Yieldcos Offer a Bright Spot for Solar Investors in 2016
An institutional investor-led slump could be a bargain opportunity for retail investors.
The below article was originally written by Matt Whittaker for U.S. News & World Report. It featured a statement by Clean Energy Advisors CEO, Chris Warren so we wanted to share as well.
You can find the original article here.
Yieldcos may be a bright idea for contrarian retail solar investors.
Institutional investors have been dumping shares in these companies, which are formed to buy stable, cash-producing assets – like solar farms – from parent companies engaging in riskier development work. That may create a bargain opportunity for retail investors. Because yieldcos are not focused on building new projects, their primary purpose is to spin off cash to investors in the form of dividends.
What’s not to like?
Institutional investors who were the primary owners of these companies became worried about yieldco growth prospects as oil prices declined. With cheaper oil, some began to worry that renewable energy sources might not be attractive alternatives. These investors have been thinking that there may be a slowdown in renewable energy development. Since peaking in April, the Indxx Global YieldCo index has lost nearly 40 percent.
The correction has gone way too far, and now these stocks offer the best bargains for retail investors going into 2016, says James Ward, utilities and power analyst for Macquarie Research, a global research firm.
Yieldcos “should be much more heavily owned by retail,” Ward says, noting that there are more yieldco investors in Canada and the United Kingdom than in the U.S.
Even without growth, yieldcos make sense for retail investors interested in collecting cash flows over coming decades, Ward says.
As share prices have dropped but dividends have remained the same, dividend yield percentages have risen from less than 5 percent in the spring to, in some cases, more than 10 percent, Ward says. That means retail investors stand to get much more bang for their buck.
Chris Warren, CEO of Clean Energy Advisors in Nashville, Tennessee, calls the oil correlation a “ludicrous argument” because solar power is becoming its own stand-alone section of the energy sector, noting that large energy producers Duke Energy Corp. (ticker: DUK) and Dominion Resources (D) are building solar generation.
While there is no fundamental connection between oil price movements and the solar space, low natural gas prices mean lower power costs. That can make it harder for renewable companies to get returns on solar and wind projects, resulting in decreased yieldco growth in the future, Ward says. But even then, cash flow generation from existing yieldco assets is safe because it is already contracted with customers, such as utilities and large commercial companies.
Investing in the renewable space and potential benefit from favorable government regulations are also upsides, he says.
While the White House’s Clean Power Plan won’t help renewable stocks in 2016 because states will still be hashing out their carbon reduction plans, renewables will benefit over the long term, Ward says.
Additionally, Ward notes that with yieldcos, investors don’t have to make special tax filings like they do with master limited partnerships, which are similar structures in which parent companies “drop down” assets.
TerraForm Power (TERP), one of the yieldcos that SunEdison (SUNE) drops producing assets into, is Ward’s top pick for retail investors, as its high perception of risk gives it a better yield that could be a bargain over the longer term.
He also likes NextEra Energy Partners (NEP), which is a yieldco from parent company NextEra Energy (NEE). The yieldco has a lower yield because there is less perception of risk, and it has a solid pipeline of wind and solar assets, he notes.
In addition to TerraForm Power, Warren also likes NRG Yield (NYLD.A), whose parent is NRG Energy (NRG).
Ward likes yieldcos for retail investors better than other segments of the solar industry because they will pay a dividend for years and one that is safe. The utilities-paying yieldcos, for example, are high-grade regulated monopolies offering inherent stability, he says.
Investing in solar panel manufacturers is more cyclical and relies on assumptions about tariffs that can be hard to predict, he says.
And batteries to store solar energy are still years away from realizing their potential, he says.
While Warren thinks Tesla Motors (TSLA) is an interesting opportunity in the battery space, he agrees that space is still limited.
Despite some publicly traded yieldcos and other solar-related companies, it can be hard for everyday investors to get access to the solar space, where investments in potential technologies can come via nonpublic arrangements. But that may change in 2016 as crowdfunding rules may allow for more small investors to come into the market.
His company, which traditionally works with high-net-worth investors on private placements, is working on a number of vehicles for 2016 that would allow for direct investment in solar for as low as $5,000, he says.