Author: Wessel Simons
‘There’s a chase on yields in the current market ’, says Gerard Reid , partner of corporate finance firm Alexa Capital LLP . ‘For investors, these yieldcos are great alternatives for government bonds, of which some even turned negative. For developers, this is quite an innovative way of selling and re-financing renewable energy projects ’.
How does it actually work? Yieldcos bundle renewable and/or conventional long-term contracted operating assets like solar and wind parks and transmission lines. By generating predictable cash flows, developers can re-finance, creating a continuous pipeline of new projects. To gain in-depth knowledge and market insight regarding the benefits of yieldcos and their potential to infiltrate the European renewables market, be sure to join Solarplaza’s industry leading conference, YieldCon , in London on July 2nd, 2015 .
An example is NRG Yield , a yieldco by the Texan utility NRG Energy . With a total capacity of more than 2,8 Gigawatts (solar, wind, transmission lines, gas),NRG Yield is currently the largest existing yieldco.
Another biggie is TerraForm Power , set up by SunEdison , an American solar module maker that suffered from the oversupply of modules. By creating their own Engineering, Procurement and Contracting (EPC) branch, it transformed into a developer of solar parks. Now, these EPC-contracts are sold to theTerraForm yieldco, creating cash to develop new projects. The total capacity in the portfolio is now 1,5 GW. By the end of last year, TerraForm acquired wind developer First Wind for $2,4 billion, expanding the types of projects they want to develop.
‘You need big scale to make a yieldco a success ’, says Reid . ‘The bigger the better. A total capacity of 750 megawatts is the minimum. A big pipeline means less selling and less legal costs. For the investor, it means a potential higher dividend ’.
Secondly, long term agreements such as Purchase Power Agreements (PPA’s), are the underlying security that puts investment risk at a minimum and offers a more stable cash flow.
For example, NRG Yield announced an average remaining contract duration of 17 years in its annual report 2014 . Famous examples are the long term 25-year PPA’s between NextEra and Google (wind power ) and First Solar with Apple (yet to be built 130 MW solar park ).
SunEdison’s competitor, First Solar , is also planning a yieldco with module maker SunPower under the name 8Point3 Energy (SEC filing ), with a total capacity of 432 megawatts over six large solar farms.
‘Long term revenue certainty like feed-in-tariff programmes and Power Purchase Agreements (PPA) help a lot ’, says Maarten Hoogstraate of legal outsourcing firm HLO and former General Counsel of Abengoa Yield. He advised the Spanish green field developer and EPC-contractor Abengoa on setting up the first ‘European’ yieldco .
Listed in June 2014, the yieldco raised approximately $700 million (€650 million) at the NASDAQ stock exchange. Its assets, valued at $6 billion, consist of contracted renewable energy, power generation and electric transmission assets in North America, South America and Europe.
Hoogstraate: ‘These projects are technically and financially robust. You need to work with qualitative partners to contract, operate and maintain them. Also, the offtaker under a PPA needs to be financially solvent’. Concluding the whole process in only six months was legally ‘quite complex and challenging’. He says: ‘The projects were spread around the globe, so we had to deal with different regulations, governments and permits. Abengoa has the majority of shares in the yieldco, but the independent directors decide over future asset acquisitions from Abengoa. From an investor’s perspective that is quite important for the decision process ’.
Pietro Radoia , PV analyst of Bloomberg New Energy Finance , sees the advantages of a yieldco from a developer’s and investor’s perspective. At the same time, he stresses that investments are not risk free under the yieldco structure. Radoia : ‘The financial product is complex and not all investors know what’s the exact content of a yieldco is and will be. As a developer you need specialised expertise and experience to set these up. We’ve seen in the past that governments like Spain can retroactively cut subsidies. Parties should aim for a mix of different projects and countries in their yieldco .’
Hoogstraate adds: ‘A dynamic circuit of projects is favourable. Not only for diversification, but also because of the fact that higher dividend can be expected ’.
To the contrary, Reid points out that a focus on a specific region or theme (power generation or infrastructure) is less risky. Reid :‘Don’t mix regions or currencies in a yieldco, because currencies can go against you and you lose money .’
Other criticism comes from financial analyst Tom Konrad . In this article , he claims that yieldcos potentially have insufficient earnings to both pay the dividend and keep investing in new and existing assets. For example, NRG Yield reported a dividend of $1.42 per share and an average yield of 3 percent. The yieldco produced in 2014 net cash of $223 million and paid out $122 million of dividend. On the other hand, net income was only $16 million.
SunEdison claims in its prospectus, a yield between 8 and 15 percent over a three year period for TerraForm . The current yield is – at the moment of publication- stuck at 2,7 percent.
According to Conrad , a lack of a sufficient net income can become a problem on the long run. ‘Dividends from YieldCos are not directly comparable to dividends from operating companies which have earnings, not just cash flow, sufficient to replace their assets over time. Investments in yieldcos should be viewed as amortizing assets ’.
Most of the activity in this field is from the US and to a lesser extent from the UK. Why isn’t there an continental European utility doing a yieldco? According toRadoia : ‘The German market is more focused on privately traded projects. The Italian market is too fragmented to create enough scale for a yieldco. The market growth in France is too modest to create scale. Solairedirect could have possibly been the only yieldco in France, but they have postponed their IPO for unknown reasons ’.
Reid concludes: ‘European utilities are in restructuring mode and act paralyzed. And that's a shame because they have access to relatively cheap capital in comparison to American utilities. I think European network operators and transmission managers are potential yieldcos. They are used to creating dividend while managing their networks, for example the National Grid Group in the UK and Elia in Belgium ’.
Solarplaza organizes on the 2nd of July in London the first conference focused on the yieldco model in Europe´s renewable energy market. With the attendance of institutional investors, financiers, analysts, IPPs, energy utilities, project developers and other stakeholders, this is your chance to learn and discuss potential yieldcos with the top of the industry.
This top 10 shows which yieldcos have the most PV energy in their portfolios to date (24.04.2015):
More information: www.yieldcon.com