macquarie’s well-funded spinoff Capstone Infrastructure, which is looking to acquire or reboot “clean energy generation projects” in North America. But for all of their green creds, much of Edison’s chosen yieldcos, from NextEra Energy to TransAlta Renewables, are more deeply vested in natural gas than solar or wind. (Pattern Energy Group, thankfully, remains a “pure-play wind operator.”)
This misapprehension of natural gas as renewable energy isn’t limited strictly to Edison or other analysts widely sharing the “simplified investment thesis” of yieldcos. It’s a unscientific bias that still exists from Main Street to Wall Street. It is also the reason that strictly solar companies who currently decide against pooling their assets in yieldco spin-offs, like standouts SunPower and First Solar — which Edison notes is now building the largest solar farm in America — are punished on Wall Street with sideways stock prices.
After beating the Street’s quarterly expectations, SunPower pushed the decision to make its power projects publicly tradable to 2015. For its part, First Solar’s stock price was reportedly “punished” by investors for postponing its yieldco as well. On its recent quarterly earnings call, First Solar CEO Jim Hughes reminded unhappy campers that his company doesn’t feel it is “missing either gross margin opportunities or market share capture opportunities because we don’t have a yieldco today.”
But the two dominant American solar companies likely can’t hold out forever, given everything from currently volatile markets and declining investment tax credits to political and economic uncertainty. Chinese manufacturer JinkoSolar recently rounded up $225 million for its yieldco. Back in America, SunEdison’s second yieldco reportedly arrives in mid-2015, from a company sporting a quickly expanding cleantech asset class, thanks its recent acquisition of First Wind.
SunEdison didn’t bill itself as the “world’s largest renewable energy development company” after that buyout for no reason: The deal was sealed with its yieldco in mind, because renewable energy yieldcos as an investment vehicle, like catastrophic global warming, are here to stay — whether we like it or not.
Edison, which as far as I can tell is unconnected to SunEdison beyond trading on Thomas Edison’s legend, is pretty specific that “climate change impacts and resource shortages” will empower high demand for cleantech like solar, wind and EVs, and that “niche players” in these convergent sectors will inevitably become mainstream energy utility providers. If you think that the visionary Elon Musk isn’t connecting his Tesla to his SolarCity to his SpaceX to become an energy power player who evolves Earthlings beyond the dirty fuels spelling their doom, then I have a real-estate investment trust in the sinking Maldives to sell you.
With apologies to SunPower and First Solar, investors are likely to ask about yieldcos at every earnings call going forward.
This article appeared at Solar Energy