In the 1950s, the federal government sought to boost home ownership
by increasing private lending. To this end, the government facilitated
mortgage lending by creating Fannie Mae and Freddie Mac. They provided
liquidity to private lenders by buying and holding mortgages,
replenishing the funds needed to make additional loans.
Renewable energy developers have a similar need to replenish their
capital to keep developing new projects. While many developers have
always sold some or all of their projects to accomplish this, they have
begun to focus on dedicated "mini Fannie Maes" in the form of yieldcos.
Credit: Shutterstock.
Renewable energy projects have been financed through a combination of
equity, debt and tax-equity financings, with the latter being used to
monetize federal tax credits that the developer cannot use due to
insufficient tax liability. Tax-equity financings range from 35 to 50
percent of the construction cost of the project, with the remaining
funds contributed as equity by the developer, sometimes in combination
with debt financing. After initial financing and construction, however, a
project generally does not produce sufficient free cash to allow the
developer to fund new projects. Consequently, developers seek an exit
opportunity that allows them to replenish capital by monetizing their
remaining project interests.
Residential Solar Market Gains Access to Capital through Securitization
For companies that develop residential solar facilities,
securitization of power purchase agreements (PPAs) and lease agreements
could become the standard method for replenishing capital. The rooftop
solar industry has seen successful securitization of solar leases, with
SolarCity bundling three pools of solar asset-backed leases in the last
two years, raising more than $200,000,000 from its third pool. In
addition, the National Renewable Energy Laboratory (NREL) has
established a Solar Access to Public Capital working group to review
solar securitization and draft best practice guidelines for
installation, operations and maintenance of solar facilities. The
working group has released model lease and PPA forms.
Solar on a residence. Credit: SolarCity.
In addition to SolarCity, other key developers in the rooftop solar
market are exploring securitization. Because of the volume of rooftop
solar leases and PPAs and the small size of individual installations,
residential solar has gravitated to standard forms and the work that
NREL is doing helps continue this process. It is possible that such
securitization will become the prevailing method for residential solar
developers to replenish capital.
Standardization More Difficult for Large-scale Renewable Development
On the other hand, large-scale renewable projects are not likely to
experience the same level of standardization due to the larger project
size and the need to tailor projects and related documentation to the
particular needs of the offtaking utility. Instead, "yieldcos" are
becoming a very effective way for utility-scale developers to replenish
capital.
A number of utility-scale developers have formed yieldcos. The trend
began in 2013 when NRG Energy formed NRG Yield. By January 2015, public
trading opened on other yieldcos, including Pattern Energy Group,
NextEra Energy Partners, TerraForm Power, and Abengoa Yield. More are
reportedly coming, with news indicating that First Solar and SunPower
are in talks to form a joint yieldco.
A yieldco is a growth-oriented publicly traded corporation formed to
hold operating assets that generate long-term, low-risk cash flows. The
cash flows are distributed to investors as dividends. Corporate level
tax is shielded in whole or in part by the developer's retained share of
accelerated depreciation and, in some cases, tax credits, and may also
be offset by interest deductions on project acquisition debt.
Additionally, yieldcos tend to attract investors that may be tax
indifferent, such as tax-preferred pension plans.
Because the yieldco sponsor is a developer, yieldcos usually have
access to the developer's project pipeline through a right of first
refusal. This provides the developer with a ready repository for its
completed projects to replenish its capital and gives the yieldco the
promise of growth.
Despite this attractive access to public markets, yieldcos will not
necessarily overtake other methods for developers of large-scale
renewable energy projects to obtain back-end financing. Yieldcos have
drawbacks, including the high cost of an IPO and the need to keep
acquiring projects to maintain cash flows and stock value. NRG Yield
recently proposed a stock split that was driven partly by the need to
raise capital for NRG Yield to obtain more projects. This is a good
reminder that because they are publicly held, the public yieldco
structure does not permit the most nimble decision-making processes.
A Yieldco By Any Other Name
Other yieldco-like equity vehicles will continue to provide
developers with viable capital raising options, without all the
attendant challenges with yieldcos. For example, many private equity
funds have entered the renewable energy project acquisition market in
recent years. These funds tend not to develop projects, but rather are
made up of financial investors who purchase contracted projects that are
nearly completed or ready for construction. The fund's investors tend
to be a limited number of large, institutional investors.
Because these funds are not publicly held companies, they may prove
to be more flexible over time. They are not "forever" investments like a
public yieldco where the investor's only "out" is to sell stock.
Rather, most have limited terms - say 12 or 15 years. Thus, there is not
the same ongoing pressure to keep generating new projects. The
investors have a limited commitment to invest a stated amount over a
stated period, and once those investments are made, the fund does not
acquire more projects (though the fund and its investors may amend the
fund to allow additional investments, or form a new fund with all or
some common investors). Furthermore, as the investment and renewable
energy markets change over time, the funds can be flexible in how they
respond; they can renegotiate arrangements with their limited number of
institutional investors in a manner that would not be possible when
dealing with thousands of public yieldco shareholders.
Wind Farm. Credit: Enel Green Power.
The industry has also seen a growing number of developers bring in
cash-equity investors (driven by a cash return, not tax credits and
depreciation) to take a portion of the developer's remaining interest
after tax equity is in place. Such cash-equity investments may acquire
an interest in a single project or a portfolio of projects. For example,
over the last few years Enel Green Power North America has completed
several such transactions where subsidiaries of GE took a cash equity
position in wind projects constructed by Enel. The benefits of this
approach are similar to those for funds: investments are limited in
scope, relieving the pressure for continued development in changing
markets, and the number of investors is small and thus can provide
greater ability to deal with changes and problems as they arise.
Another yieldco-like vehicle is an entity formed to acquire a
particular developer's projects with a discrete number of institutional
investors. This is effectively a "private" yieldco where no public stock
offering is involved. It operates like a cash equity investment, but
can be more open-ended in duration and investment commitment. It has the
benefits noted above for funds and cash equity investments, but can be
more flexible in terms of structure than your typical fund (which is
structured to meet prevailing expectations of investors, rather than
being tailored to the specifics of a developer's situation and project
opportunities).
Over the next few years, expect to see further evolution of these
capital raising techniques. While we may see residential solar
developers gravitate toward securitization, developers of large-scale
renewable energy projects will continue to look to other yieldco-like
structures as a viable means of raising capital.
http://www.renewableenergyworld.com/articles/print/volume-18/issue-3/features/finance/understanding-the-yieldco-structure-for-renewable-energy-project-finance.html