With about one dozen YieldCos now trading on North American exchanges, the vehicle has seen explosive growth over the past 18 months.  According a recent report by Deutsche Bank, and despite some gloominess surrounding other renewable energy investing approaches, the outlook on these structures is strong.

The cost of capital required for energy projects has been reduced via the YieldCo model due to access to cheap corporate debt and as their use of standardized project structures and documents have lowered transaction “soft” costs.  YieldCos have created efficient homes for the assets that large companies formerly kept on their balance sheets and have additionally allowed nascent entities to raise relatively cheap capital for acquisitions. They have also facilitated diversification of the renewable energy investor base as typical dividend-focused individual investors have been able to “go green” as an alternative to low yield bonds in a way that has been difficult in a tax credit-driven environment. Arguably, this has lowered return expectations, and therefore the cost of capital, further.

Despite the financing advantages of YieldCos, there is overriding market uncertainty within the solar industry in the face of the expected stepdown of the Investment Tax Credit (ITC) from 30% to 10% at the end of 2016.  However, Deutsche Bank is confident that many YieldCos will not feel the impact as they have “already untangled themselves” from their tax equity partners and replaced their contributions with increased debt. Deutsche also claims that YieldCos have the potential to facilitate the move to solar grid parity through capital structure, as equity is trading at a lower cost than debt.

Based on such projections, and given the ongoing uncertainty of the usefulness of the ITC over the next few years, developers should be working diligently to ensure that their project pipelines are ready for scrutiny from potential YieldCo partners.  Projects should be priced accurately and account for market-rate developer and EPC fees.  Standardized document suites should be utilized and transactions must be structured efficiently and in compliance with tax rules.  Developers also need to avoid the trap of presenting “shovel ready” projects without any land rights, executed revenue contracts or permits in place.  Taking these steps and avoiding these pitfalls is critical as anticipating and meeting the needs and expectations of YieldCo acquirers will likely be an increasingly important objective for developers heading into a stormy period.