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June 5, 2014Yieldcos in Solar Industry
Major solar energy developers such as SunEdison (SUNE) and Abengoa are soon going to make an IPO of their solar asset subsidiaries. This will raise much needed capital for these companies which will allow them to build more utility scale solar projects. The cost of capital is one of the biggest variables in deciding the feasibility of a solar project. These yieldcos will help these companies lower the cost of capital for their projects and deliver their balance sheets.
The “Yieldco” concept has become the rage these days and it is expected that other large solar developers such as SunPower (SPWR) will also come up with these investment vehicles. The securities will be backed by major solar plants, which generally yield fixed cash flows for 25 years. As the solar industry has matured, large investors have become more comfortable in investing in the large solar power plants which can deliver fixed cash flows over large periods of time. Major investors such as Warren Buffett and banks such as Goldman Sachs, Morgan Stanley have already invested billions of dollars in such power plants. These yieldcos will allow smaller investors to put money into these green energy plants which was earlier reserved only for the giant investors.
It is a win-win situation for both the investors and companies and should gain more fuel going forward, as solar energy capacity continues to ramp up in an impressive manner around the globe. It is expected that around 45-50 GW will be installed in 2014, at an investment for $100 billion. Large investments such as these, need big buck investors such as pension funds to get involved in funding such large projects. Yieldcos will allow both small and large investors to buy solar assets, which can give a yield of 7-8% easily. Compared to the current depressed yields in the US market this is quite attractive. This will also hedge fixed income investors, who have invested in the securities of utilities for their high yields. Note utilities face a major risk from solar energy whose costs are continuously going down.
NRG Yield has already shown sharp appreciation in shares and SunEdison’s IPO could repeat the same given that the assets are similar for both.
TerraForm Power Inc, a unit that solar company SunEdison Inc created to own and operate some of its solar power plants, filed for an initial public offering to raise up to $50 million. SunEdison is following in the footsteps of NRG Energy Inc, which last July listed a unit holding some of its wind and natural gas assets, as solar firms seek newer and cheaper ways to finance new solar power plants.