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Gaurav Agnihotri

Gaurav Agnihotri

Gaurav Agnihotri, a Mechanical engineer and an MBA -Marketing from ICFAI (Institute of Chartered Financial Accountants), Mumbai, is a result oriented and a business focused…

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Are Low Oil and Gas Prices Undermining Renewable Energy Yieldcos?

Are Low Oil and Gas Prices Undermining Renewable Energy Yieldcos?

With stock prices soaring and the investor money flowing in at a rapid pace, renewable energy companies have experienced significant growth recently. However, this trend is slowly and steadily changing, as one of the world’s largest renewable energy companies, Sun Edison, has witnessed its share price collapse by around 70 percent since July 2015. So, what is behind this reversal of fortunes?

One of the biggest reasons for this fallout has been the loss of investor confidence in the financial structure of Yieldcos, a publicly traded company that is formed mostly by renewable companies for purchasing and operating power plants that are developed by their parent companies. Yieldcos had become enormously popular over the past year or two, but are quickly falling out of fashion.

Sun Edison planning to downsize its workforce and cut costs

Sun Edison, the biggest renewable energy company in the world, is now planning to reduce its project development costs by close to 20 percent. The IPO of its Yieldco, Terraform Global Inc., did not raise as much funds as expected, and with the collapse of its share price in the stock market, the company announced it will downsize its 7,000 plus workforce by almost 15 percent. This job cut comes at a time when oil and gas drilling companies have already eliminated more than 50,000 jobs this year. Sun Edison has also cancelled a $700 million deal to purchase a renewable energy firm called Latin American Power in addition to terminating its operations in Britain. Related: Is Oil Trending? How Twitter Influences Oil Price Volatility

 

(Click to enlarge)

Image Source: Yahoo Finance

Management at SunEdison has even informed its investors that it would not be investing any of its capital in its Yieldcos, TerraForm Global and TerraForm Power, until conditions improve in the market. “We need to adjust our tactics, at least in the short to intermediate term,” said SunEdison’s CEO Ahmad Chatila. This clearly shows that the initial euphoria of investing in Yieldcos is slowly and steadily reducing. Related: Is The Oil And Gas Fire Sale About To Start?

Yieldcos offered stable returns and dividends to their investors through their power projects and electricity payments. Formed with the intention of shielding investors against any regulatory changes, Yieldcos also provided some of the benefits of financing mechanisms like MLPs (master limited partnerships) that renewable energy was unable to take advantage of.

However, the problem began when these Yieldcos started growing too quickly thereby resulting in increased competition and higher prices for upcoming projects. As a result, investors began to lose faith, as they were apprehensive of the long term sustainability of Yieldcos. “Pretty soon, a number of investors got scared to the point of saying, ‘Look, do we really understand this model and is it broken?” said Micheal Garland of Pattern Development and Pattern Energy Group. Moreover, the possibility of an interest rate hike by the Fed made Yieldcos less favorable to investors.

SunEdison is not alone

SunEdison is not the only renewable energy company that is facing the financial crunch. Even NRG energy recently announced that it would be pursuing a more ‘limited’ strategy for its Yieldco, NRG Yield which has already witnessed a 30 percent downfall (in addition to being downgraded by Moody’s investor service) in its share price in the last few months. From this, it is evident that this Yieldco would have a tough time raising capital for its upcoming projects. The number of Yieldcos grew substantially between 2013 and 2014, including the likes of Abengoa Yield Plc, Brookfield Renewable Energy Partners TransAlta Renewables and 8point3 Energy Partners (which is a joint venture between Sunpower and First Solar and raised around $420 million through its IPO in June this year). Related: Oil Prices Still Not Low Enough To Fix The Markets

What is the real reason behind the downfall of Renewable energy Yieldcos?

(Click to enlarge)

Image Source: Vox 

The biggest reason behind the downfall of Yieldcos is the global oil price slump, the effects of which are now slowly but steadily beginning to bleed over into the renewable energy sector. Cheap oil is creating massive economic pressure on the renewables sector.

Moreover, with economic slowdown in countries like China and Japan (which are among the biggest job creators in the renewable energy sector) the renewable energy industry may face a tough time in the coming few months, which will directly affect the future performance of the Yieldcos. Lastly, many Yieldcos are now finding it difficult to raise new capital due to poor investor sentiment (as discussed previously) towards renewable energy stocks. Investors should proceed with great caution when dealing with these Yieldco stocks over the next few months.

By Gaurav Agnihotri for Oilprice.com

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  • Whattheheck on October 27 2015 said:
    The low demand and high inventory causing suppliers to drop out of the market is a perfect storm. I give it 2 years the production is dead and the stock is depleted you will see people freezing to death because of the price of fuel and the lack of supply

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