Enel Green Power is forming a yieldco with its renewable assets in the United States, joining a trend that started about 2 years ago and accelerated in 2014.
The idea behind yieldcos is not new. It involves the creation of a company to buy and retain operational infrastructure projects and pass the majority of cash flows from those assets to investors in the form of dividends. Structurally, yieldcos are very similar to real estate investment trusts (REITs). They are also almost ideal for renewable energy projects such as wind farms.
A crucial aspect of yieldcos is that they are not exposed to development or construction risk—this is borne by either the parent company or a third-party developer. Yieldcos simply acquire infrastructure projects that are or have recently become operational. They fund the acquisitions by issuing shares (normally debt is only used at the project level), which they can do at a lower cost of capital (the return on the investment that shareholders want to invest in the company) than their parent companies or developers because they’re shielded from development and construction risks.
Squeezing Out Risk
Another key aspect of yieldcos is that their assets produce fairly predictable cash flows that can be paid to shareholders as dividends. That’s why renewable energy projects such as wind farms are perfectly suited for them. Wind farms and solar power projects are not significantly exposed to changes in the market. On the upstream side, they depend on free resources—wind and light—while on the downstream, they are protected by regulations (feed-in tariffs, long-term power purchase agreements, Renewable Portfolio Standards, and so on).
For developers, yieldcos offer a quick way to sell maturing assets and redeploy capital into early-stage developments that offer higher returns. From an investor point of view, yieldcos offer an investment option with very little risk—which is a testament to how far the investment community’s understanding of wind and solar technologies has come.
New Era or Fad?
The emergence of yieldcos has been driven by a strong initial public offering (IPO) market in the United States and Europe over the last few years, as well as the impact of quantitative easing (QE) policies around the world that resulted in lower interest rates and returns from conventional financial products (i.e., bonds and equities). As a result, the 6%–7% dividend yield of listed green infrastructure funds looks attractive to investors, compared to 4% interest rates on 10-year corporate bonds and even less for government paper.
Still, yieldcos might turn out to be a short-lived fad. As the economic recovery accelerates, and talk of interest rate hikes in the United States fills the financial media, investment vehicles like yieldcos could lose some of their appeal. So if you have solar or wind assets lying around, you may want to take some fashion advice from Enel’s CEO Francesco Starace (an Italian, after all): “Now is the time to do this.”
Tags: Building Innovations, Commercial Real Estate, Finance & Investing, Renewable Energy, Wind Power
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