Investors bail out of clean energy's yieldcos

NEW YORK • Only a few months ago, it seemed that the renewable energy sector could do little wrong: Stock prices were soaring and money was pouring in as investors flocked to get in on the action. That is no longer the case.

Low oil and gas prices have roiled the energy markets and the spectre of rising interest rates has rattled investors' confidence in the industry's returns.

Lofty stock prices have tumbled, leading renewable energy companies to scramble for new approaches to their businesses.

Nowhere has the retrenchment been more acute than in a newfangled financing mechanism called a yieldco.

Yieldcos - public companies conceived by renewable energy firms as a way to raise cheaper capital for project development - have attracted billions in new investments.

They buy and operate power plants, mainly those that their parent companies develop. They then collect the contracted electricity fees and pay out the bulk of them as dividends.

With investors hungry for stable returns, energy yieldcos were greeted with enthusiasm through initial public offerings of their stocks over the last 11/2 years.

Last week, though, one of the most aggressive companies in the sector called a timeout.

SunEdison, which has bought several companies in recent months in a bid to become the world's largest renewable energy developer, told investors that it would not sell any more projects to its yieldcos, TerraForm Power and TerraForm Global, until conditions change.

The company said it would streamline operations, withdraw from Britain and cut roughly 15 per cent of its workforce.

That adjustment is hardly unique to SunEdison, or even to yieldcos.

Last month, NRG Energy announced that it would separate its once-heralded "green" enterprises into a separate company with a tight budget. It also said it would pursue a more limited strategy with its yieldco.

Moody's Investors Service downgraded that company, NRG Yield, saying the 30 per cent decline in its share price in recent months would inhibit its ability to raise money for new projects.

Still, executives and analysts say the industry's long-term prospects remain sound.

"Since July, the sun has continued to shine and the wind has continued to blow and the performance of the wind farms and solar farms that are on the ground hasn't changed at all," said JP Morgan analyst Paul Coster. "This is really in large part turmoil of the market's own making."

Nonetheless, that market churn is complicating efforts to push renewable energy to mass scale at a critical time in its development.

As subsidies, incentives and mandates totter on the brink of planned and potential extinction, it is more important that the industries reduce costs to compete in the marketplace, experts say.

Yieldcos were to be an important part of solving that puzzle. Without them, advocates say, it may be harder to reach that goal.

"Initially, there was some euphoria and some market over-reaction to the idea," said Standard & Poor's credit analyst Aneesh Prabhu. "But the bloom has come off the rose."

More than a dozen yieldcos have been formed since 2013, but as they proliferated, they drove up competition and prices for projects.

Despite all the turmoil, executives say interest in clean energy remains robust.

"There may not be that much enthusiasm for yieldcos, but the pendulum has swung to the opposite direction", with private lenders and corporations making investments, said Mr Lyndon Rive, chief executive and co-founder of SolarCity, an American provider of energy services.


A version of this article appeared in the print edition of The Straits Times on October 13, 2015, with the headline 'Investors bail out of clean energy's yieldcos'. Subscribe