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  • Roger S. Conrad

Another Look at Yieldcos

By Roger S. Conrad on Jul. 31, 2015

Even NRG Yield has expanded its purview to include clean energy, forming a partnership with its sponsor, NRG Energy (NYSE: NRG), to invest in portfolios of rooftop solar-power leases originated by NRG Home Solar. A second partnership, announced in May 2015, will acquire portfolios of distributed generation assets owned or developed by NRG Energy.

This business line carries a unique set of risk factors: Signing a 20-year contract with a homeowner entails much more credit risk than selling output under long-term contracts to a regulated utility.

Questions remain about how providers of rooftop solar-power systems will manage this credit risk through the economy’s ups and downs, especially if the companies privilege quantity over quality.

When highlighted yieldcos in the April 2, 2015, issue of Energy & Income Advisor, the two buy-rated stocks traded at or above our targets.

But yieldcos have underperformed handily over the past 10 weeks, with the Bloomberg North American Power Yieldco Index giving up almost 20 percent of its value.

(Click graph to enlarge.)Yieldco vs WTI

Interestingly, the index’s fortunes have tracked West Texas Intermediate crude oil, with these equities gaining strength when oil prices weaken and selling off when crude tumbles.

This relationship reflects concerns that inexpensive oil and natural-gas prices will undermine the economics of renewable-energy projects—a replay of what occurred in the early 1980s, when the Reagan administration eliminated subsidies established by the Carter administration.

Cheap oil and gas prices and the uncertainty of the upcoming presidential election raise questions about whether mandates for renewable energy and rules on greenhouse-gas emissions will come under pressure.

Meanwhile, development of solar-power capacity in the US has accelerated to take advantage of tax credits before they expire at the end of 2016, raising concerns about a potential boom and bust.

Although renewable-energy technology has improved by leaps and bounds since the 1970s, most of these solutions remain expensive sources of intermittent power that only keep the lights on when the sun shines and the wind blows.

But even a Republican victory in the 2016 presidential election won’t necessarily stamp out renewable energy the way it did in the early 1980s.

For one, developers have taken advantage of subsidies to build a significant amount of capacity, and electric utilities have discovered that they can grow earnings by recovering investments in wind and solar power in their rate base. Clean energy appears to have a powerful patron besides the government.

And even if investment in new renewable-energy capacity screeches to a halt, yieldcos’ cash flows would still be protected by long-term contracts.

In some sense, yieldcos face the same questions as midstream MLPs—namely, will they be able to deliver on the market’s lofty growth expectations, or will they undergo a re-rating?

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor