The yieldco is a relatively recent innovation in clean energy finance. There are only six renewable energy yieldcos, mostly solar power (TAN), trading on US markets. NRG Energy’s (NRG) NRG Yield (NYLD) and SunEdison’s (SUNE) TerraForm (TERP) are two of them. The novelty of yieldcos, as well as a lack of historical data about them, warrant due diligence when investing.
A yieldco is nothing more than a portfolio of projects previously operated under the sponsor’s banner. Since the portfolio is all that a yieldco has, you need to look closely at its composition to understand the investment potential. More precisely, look at the following details in a yieldco’s prospectus:
- portfolio size and mix
- remaining duration
Portfolio size and mix
According to the National Renewable Energy Laboratory, a yieldco should have enough operating projects to diversify risks related to operations, geography, and creditworthiness. Some yieldcos, such as NRG Yield (NYLD), offer a mix of assets including solar, wind, and thermal.
Another consideration is the counterparties with which the yieldco has power purchase agreements. Since a yieldco earns most of its revenues from power purchase agreements, a look at the counterparties and their financial position will help you understand the risk and its possible impact on future cash flows.
Investors choose yieldcos because they offer stable cash flows for an extended time. When power purchase agreements are about to expire, cash flows will become more volatile.
All of the above information is present in company filings. Aside from these factors, dividend history and a sponsor’s standing are important determinants.