Renewable energy is a special type of energy derived from natural resources like wind, rain, sunlight, waves, geothermal heat and tides. Its ability to replace conventional fuels in electricity generation, motor fuels, air and water heating and cooling among other off- grid energy services had made the energy sector quite popular with various investors competing to get a slice of the potential profits in the previous months.
The recent fall in gas and oil prices has managed to have a negative impact on the renewable energy sector. This together with the constantly rising interest rates has made investors question the industry’s ability to dominate the energy markets as it used to. Although most of the financial and energy experts concur on the fact that the business is still highly viable, there has been a fall in stock prices, making renewable energy companies to re-evaluate their approaches with some embracing extremely drastic measures.
One of the approaches that has managed to bring with it massive retrenchment of the workers employed by renewable energy companies is a financial mechanism going by the name “yieldco.” Yieldcos are special public companies that have been conceived by renewable energy companies as a means of raising cheaper capital for development. This alone has attracted billions in new investments.
Yieldcos are in charge of purchasing and operating power plants developed by their parent companies. They then collect all the contracted electricity fees and pay out a great percentage to them as dividends. This has made them to be very popular with investors looking for stable returns as well as making them a hot cake in the stock market over the last one and a half years. This was however not meant to last.
SunEdison which is an aggressive company in the renewable energy sector delivered some disturbing news last week. The company which has purchased several renewable energy companies in a calculated move to become the world’s largest renewable energy developer in the recent months has decided to stop selling any further projects to its yieldcos unless there is a positive shift in the market conditions. Other drastic measures it wishes to implement include withdrawing from Britain, retrenching 15 percent of its workforce and reducing project development by around 20 percent.
The trend taken by SunEdison is quite disturbing as other companies and yieldcos have managed to follow suit. For instance, NRG Energy announced last month that it would separate its popular green enterprises consisting of an electric vehicle charging network and a home solar division into a separate stand-alone company with a really tight budget. The company is also going to pursue a limited strategy with its yieldco. Moody Investors Service on Tuesday downgraded the NRG Yield Company on grounds that a 30 percent decline in its share price was going to prevent it from raising additional funds for new projects.
Despite all these facts, analysts and executives are still optimistic that the industry’s long- term prospects are achievable.
According to Paul Coster, who is an analyst at J.P. Morgan, the wind has continued to blow and the sun has kept on shining since the start of July keeping the performance of wind and solar farms at a constant level. He blames the problems in the renewable energy sector, primarily on the unpredictable energy market.
The market churn in its own way has managed to complicate the various efforts meant to push renewable energy to mass scale production and consumption. Experts argue that in order for the sector to thrive, it is vital for the industries involved to reduce the various production costs they incur. This can be easily achieved through the use of yieldcos.
Aneesh Prabhu, a credit analyst at Standard & Poors has blamed the fall in yieldcos on the great euphoria and market overreactions to the idea. The original idea behind the formation of yieldcos was to combine fully and partially completed power projects offering steady, low-risk cash flows manifested as power purchase agreements to cover electricity payments in over 15 years or so. The yieldcos which were tied to their power plant developers were to have steady pipeline projects from the parent companies that were to benefit through the sales made by the yieldcos.
Energy development is an expensive venture hence limiting renewable energy projects’ access to tax- advanced financing mechanisms like master limited partnerships that have been widely used in building oil and gas infrastructure over the years. According to Dan W. Reicher, executive director of the Steyer-Taylor Center for Energy Policy and Finance at Stanford, yieldcos were an inventive twist on master limited partnerships that were meant to provide similar benefits. The only limitation was that they did not manage to get all the tax benefits.
Despite all this, the yieldco system has managed to attract various investors with analysts and clean- energy advocates predicting increased success and activity in the sector. The potential of the private companies has led to the formation of over a dozen yieldcos since 2013 with many going public. The tremendous increase in yieldcos drove up competition and average project prices. This made interest rates to increase significantly, making the companies less attractive as compared to more conventional financing.
The fall in a single project carried out by a specific yieldco led to other consecutive failures. A great percentage of analysts and executives attributed the decline to the evident mismatch between the investors. For instance, most of them were looking for quicker returns while others who were losing money in oil and gas industries decided to dump their renewable stocks in order to cover their huge losses.
This puts the companies in the renewable energy sector in a situation that saw the fall in share prices raising dividend yields, making it quite difficult to borrow money or issue equity. Furthermore, this has led to the reduction in new project returns and the falling of share prices. A number of investors soon got really scared with some trying to question if they really understand the model. Michael Garland the chief executive of Pattern Development and Pattern Energy Group together with other analysts do argue that the model works but has to go through market correction to attract different kinds of investors.
There were additional pressures at SunEdison. It’s constant engagement in acquiring companies like “July of Vivint Solar” which is a fast-growing rooftop solar installer left investors disturbed and confused. This led to an up to 70 percent decline in stock sales deepening their woes even further.
Despite all the problems facing the renewable energy sector, the interest in clean energy is said by executives to be robust. The decline in interest in yieldcos has led to private lenders and corporations investing directly in renewable energy companies. Yieldcos should however not be ruled out as their potential for financing is still strong.