YEILDCO, NEW ENERGY FUNDING W/O TAX CREDITS

Beyond Old Incentives: Unlocking A New Source Of Solar Project Capital

Andrew Redinger and Daniel Brown, 5 March 2013 (Solar Industry)

“…[T] he U.S. power market…[from 2008 to 2011] experienced a 1% compounded annual increase in installed capacity. Electricity sales statistics have been flat over the same period…By contrast, wind installations have increased by 21%, and solar installations have increased by 73%...despite the fact that the levelized cost of energy (inclusive of tax benefits) for renewable technologies is dramatically above that of conventional combined- cycle natural gas plants. In July 2012, the U.S. Energy Information Administration estimated the levelized cost of a conventional combined cycle at $66.10/MWh, wind at $96.00/MWh and solar photovoltaics at $152.70/MWh…In 2012, average wholesale prices at PJM West were $40.18/MWh, a decrease of 22% from 2011…[at MISO Illinois it was $32.06/MWh, down 17%.; at ERCOT Houston it was $35.91/MWh, down 43%; and at Palo Verde it was $30.03/MWh, down 18%.]…This decline in prices is highly correlated to declining natural gas prices, due to the shale gas phenomenon. In 2011, the average Henry Hub was $4.02/MMBtu, while in 2012, it was $2.75/ MMBtu, a decline of 31.5%....

“...[T]he average 2012 RPS target of the 31 states with RPS was 7.6%. As of November 2012, these RPS targets had been met, with 8.0% of eligible generation being renewable…[T]hese standards should continue to be a driver of growth, as the 2015 average target is 10.6% and the 2020 average target is 16.4%...In an era of marginal increases in required capacity, with the price of wholesale power across the country declining, when tax equity is increasingly constrained, how can the renewable energy industry sustain its growth?”

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“…For more than a decade, the public equity markets have been a tremendous source of capital for master limited partnerships (MLPs) and real estate investment trusts (REITs)…These assets typically generate significant cash flow from long-term revenue contracts. MLPs and REITs pay the majority of this cash flow out to investors as dividends…[P] ublic equity investors value these assets at 7% to 8% distributable cash flow yield, which is the equivalent of a levered equity discount rate…[Renewable power assets] are, in many ways, higher quality…[They are non-cyclical and typically have revenue contracts of 15 to 20 years with investment-grade counterparties. If investors value MLP and REIT assets at 7% to 8% distributable cash flow yield, there is good reason to believe they will value renewable assets at similar, if not lower, yields…

“Due to current Internal Revenue Service rules, renewable assets are not eligible for the tax-advantaged status enjoyed by MLPs and REITs…[W]e believe a vehicle for accessing this low-cost equity capital exists today…A YieldCo is simply a C corporation that acts as a holding company for renewable assets. Due to the myriad of tax benefits available to renewable energy assets - such as bonus or MACRS depreciation, investment tax credits, and production tax credits - the YieldCo vehicle can carry forward net operating losses and shield taxes for extended periods of time. As additional assets are developed and/or acquired, the tax shield period is extended even further…By allowing renewable energy projects to access mid- to high-single-digit costs of capital, YieldCos can enable the renewable energy industry to sustain the momentum it has been building.”

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