U.S.-listed renewable energy yieldcos have fallen in and out fashion since they burst onto the markets early last decade. Where do they stand today as investors reassess the energy landscape in a post-coronavirus world?
Leading yieldcos like NextEra Energy Partners, TerraForm Power and Atlantica Yield all saw rapid rises in their share prices in late 2019 and early 2020. The surge came after years of lackluster performance that followed the initial yieldco boom and then bust of the mid-2010s.
Yieldcos focus on the relatively low-risk business of operating wind farms, solar arrays and other clean-energy assets, and they typically offer investors a generous dividend.
The recent revived interest in yieldcos may have been driven by jitters over the outlook of other energy stocks, particularly those related to fossil fuels. The main period of yieldco growth coincided with a quickening in the pace of renewables acquisitions by oil majors.
In some cases, U.S. yieldco stock prices in February 2020 were the highest seen since the market's heyday in the summer of 2015.
Like nearly all energy stocks, yieldcos got slammed by the coronavirus pandemic. Unlike many oil and gas stocks, however, yieldcos have recovered quickly.
Compared to some other energy investments, yieldcos today "are considered a safe haven," said Pietro Radoia, senior analyst at Bloomberg NEF.
In that sense, yieldcos share similarities with power utilities, whose businesses (and share prices) tend to be fairly resilient in the face of broader downturns. Compared to utilities, though, yieldcos have the benefit of portfolios geared toward a low-carbon future.
As of May 13, shares of NextEra Energy Partners were down just 8 percent compared to where they stood at the beginning of 2020. By contrast, ExxonMobil's shares were down 40 percent amid a historic collapse in global oil prices.
Sustained interest in yieldcos after the COVID-19 pandemic?
The question now is whether yieldcos will retain their new luster in a post-coronavirus economy. Despite the many tailwinds for renewable energy, it's a tricky question, experts say.
Yieldco revenue is often based to a large degree on the value of federal tax credits and stable, long-term power-purchase agreements with utilities, both of which are gradually disappearing. It's unclear how or if the yieldco model will adapt to renewables projects carrying a significant level of merchant risk, particularly once high levels of renewable penetration raise the prospect of price cannibalization.
Gerard Reid, co-founder and partner at Alexa Capital, a London-based financial adviser, said he believes yieldcos will be able to make that change. “I think you’re going to move yieldcos more toward the [master limited partnership] market,” Reid told Greentech Media. “[MLPs are] taking price risk and volume risk in the market. I can only see the same thing happening with yieldcos.”
Sustained investor interest in yieldcos could drive capital into solar and wind projects in the years ahead, making them more competitive against alternatives like natural-gas-fired plants.
Many of the concerns over the governance and strategy of U.S. yieldcos that led to their underwhelming stock price performance last decade have been laid to rest.
Last month, James Robo, CEO of NextEra Energy Partners, said, "We have as much confidence in [the company's] long-term future as we ever have had."
Renewed confidence in yieldcos has already sparked several major acquisitions, with the Canada Pension Plan Investment Board buying wind yieldco Pattern Energy late last year, and Canada's Brookfield agreeing to buy TerraForm Power this January in a deal expected to close in the third quarter of 2020.
Avangrid, the U.S. utility and renewables developer controlled by Iberdrola, has said it is reconsidering the launch of a yieldco, having resisted the trend for the last decade.
As institutional interest in renewables rises, one important question is whether yieldcos can help to bring money into the earlier stages of project development.
Before being acquired, Pattern Energy had started investing into its privately held sister company, Pattern Development, telling its investors they would benefit from exposure to the higher-return development business.
“The key question is how we get more equity capital into the development stage, to bring forward more projects,” said Charles Donovan, director of the Centre for Climate Finance and Investment at Imperial College Business School in London, U.K.
“Once projects are fully de-risked and operational, and have proved their merit, yieldcos will take them," Donovan said. "But there are a lot of other investors in private markets who will take them as well.”