Will the ITC Boost Yieldcos' Fortunes?

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In fact, most yieldcos have been increasing dividends, which investors should be pleased with. In October, NextEra Energy Partners more than doubled its dividend to $0.27 per share and said it was on track for 12%-15% distribution growth through 2020. 8point3 Energy Partners said its fourth-quarter dividend would grow 3.5% to about $0.22 per share and implied that more growth is coming in 2016.

In general, yieldcos have been operating as planned, but falling stock prices have made future growth potentially more difficult. Part of the problem with yieldcos is that they rely on the ability to purchase more projects to grow distributions. But to buy projects, they need to issue debt and equity. To be economical, that equity has to be issued at a low cost of capital (i.e., low dividend yield). With dividend yields are near 10%, as they have been recently, there's no ability to issue new equity and buy projects at compelling economics. So, the yieldco model falls apart for both yieldcos and the companies hoping to sell projects to them.

Image source: SunPower.

Why yieldcos are needed

If the ITC extension can get investors excited about renewable energy again and bid up shares of yieldcos, it could help boost renewable energy growth, mainly because yieldcos are needed to drive project economics.

When a solar developer bids for a project, they have to assume some cost of capital for what they're installing. If your cost to build a system is $100 million, you expect to generate 100,000 MWh of electricity per year, and your cost of capital is 8%, then you can bid $0.08 per kWh. If yieldcos fall and the value of projects falls along with them, then the cost of capital goes up. A rise to a 10% cost of capital would mean you could only bid $0.10 per kWh to develop the same project economically.

This puts many developers in a bit of a bind because they were counting on selling projects to yieldcos or third parties with a low cost of capital. So, when yieldcos began to fall, that low cost capital dried up as well.

To fuel further growth of the solar industry, ITC or no ITC, there needs to be buyers for projects. So, a recovery in yieldcos would be good news for solar as a whole.

Yieldcos could finally be on a path to recovery

There's at least a little life in yieldco shares lately, and that's welcome news for both the solar industry and yieldcos themselves. If yieldcos can get back to a low cost of capital, they'll have a growing pool of assets to buy from with the ITC extension. That could lead to further dividend growth, which would make yieldcos even more valuable.

It's a self reinforcing loop that drives value in yieldcos, but it all starts with a low cost of capital and shares still need to recover to get capital costs down. If they do, this could be a booming asset class for the next decade.

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The article Will the ITC Boost Yieldcos' Fortunes? originally appeared on

Travis Hoium owns shares of 8point3 Energy Partners and SunPower. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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