Renewable Energy Financing Hits a Snag

Source: By DIANE CARDWELL, New York Times • Posted: Wednesday, October 14, 2015

SunEdison, which built the 24-megawatt Cascade solar plant in California, said it would trim expenses and streamline operations, which would include cutting its work force about 15 percent. CreditSunEdison, via PR Newswire

Only a few months ago, it seemed that the renewable energy sector could do little wrong: Stock prices were soaring and money was pouring in as investors flocked to get in on the action.

That is no longer the case. Low oil and gas prices have roiled the energy markets, and the specter of rising interest rates has rattled investors’ confidence in the industry’s returns. Although energy and financial experts say that the basics of the business remain sound, the lofty stock prices have tumbled, leading renewable energy companies to scramble for new approaches to their businesses.

Nowhere has the retrenchment been more acute than in a newfangled financing mechanism called a yieldco. Yieldcos, public companies conceived by renewable energy companies as a way to raise cheaper capital for project development, have attracted billions in new investments.

The yieldcos buy and operate power plants, mainly those that their parent companies develop. The yieldcos then collect the contracted electricity fees and pay the bulk of them out as dividends. With investors hungry for stable returns, energy yieldcos were greeted with enthusiasm through initial public offerings of their stocks over the last year and a half.

Last week, though, one of the most aggressive companies in the sector called a timeout.

SunEdison, which has bought several companies in recent months in a bid to become the world’s largest renewable energy developer, told investors it would not sell any more projects to its yieldcos, TerraForm Power and TerraForm Global, until conditions change. The company said it would trim expenses and streamline operations, including reducing project development by 20 percent, withdrawing from Britain and cutting roughly 15 percent of its work force.

“We need to adjust our tactics, at least in the short to intermediate term,” Ahmad R. Chatila, SunEdison’s chief executive, said in a conference call with financial analysts on Wednesday.

That adjustment is hardly unique to SunEdison, or even to yieldcos. Last month, NRG Energy announced that it would separate its once-heralded green enterprises — which include a home solar division and an electric vehicle charging network — into a separate company with a tight budget. It also said it would pursue a more limited strategy with its yieldco. On Tuesday, Moody’s Investors Service downgraded that company, NRG Yield, saying the 30 percent decline in its share price in recent months would inhibit its ability to raise money for new projects.

Still, executives and analysts say that the industry’s long-term prospects remain sound.

“Since July, the sun has continued to shine and the wind has continued to blow and the performance of the wind farms and solar farms that are in the ground hasn’t changed at all,” said Paul Coster, an analyst at J. P. Morgan. “This is really in large part turmoil of the market’s own making.”

Nonetheless, that market churn is complicating efforts to push renewable energy to mass scale at a critical time in its development. As subsidies, incentives and mandates totter on the brink of planned and potential extinction, it is more important that the industries reduce costs to compete in the marketplace, experts say. Yieldcos were to be an important part of solving that puzzle. Without them, advocates say, it may be harder to reach that goal.

“Initially there was some euphoria and some market overreaction to the idea,” said Aneesh Prabhu, a credit analyst at Standard & Poor’s. “But the bloom has come off the rose.”

The idea behind yieldcos was simple on its face: Bundle together completed or nearly completed power projects that ostensibly offered steady, low-risk cash flows in the form of power purchase agreements covering electricity payments over 15 years or so. Because they were tied to power plant developers — including Abengoa, NextEra Energy and Pattern Development — the yieldcos would have steady pipelines of projects from the parent companies and the parent companies could replenish their capital through those sales.

Part of the rationale was that energy development is expensive and renewable energy projects do not have access to tax-advantaged financing mechanisms like master limited partnerships. Those partnerships have spurred the building of oil and gas infrastructure like pipelines over the decades. “This was an inventive twist on master limited partnerships, and provided some of the same benefits,” said Dan W. Reicher, executive director of the Steyer-Taylor Center for Energy Policy and Finance at Stanford. But, he said, they do not get all the tax benefits.

Nonetheless, for a while, the system proved attractive to investors, and analysts and clean-energy advocates predicted ever more activity and success in the sector. More than a dozen yieldcos have formed since 2013, and many have gone public, including 8point3 Energy Partners, a joint venture of First Solar and SunPower that raised $420 million in its initial public offering in June.

But as yieldcos proliferated — each with a hunger to bring in new projects to satisfy investor demand for growth — they drove up competition and prices for projects. Investors began to lose confidence that there would be enough projects to go around. In addition, the threat of rising interest rates made the yieldcos less attractive than more conventional financing. And depressed prices for oil and gas brought down energy values over all.

“Your growth story is only as good as your last project or your pipeline that you’re projecting,” said John J. Marciano III, a lawyer at Chadbourne & Parke who focuses on the development, financing, purchase and sale of energy and infrastructure projects and aviation equipment. “Once one started to go down, the others just probably followed the pack.”

Several analysts and executives attributed the declines to a mismatch between the investors — which include hedge funds looking for a relatively quick return — and the investments, intended to pay back over a long time. Others said investors who were losing money in oil and gas began dumping their renewable stocks to cover those losses.

Either way, the new companies became caught in a kind of self-reinforcing downward spiral in which the drop in share prices raised dividend yields, making it more expensive to borrow money or issue equity. That, in turn, lowered the returns on new projects and pushed down share prices even more.

“Pretty soon, a number of investors got scared to the point of saying, ‘Look, do we really understand this model and is it broken?’ ” said Michael Garland, chief executive of Pattern Development and Pattern Energy Group. He and others argue that the model works but must go through a market correction and attract different kinds of investors.

At SunEdison, one of the most prominent companies involved, there were additional pressures. Its acquisition spree — especially its purchase in July of Vivint Solar, a fast-growing rooftop solar installer that markets its services to residential customers — left investors wary and confused. Executives at SunEdison, whose stock has declined by 70 percent since the Vivint announcement, acknowledged last Wednesday that they needed to do a better job of explaining to investors what they were doing and why.

Despite all the turmoil, executives say interest in clean energy remains robust. “There may not be that much enthusiasm for yieldcos, but the pendulum has swung to the opposite direction,” with private lenders and corporations making investments, said Lyndon Rive, chief executive of SolarCity. That company has not yet created a yieldco but Mr. Rive said it was “keeping an open mind” to the approach, saying, “Financing is still very strong.”