Understanding Solar Yieldcos
Project financing has proven to be an obstacle for solar project developers in the past. Developers in the United States have largely relied on complex tax equity investments or expensive bank debt to fund their projects, as they have had difficulty tapping into cheaper sources of capital due to the lack of long-term data on solar power, and the perception of solar being a risky and unproven form of energy. However, things have been changing of late. The continuing decline in prices of solar systems, the improvements in panel technology and the commissioning of several large-scale solar projects have brought about a greater acceptance of solar power and have made solar assets increasingly attractive even to mainstream investors. This has opened up new avenues for financing for solar companies, allowing them to raise debt and equity by issuing securities that can be traded in the open market. In this note, we take a look at the Yieldco structure of equity funding and why it could prove useful for companies such as SunPower (NASDAQ:SPWR), which have significant exposure to the project development space.
We have a $31 price estimate for SunPower, which is slightly below the current market price.
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What Are Yieldcos?
A Yieldco or yield company is a separate corporate subsidiary set up by energy companies to transfer a portfolio of operational energy projects. Yieldcos are typically listed after they are spun off from their parent companies and offer among the lowest costs of equity funding for renewable energy projects. The reasons for the low capital costs are manifold. These companies generate stable cash flows by selling electricity under power purchase agreements with utilities and distribute most of the cash through quarterly dividends. While yieldcos are currently subject to corporate taxes, there can be tax advantages depending on the yieldco’s structure. [1] The Yieldco model also allows investors to single out the cash flows generated by the power plant assets without giving investors exposure to other aspects of the parent company’s business. Additionally, Yieldco investments are relatively liquid, since they trade in the open markets.
The concept of Yieldcos has been steadily gaining acceptance. Last year, NRG Energy listed one of its subsidiaries, NRG Yield Inc., which held some natural gas and renewable generation assets. The stock has performed well, gaining close to 90% since it went public. More recently, solar project developer SunEdison filed for an IPO for its solar project spin-off, called TerraForm Power. [2] Given the recent success of these yield vehicles in the capital markets, solar project developers such as First Solar and SunPower could take steps to form their own Yieldcos. For instance, SunPower has roughly 517 MW of projects which it intends to retain on its balance sheet post-completion. The company could monetize these assets by forming a Yieldco and thereby raise relatively cheap equity funding to drive its project business.
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Notes:- Yield Cos compared, Chadbourne & Parke LLP, December 2013 [↩]
- SunEdison solar power plant unit files for IPO, Reuters, May 2014 [↩]