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All you wanted to know about...Yieldcos

LOKESHWARRI S K | Updated on January 22, 2018

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As fossil fuels begin their final century of existence, there is a wild scramble to increase electricity generated through renewable sources. Regulators across the globe are looking for ways encourage renewable energy to keep the lights from going out on planet earth.

To increase the production of power through sources such as solar or wind energy, the generating companies have to be provided with adequate funds. Yieldcos are an innovative method of funding sustainable energy projects that is gaining popularity in the United States. There are reports that the Indian regulators are also taking a long and hard look at these.

What is it?

We are all familiar with Real Estate Investment Trusts (REITS), wherein an investor buys a share in a completed real estate project and enjoys a steady stream of income from the rent earned by the property.

Yieldcos work on broadly similar lines. Alternate energy companies can hive off operating assets that are already earning revenue to Yieldcos that are then publicly listed and traded. The parent company continues to own a substantial stake in the company and the public are usually offered a minority stake.

The Yieldco distributes the earnings adjusted for interest, tax, maintenance cost, principal payment on debt taken for the project and a certain amount set aside for prudent conduct of the business. Of the adjusted earnings, 70 to 90 per cent is paid as dividend to the shareholders.

Yieldcos are a new concept in US too and only a handful of them such as NRG Yield Inc., Pattern Energy Group, Inc., TransAlta Renewables, Inc., Abengoa Yield Plc, TerraForm Global and TerraForm Power. SunEdison owns TerraForm Power and TerraForma Global.

Why is it important?

There is an ongoing race towards obtaining energy security and increasing the generation of renewable energy is the only way we can achieve that goal. Currently, renewable energy accounts for 15 per cent of electricity generated in India. The country wants to increase the share to 40 per cent by 2030. To do that, the current capacity will have to increase over ten-fold in the next fifteen years.

Renewable energy companies can raise funds for this expansion from Yieldcos. They can monetise some of their operational assets and the money can be used to fund new projects. Since the parent company continues to hold a majority stake in the Yieldco, it can continue to benefit from the earnings of the asset.

Many investors do not want to invest in to renewable energy projects in the early stages since they carry higher risk. Such investors would be happier to put their money in to Yieldcos that hold assets that are already generating income. The risk is lower here and returns are likely to be more predictable.

Why should I care?

Indian financial institutions are taking renewable energy rather seriously now. Yes Bank and EXIM Bank have issued green bonds to raise funds to finance these projects. Yeildcos could also be soon allowed in India. If these instruments make it to the exchanges, you need to understand how these work, in order to decide if you want to park some of your money in them. If you care about the fuel security of the country and want to keep our planet green, these instruments could be to your liking.

The bottomline

There’s a green way to earn some steady returns.

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