How Are YieldCos Changing the Solar Investing Landscape?

A YieldCo can be defined as a dividend growth-oriented public company formed to hold operational assets, which produce an expected cash flow based on long-term power purchase contracts.

The idea of an YieldCo first emerged in 2012. Owing to the perception that solar energy is a risky form of investment, companies in the renewable industry have found financing for any kind of project quite difficult. In this situation, the adaptation of the REIT program to renewable energy seemed to be a good idea to ensure a steady stream of funds.

An YieldCo is an independent power producing corporation that operates primarily renewable energy assets comprising water, wind and solar. The company is publicly traded, yields a predictable cash flow, and distributes its income or cash flow (about 80%) as dividends to its shareholders. The common thread between YieldCos, master limited partnerships or MLPs in the oil and gas sector, and REITs is that they all offer stable cash flow to investors.

The renewable energy projects are sold by energy companies through "drop down" transactions to publicly traded YieldCos, which develop them and generate stable cash flow by selling electricity under power purchase agreements ("PPAs").

The first YieldCo − Brookfield Renewable Energy Partners LP BEP − was created by Brookfield Asset Management BAM .

The Impact on Industry

The impact of YieldCo financing on solar developers and plant operators has been huge. Due to its relatively cheap way of raising capital to finance new projects, as well as arranging a revenue stream from finished projects, it has gained immense popularity.

"YieldCos raised $1.6 billion from the public markets worldwide in the second quarter of 2015, with about $800 million in debt, and accounted for almost a third of all large-scale project acquisitions," said Raj Prabhu, CEO of Mercom Capital Group, in the company's weekly funding report on Sep 7, 2015.

In 2014, NRG Energy listed one of its subsidiaries, NRG Yield Inc. NYLD , which contains some natural gas and renewable production assets. To improve the liquidity position, SunEdison SUNE has formed two YieldCos - TerraForm Power Inc. TERP and TerraForm Global Inc. GLBL - and raised nearly $2 billion over the last year by publicly listing them. First Solar FSLR and SunPower SPWR also took the plunge to form their own YieldCo − 8point3 Energy Partners CAFD .

Are YielCos in Trouble?

After a strong 2014 that saw a series of IPOs and surging valuations, 2015 is turning out to be a difficult year for solar YieldCos. The Global Yieldco Index is down by about 27.4% so far this year and many YieldCos that held IPOs this year have witnessed share losses. 8Point3 Energy Partners lost 36.7% since its listing in June, while TerraForm Global has declined 42.9% since its mid-July IPO.

The downturn can mainly be attributed to falling crude oil prices as well as the China slowdown. As the world's biggest producer of solar panels, China is now contending with lower growth forecasts (below 7% for 2015), decreasing exports and industry overcapacity. Along with the ongoing decline in the stock market, its solar industry may also be at risk.

Beyond the China factor, the renewable energy sector as a whole - and solar stocks in particular - have taken a beating ever since oil prices began to tumble last June. The decline in oil prices has made renewable energy stocks unattractive, sparing neither U.S. nor Chinese solar companies.

To Conclude

While the solar energy sector's long-term potential is undeniable, the industry is faced with a number of near-term challenges that will likely keep both solar stocks and their YieldCos under pressure. That said, the demand for solar energy is strengthening at a rapid clip and analysts see no fundamental correlation between the oil plunge and solar share losses.

Increasing demand for solar power, massive panel installations, advanced technologies, global warming issues and Obama's 'Climate Action Plan' will ensure that the solar boom is not fizzling out anytime soon.

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FIRST SOLAR INC (FSLR): Free Stock Analysis Report

SUNEDISON INC (SUNE): Free Stock Analysis Report

BROOKFIELD ASST (BAM): Free Stock Analysis Report

SUNPOWER CORP-A (SPWR): Free Stock Analysis Report

8POINT3 ENERGY (CAFD): Free Stock Analysis Report

TERRAFORM POWER (TERP): Free Stock Analysis Report

TERRAFORM GLBL (GLBL): Free Stock Analysis Report

BROOKFLD RENWBL (BEP): Free Stock Analysis Report

NRG YIELD INC-C (NYLD): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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