Yieldco Valuation

The yieldco prices have fallen drastically in the last few months, due to the energy sector meltdown that has taken place in the stock markets. Not only yieldcos, but renewable energy stocks have also taken a major battering. This has led many of the yieldco sponsors to curtail the project dropdowns and halt their plans for growth. Unlike the RE companies, yieldcos depend heavily on their stock price valuation for their growth. They need to raise funds through both equity and debt routes in order to buy assets, which are sold to them by their sponsors. With low valuations and high yields, it does not make sense for these yieldcos to dilute their equity.

A large part of the correction was due to the fact that some hedge funds had piled into these securities, leading to a temporary overvaluation. The long term prospects of these yieldcos remain quite good, with solar PPAs guaranteeing their long term cash flows. Wind and Solar energy growth have already eclipsed fossil fuel capacity additions in the west and this trend will only strengthen, as these RE sources become cheaper by each year. The short term turmoil in the energy markets are unlikely to change the broader trend of yieldcos being used as means of raising cheap finance for the trillions of dollars needed for RE growth in the future.

While some companies have put their plans of bringing out yieldcos on hold, others such as Canadian Solar are still going ahead with their plans. The high quality yieldcos with strong sponsors should continue to earn interest from investors. The current downturn has made many of these securities quite attractive from a valuation perspective. Some of the yieldcos are giving a 7-8% yield, which is quite good coupled with their growth prospects. I think the governments could help by giving them a favorable tax incentive going forward. This will lower the costs for RE and bring out increasing democratization in the ownership of RE assets. Fossil fuels still get hundreds of billions of dollars of subsides which dwarf the RE subsidies. Some leveling of the playing field is needed in order to RE to keep growing and fight climate change.