Are YieldCos the solution to lowering renewable costs even further?

We’ve seen just how much improving financing options have transformed the rooftop solar world. SolarCity’s tremendous run has been a direct result of the ability of customers to finance or lease, rather than buy, their solar systems.

But significant financing innovation has not yet come to utility scale solar farms where projects routinely must still pay 8 to 10 percent interest on financing. Cost of capital and ease of access to that capital impacts both the price of renewable energy and how quickly projects get developed.

Much of the reason for high interest rates has been the unproven track record of solar projects and thus a greater perceived risk. But as solar farms get their first few years under their belt, this perception is slowly lessening.

Enter yieldcos. A yield company is a separate corporate subsidiary set up by energy companies that generate stable cash flows based upon long term power purchase agreements. By allowing investors to single out the cash flow, there’s generally less exposure to other risks at the underlying company. Perhaps most importantly yieldcos are fairly liquid as they trade in open markets. Last year NRG Energy listed a subsidiary as a yieldco.

The payoff of all this financing maneuvering is lower capital cost for the project itself, up to 20 percent lower according to a recent Climate Policy Initiative Paper.

The CPI paper noted that there were still some principles that needed to characterize yieldcos, ranging from lower investment fees to good liquidity. Additionally, strong power purchase agreements would need to underlie any yieldco.

For institutional investors looking for good long term dividends with relatively safe investments, yieldcos could become good options, which would in turn further drive down solar costs and further derisk the investment. With any new technology, creating financing instruments always requires a period of trust building as the historical risks and failure rates of the products are unknown. But at least unlike the mortgage securities market, it may well be harder to live without power than it is to walk away from a home.