Several successful yieldco IPOs raised capital from public equity markets in 2014 and lowered financing costs for developers. We expect successful IPOs of emerging market yieldcos to be an even more significant event for the solar sector in 2015. EM yieldcos have the potential to lower cost of capital for EM solar projects by 300-400 bps and reduce solar electricity costs by 3-4c/kWh, in our view. In markets such as India where solar electricity cost of ~12c/kWh is nearly competitive with coal at ~10c/kWh, EM yielcos could make solar even cheaper than coal and other forms of electricity generation. EM yieldcos come with a lot of risks - policy, currency, market risks to name a few. But if the equity markets are able to price some of the risks in valuation, the growth potential from these EM solar markets is enormous, in our view.
What happens beyond 2016 and what happens to yieldcos in a rising interest rate environment? These are some of the questions on the minds of investors.
While interest rates could rise in the US, a globally coordinated rate increase is unlikely in our view. As long as the yieldcos are able to offset rising rates by finding incremental growth opportunities, we don't see a significant increase in yields. Moreover recent trading history of these vehicles suggest that investors view these stocks more like growth stocks as opposed to income stocks. Finally, a rising rate environment would likely mean a rising power price environment and as such we don't see any major impact on yieldco economics.
We believe the successful IPOs of some of the recent YieldCo offerings is a significant positive for the overall solar/renewables sector and a key catalyst enabling the sector's transition from subsidies to grid parity. We believe management teams can create greater long term shareholder value by spinning off projects into a new YieldCo vehicle versus selling projects.
What are some of the key positives of YieldCos for the solar sector? First, new YieldCo structure offers the company significantly lower cost of capital. Not only do YieldCos reduce the cost of equity from 10%+ to less than 5% but because in many cases, equity is trading at a lower cost than debt, YieldCos also offer the potential to change the capital structure which should enable further reduction in cost of capital. Second, YieldCos with scale and development capability have the option to grow into international solar markets or move into residential solar (where cost of capital is higher) and also potentially grow into wind/hydro/transmission segments. There is a significant amount of installed renewables/transmission that is capacity available for sale and a lot of that capacity could be acquired/dropped down into existing YieldCos.
Vishal Shah, Managing Director of Deutsche Bank, will give a keynote speech during YieldCon on 2 July in London