What Commercial Solar Developers Need to Know about Yieldcos

If you’d like to listen the interview, please scroll to the middle of the article. 

There’s been a huge amount of buzz about yieldcos and their potential impact on financing more commercial solar projects by providing cheaper capital. There have been 8 IPOs in 2013 and 2014 with many more on the horizon.

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There have been some basic descriptions of yieldcos in the trade press, but nothing has described what commercial solar installers need to know about this new legal structure or how it could impact their day-to-day business.

This article will try to translate some of the buzz and address the questions that commercial solar installers will likely have. For example:

• Do yieldcos have a tax appetite?
• How will yieldcos impact that day-to-day operations of a commercial solar developer or EPC focused on mid-market projects?
• When should you start doing research on yieldcos?

What is a Yieldco? Why are they useful?

I’ve listed a number of my favorite yieldco articles at the bottom of this article, but this article on SunPower entering the yieldco market does a good job of describing the basics and attractiveness of yieldcos in the solar market.

Yieldcos offer among the lowest costs of equity funding for renewable energy projects for several reasons. Firstly, these companies generate stable and predictable cash flows by selling electricity under power purchase agreements and distribute most of their cash through quarterly dividends. Secondly, the model allows investors to single out the cash flows generated by the power generation assets without giving investors exposure to other aspects of the parent company’s business. Additionally, Yieldco investments are quite liquid, since they trade in the open markets.

Yieldco 101 Target Audience

This article is for three audiences:

1. Professionals experienced in commercial solar development who don’t have extensive experience in finance.
2. Commercial solar EPCs who want to start developing their own projects.
3. Solar professionals who have heard of yieldcos but don’t know what they are or how they could impact their business.

LISTEN TO THE INTERVIEW

Note: For the most part, I called the person’s name who was answering if you couldn’t tell. In then first question, it is, Tom Konrad, Chris Lord, Keith Cronin.

Here is who I connected with in the interview:

• Tom Konrad – Tom runs a blog called Alternative Energy Stocks. He also writes for Forbes and is Director of Research at the JPS Green Economy Fund. In the interview, he provides the perspective of the public equity markets.
• Keith Cronin – Keith runs SunHedge, a solar consulting firm. Keith sold his solar company to SunEdison in 2007. Now he provides consulting to solar developers, EPCs, property owners, and high net worth individuals. In the interview, he provides the perspective of the solar developer.
• Chris Lord – Chris is a former lawyer with deep banking experience. He is the principal at CapIron Inc., a firm he created to provide advisory and consulting services to customers, owners, developers, utilities, suppliers, installers and distributors covering the full range of value-add in renewable energy and energy efficiency. In the interview, he provides the perspective of the private investor community.

Here’s what you’ll learn

These are somewhat in order, but we did jump around.

YieldCo 101 

• What are yieldcos? What’s the buzz? Why do people care about this within solar industry?
• Do yieldcos have a tax appetite? Can they provide tax equity for my project?
• What is a yieldco, and how does it differ from independent power producers and other entities that own or control energy generation assets?
• What does the best deal for a yieldco look like? How is it structured? What kind of an off-take? Utility-scale versus DG commercial? What projects are economical?

Yieldcos and Public Equities

• What are your top yieldco stock picks?  Any to avoid?
• Why pick these versus traditional stocks?
• How will interest rate changes impact yieldcos?

Commercial Solar Implications

• Do commercial solar installers need to spend any time thinking about these? (Less than 5MW)
• When do commercial solar installers need to pay attention to yieldcos?
• What should a developer consider before partnering with a yieldco or selecting one as a buyer?
• How, specifically, would working with a yieldco change a deal? (Not flexible in structure or due diligence)
• What kind of rates are yieldcos looking for in transactions for cash equity? For debt?
• How to think about starting a yieldco versus owning your own assets.

Conclusions / Parting Thoughts

• Will yieldcos revolutionize or otherwise open up the world of renewable energy finance, and particularly solar?

Here are the articles I’ve found to be most useful. If you’re completely unfamiliar with the term, these would be useful to read through before listening to the interview.

• Yieldcos on Wikipedia
• A Rock That Churns Out Cash: Solar YieldCos
• Why SunPower is Increasingly Holding Solar Projects on Its Books
• Solar YieldCos: Proven Concept or Hype?
• This ‘Yield Co’ Variation Is Yet Another Financial Innovation in Clean Energy