In the past two years, the proliferation of YieldCos,
and their ability to open new sources of capital for renewable energy
projects, has captured the attention of the energy industry. While a
YieldCo’s potential to catalyze renewable energy development is immense,
the focus on feeding YieldCos has come at the expense of adequate
transparency into the underlying assets being delivered into the
financing mechanism. However, as U.S. bond yields rise, the long-term
viability of YieldCos will necessitate operational improvements amongst
their parent companies in order to compensate for tightening market
conditions.
These improvements must drive efficient compliance and
transparency to capital market requirements while also allowing YieldCos
to effectively diversify their holdings. YieldCos’ ability to attract investment is predicated on growth and,
consequently, the ability to acquire new assets that can deliver steady
cashflows. In the U.S., the effects on solar development are tangible.
My company’s distributed energy insight report, which compiles data from
3000+ projects seeking financing, highlights that YieldCos are not only
providing low-cost capital to solar projects but are also contributing
to widespread competition for project acquisitions. The result has been downward pressure
on the economic returns necessary for projects to successfully attract
financing. Meaning more projects can find financing and are being sold
for higher prices. This has undoubtedly helped grow project development.
However, rapid growth has come at a cost. YieldCos, generally
speaking, have been so focused on originating and developing projects
that insufficient attention has been allocated to mechanisms that ensure
that the projects feeding YieldCos are going to perform as anticipated.
This oversight inflates the risk premiums attributed to the investment
vehicle. The early Yieldcos and their performance and reputation pave the way
for more Yieldos to enter the market. This puts a lot of pressure on the
incumbents to avoid any missteps.
Despite their current risk profile, YieldCos have been able to
deliver low-cost capital in the context of historically low U.S. bond
yields, but this is going to change. As bond yields rise, so will the
risk-adjusted returns expected from YieldCos and — consequently — the
energy projects themselves. The result will be a tighter project
development market, making it more difficult for a YieldCo to find
sufficient cash flows to maintain growth. Additionally, these conditions
come at a time when the expected reversion of the Investment Tax Credit
(ITC) could have a severe dampening on U.S. solar project development
beyond 2016; adding another constraint to adequately delivering YieldCos
new assets.
In order to mitigate the effects of rising bond yields, YieldCos will
have to address the risk-adjusted returns that will be expected of the
asset class. The easiest way to address risk perception is by providing
the capital markets with transparency into the underlying assets that
are being delivered into the YieldCo. The more project data that can be
delivered in an organized methodical way, the less risky the asset class
will be perceived.
It’s also critical to feed YieldCos with projects diversified across
technologies, geographies and projects sizes. A trend that is
increasingly occurring in the market, most recently exemplified by
SunEdison’s acquisition of the residential solar developer, Vivint
Solar, which helps support the companies YieldCo, TerraForm.
Diversification helps expand the base of opportunities for the financing
vehicle, while it also ensures that it is not overly exposed to one
specific risk.
Here’s the rub. While diversification and transparency are necessary, achieving both requires organizational efficiency
that is rare in the growing renewable energy sector. Expanding
organizational bandwidth to evaluate a variety of technologies, smaller
projects and new energy markets can easily drive up overhead costs. So
can organizing, reporting and delivering all the data relevant to the
capital markets.
Thus, the operational efficiency of the YieldCo and the parent
company becomes critical to the ongoing success of the structure. The
YieldCo requires a streamlined investment process that can process a
massive quantity of projects while also maintaining a robust capacity to
capture and track all the relevant data associated with those projects
in such a way that does not explode overhead costs.
While the YieldCo has provided new capital resources to renewable
energy projects and could continue to be a boon to the industry, new
capital can not mask operational inadequacies forever. The YieldCo, as a
financing structure, will face challenges in the near term as the
market tightens. Only those that can operate a YieldCo efficiently,
delivering transparency and and operating with speed, will have healthy
returns.
http://www.renewableenergyworld.com/articles/2015/07/why-the-future-of-the-yieldco-is-at-risk.html
No comments:
Post a Comment