There has been a lot of excitement around YieldCos and their ability to improve the financing prospects for solar.
Major solar companies like Canadian Solar, First Solar, JinkoSolar, SunEdison and SunPower all seem to be investigating the possibilities of launching their own YieldCos. These companies have good reason to be interested: YieldCos have the potential to create value by improving access to cheaper sources of capital and the potential to unlock the value of solar assets that are not being recognized by the market.
When compared directly to sponsor equity, the advantage of the YieldCo is that it may provide capital at a reduced cost. For example, the cost of capital for most financiers is in the 8 percent to 10 percent range. Take-out investors are generally interested in solar projects that model 8 percent to 10 percent returns over a twenty-year period.
NRG’s YieldCo is paying its shareholders a dividend of around 3.5 percent, and Pattern Energy is paying 4.5 percent. While the difference in these rates is not the true difference in cost of capital for a developer, with enough liquidity and stability, a YieldCo may eventually demonstrate a cost of capital in the 6 percent to 7 percent range for certain projects. If projects could be financed with a cost of capital in the 6 percent to 7 percent range (vs. 8 percent to 10 percent), there would be a significant increase in the number of economically viable projects.
When it comes to unlocking the value of solar assets through a YieldCo, SunEdison has released some actual numbers. In Q3 2013, it estimated a 2.6X increase in valuation if the company could lower the cost of capital, apply underwriting assumptions and factor in residual value from PPAs -- all of which might be addressed by a YieldCo.
Then, in Q4 of 2013, SunEdison announced it had captured $158 million by retaining 127 megawatts of projects instead of selling them off. Theoretically, SunEdison could unlock the value of these assets with a YieldCo.
Despite these prospective benefits and the fact that both NRG and Pattern Energy have launched successful YieldCos with renewable assets, the solar YieldCo model has yet to be completely proven. And even if it's proven, it will only be game-changing for a handful of publicly held solar corporations.
One major challenge is tax equity. To our knowledge, no company has successfully combined a solar YieldCo with tax equity, and tax equity is one of the major limiting factors for solar development overall.
The solar power plants in NRG’s YieldCo leveraged the 1603 grant, while Pattern Energy’s YieldCo is made up of wind assets. In order to launch a solar YieldCo today, solar developers or investors would need a tax equity investor who is willing to participate in the YieldCo structure. It is going to be challenging to find tax equity investors interested in investing alongside YieldCo shareholders, as many investors would prefer to simply invest alongside a single sponsor equity investor who has more skin in the game.
The true test for solar YieldCos will be whether developers can structure deals that are appealing to all the financing sources within the solar capital stack. Until then, solar YieldCos may not adequately scale.
Natacha Kiler is the marketing director for SolSystems, a boutique renewable energy financial services firm.