3 November 2015


Trina Solar Canadian Solar

US yieldcos will revive next year, say experts

Author: Susan Kraemer, Solarplaza

Experts are painting a rosier picture of yieldco potential in 2016 after most of the traded vehicles suffered sharp losses in value earlier this year.

"The way we see yieldcos priced right now is with very little distribution growth if any,” said

Jay Jacobs, director of research at Global X Funds, which manages the Global X YieldCo Index Exchange-Traded Fund (ETF). “They're almost priced like a bond. We believe that's just not accurate. The cash flows in a yieldco are robust. We think that they will continue to grow distributions in the future."

Jacobs sees the summer's yieldco share price drop as a temporary market correction. The cash flows in a yieldco come from already operational renewable projects, typically with 25-year contracts of stable income.

Also, while the drop in the fossil fuel energy market is a commonly suggested cause for the renewable energy yieldco rout, oil is not in the electricity market and oil prices are neither stable nor as secure as the 25-year income from a solar farm power-purchase agreement.

Jacobs found it unusual to see these disparate asset classes being lumped together, together with master limited partnerships (MLPs) in the natural resources sector.

"Along with our yieldco fund and an MLP fund, we also have a lithium fund, which invests in lithium miners and battery producers, and we were surprised to see these three industries pulled down with the broader energy sector over the last few months,” he said.

“MLPs and lithium miners are fundamentally more insulated from spot oil prices than traditional energy companies.”

The current undervaluation will not last much beyond the end of the year. Bubbles tend to burst too quickly and overcorrect.

Clean energy portfolio manager and editor Tom Konrad thinks the current undervaluation will not last much beyond the end of the year. Bubbles tend to burst too quickly and overcorrect, he said.

And from April to July “a gigantic amount of both new offerings and secondary offerings” were coming online at once, he stated.

The question now is whether appetite will return for new yieldco offers. The pipeline of new yieldco offerings, according to Jacobs, became delayed when the yieldco market began to slide.

Solar developers with potential yieldco initial public offerings (IPOs) in the pipeline include Canadian Solar and GCL New Energy, which both aimed at an IPO in the fourth quarter of 2015 to first quarter of 2016, along with SunEdison and Trina Solar.

One company that is not contemplating a yieldco for now is SolarReserve, which has 300 MW of PV in the US and South Africa.

"The recent downturn in yieldco structures has weakened these options, and we will see if the markets settle down in order to maintain this as an attractive opportunity,” said Kevin Smith, chief executive.

Nevertheless it remains a fact that yieldcos have been a real boon for the still-young solar industry. Bloomberg New Energy Finance valued the total yieldco market at USD$27 billion by April 2015. Cheap equity finance in the new yieldco market cost almost as little as debt.

As a result, said Smith: "A project that normally would demand investment returns in the 10% to 12% range by private investors under a project finance structure would be able to offer returns to yieldcos in the 7% range or lower."

There is a strong incentive for the yieldco model to get back on track.

This relatively low requirement for dividend yield facilitated rock bottom solar prices. When solar developers build these lower return expectations into power bidding philosophy, their bids could be as much as 20% lower, according to Smith.

Thus there is a strong incentive for the yieldco model to get back on track. When the market returns, Konrad believes that US yieldcos might look more like the English yieldcos such as Bluefield Solar Income, which weathered this year’s dip better.

UK yieldcos promise a much less extravagant dividend growth rate, more like the rate of inflation, so they are at less risk of volatile share prices due to the arbitrary enthusiasms of the stock market.

"We won't see promises to raise dividends 15% a year based on buying clean energy assets,” Konrad said. “I bet no one in their right mind would try that now."

Get the latest on US yieldcos at YieldCon in New York City on December 3, 2015, where you can meet yieldcos, institutional investors, financiers, analysts, independent power producers, energy utilities, project developers and other stakeholders.


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