The $26 Billion Hole That Has Clean Power Scrambling for Cover

Two years ago, yield companies like TerraForm Power Inc. and NRG Yield Inc. were the newest, hottest thing for energy investors – a way to make steady returns off the booming clean energy sector. Share values soared after they were spun off by parent companies eager to cash in. Today, those same parent entities have put as much as $26 billion worth of sales to their affiliates on hold after the market value cratered.

“Yieldcos are stranded right now,” Ben Kallo, an analyst with Robert W. Baird & Co. in San Francisco, said. Given the drop in their values, yieldcos effectively have lost their sense of purpose, which was to use their shares to buy new plants. “The best course of action is to wait it out,” he said.

The swift change in fortunes came as the Federal Reserve prepares to raise interest rates, reducing the attractiveness of yieldco returns, and amid a broader selloff in commodities this year. For SunEdison Inc. and NRG Energy Inc., the drop in yieldco values has meant the removal of a willing – and related – buyer for power projects, sales that would fund future growth for the parent company.

SunEdison offers up a cautionary tale for investors. The world’s biggest renewable energy developer said last month it doesn’t expect to sell any projects to its two yieldco units through 2016 after they slumped in value.

The first, TerraForm Power, has plunged 55 percent from its $42.15 April peak and closed on Nov. 2 at $18.78. That’s down from $25 at the time of its initial public offering in July 2014. The second, TerraForm Global Inc., has lost 47 percent since its trading debut in July. Given the losses, Chief Executive Officer Ahmad Chatila has said SunEdison will look to unload assets to third-party buyers or hold them.

Yieldcos Stranded

At least 12,873 MW of projects by developers in North America, such as NRG Energy Inc. and SunEdison, were targeted by the companies’ yieldcos, according to data compiled by Bloomberg. Utility-scale assets had an average acquisition price of about $2.8 million a MW for solar and $2 million for wind at the end of 2014, according to Bloomberg New Energy Finance. Using that estimate, the facilities that were targeted for sale to yieldcos are worth at least $26 billion.

“It’s bad timing because demand for renewable energy is stronger than ever,”  Jay Jacobs, an analyst at Global X Management Co. in New York, said. Global X manages the only exchange-traded fund dedicated to yield companies.

“When the market goes down, it can hurt the pipeline of new projects,” he said.

NRG Energy, the largest U.S. independent power producer, said in September that it’s not a good time to sell shares of its yield investment vehicle – NRG Yield – and the company can avoid going down that route until 2019 at least.

Clean Energy

Utility owners seeking to increase their clean energy holdings, such as Southern Co. and Consolidated Edison Inc., will likely compete with private equity investors to snap up renewable projects, said Jay Rhame, who helps manage $2.5 billion including utility funds at Reaves Asset Management in Jersey City, N.J.

Canadian Solar Inc., the third-largest panel maker, said last month it’s considering a private yieldco to take some of its operating power plant assets, since the public market is now shut. “If the market doesn’t come back, we’ll choose other ways to finance our projects,” CEO Shawn Qu said in an interview in Beijing.

Parents of the yield companies hope they will be able to issue shares again to finance power plants at some point in the future. For the time being, they’re in a holding pattern.

“Yieldcos were created to be financing vehicles, and if they are not able to finance projects, then they are not really serving their purpose,” Rhame said.

©2015 Bloomberg News

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