Oil’s downward spiral is spooking renewable energy investors
Even though there is little fundamental linkage between oil prices and the competitiveness of solar or wind power across the developed world, newly risk-averse investors in renewable energy Yieldcos are dumping investments they suddenly consider overvalued.
For the first half of 2015, the renewable energy sector appeared unstoppable, as costs around the world plunged and installed capacity soared. Ahead of an international climate summit in Paris at the end of the year, rosy projections of solar and wind adoption inspired optimism that the world could replace fossil fuels with zero-carbon energy and prevent catastrophic climate change. Few paid attention to an ironic trend: the same investors holding oil and gas assets had also piled into an obscure but crucial class of renewable energy investment vehicles called “Yieldcos,” stocks for dividend investors that that have helped drive down the financing costs of clean energy.
As it turned out, renewable energy prospects hitched to the conventional energy bandwagon hit a bump in the road. In June and July, the bottom fell out of the oil market (again); the Fed strongly hinted at interest rate increases; and a number of renewable energy firms sought large sums from public capital markets. Together, these three unrelated developments conspired to spook fossil fuel investors, who dumped renewable energy Yieldco shares and plunged prices into a vicious downward spiral.
Now the stakes are high: if Yieldcos fail, renewable energy could lose access to public markets and the low cost of capital necessary to scale up wind and solar. To recover, Yieldcos may have to restructure, seek help from parent developer firms, and hope for constructive public policy to further de-risk renewable energy investments.
A Yieldco is an innovative financial vehicle that enables institutional and retail investors to buy shares of a portfolio of projects, unlocking public capital for renewable energy. In general, a Yieldco will team up with a parent renewable energy project developer to split the low and high-risk aspects of renewable energy deployment. The parent developer undertakes the risky activities of constructing the project and finding a long-term utility buyer for the power. The Yieldco simply purchases and operates a diversified portfolio of projects, offering public markets an attractive low-risk equity investment whose tax-sheltered dividend payout beats the return from other low-risk investments, like U.S. Treasuries.