Two of Europe’s largest utilities are avoiding investments in yieldcos, a business model that has raised $28 billion for the renewable energy industry, citing volatility in market conditions and pressure to keep the businesses growing at all costs.

Enel SpA and Energias de Portugal are avoiding publicly traded yieldcos, preferring to own and operate wind and solar farms they develop. Under a yieldco, those assets are hived off into a separate business that pays cash flows to investors. The challenge for executives of yieldcos is to ensure their businesses keep growing.

“It is something we don’t want to have -- an obligation to perform no matter what is a recipe for disaster,” Francesco Starace, chief executive officer of Enel, said in an interview at the Bloomberg New Energy Finance summit in London. “Growth is good if it provides value, not at any cost.”

Investors bought yieldco offerings in the past 2 1/2 years by SunEdison Inc. and NRG Energy Inc. then sold off holdings amid concerns interest rates would rise, choking off a source of cheap capital to the entities. EDP, which is the main utility in Portugal, shelved work on making a yieldco in September after studying it for four months. The CEO said his company wanted to avoid complicated business structures.

“Utilities are not about accounting, they are about creating value,” said EDP CEO Antonio Luis Mexia said conference. “It should be developing, building, operating, it should be a normal business.” 

Enel runs a private yieldco with General Electric Co.

EDP will go down the “traditional M&A” route rather than a yieldco structure, Mexia said. The market went through the recent dip because “yieldcos did a lot of things they shouldn’t have done, buying into things that were not renewables-related. Investors were stressed,” he said.

Enel sees interest rates as another risk to the yieldco market. The investments are attractive against a backdrop of low interest rates, but “if there is even a risk for interest rates to rise, all of a sudden they are a disaster,” said Starace. “We don’t want to be exposed to these kinds of things.

Yieldcos listed in the U.K. such as Bluefield Solar Income Fund and Greencoat U.K. Wind have said that the European model for this financial product is sustainable while the U.S. one is not.

“A yieldco should be valued on return, not on EBITDA,” said Stephen Lilley, partner at Greencoat Capital, in an interview. “After 20 to 25 years, the asset is worth nothing, which U.S. yieldcos do not seem to take into account, as they focus on pipeline rather than return.”

The type of investor differs greatly in the two markets according to James Armstrong, managing partner of Bluefield LLP, which advises the Bluefield fund. In the U.S., many were short-term such as hedge funds which has contributed to the volatility. In Europe, they tend to be longer-term.

“None of our funds have an obligation to grow,” said Lilley. “Our share price isn’t higher or lower depending on our pipeline. Unless new assets benefit the company, we don’t buy them.”