In the light of the SunEdison's (SUNE) decline, the yieldco model may be bruised and broken, but there is still opportunity for repair, according to David Crane, former CEO of NRG Energy (NRG).
Yieldcos are a relatively new structure in the renewable energy space that bear some resemblance to the master limited partnerships seen in the oil and gas industry. They are spun off from a parent company for the purpose of purchasing operating assets with (ideally) stable cash flows. Investors were attracted to the vehicles because they were expected to deliver consistent cash flows.
The structures have faced scorn following SunEdison's financial troubles and allegations that it misappropriated funds one of its yieldcos, TerraFrom Global (GLBL).
Looking at the broader yieldco space, Crane sees three related problems hitting them today. Due to real and perceived risks, they no longer have ready access to capital markets, which leads to the second problem: inablity to pursue projects. Finally, investors have less trust in the sponsor.
"There's plenty of opportunity, it's just that those companies are all financially stretched right now," Crane told Real Money on Thursday. (A few months ago SunEdsion CEO Ahmad Chatilla told Crane that there was 60,000 megawatts of renewable opportunity globally.)
While the yieldco structure appears to be broken there are possibilities -- but no quick fixes -- for the vehicles.
"These yieldcos should be doing some time in private hands so that the taint that surrounds them gets forgotten," Crane said.
Part of the problem with yieldcos is that the market got ahead of itself in valuing the companies when they launched, Crane said. This was likely due to the vehicles being the new kid in town at a time when investors were hungry for yield, he added.
The second thing that could fix the structure is having the yieldcos break away from their sponsor. An infrastructure fund could take a controlling interest in the yieldcos in place of their sponsor. Under such a structure, the yieldcos would purchase assets from multiple sponsors, Crane said.
Crane spoke of some of the criticisms he heard about yieldcos when he was at the helm of NRG, which launched its own yieldco, NRG Yield (NYLD), in December 2012. On one hand, the sponsor's shareholders would accuse the company of selling good assets too cheaply to the yieldco. Meanwhile, the yieldco's shareholders would accuse the sponsor of selling at unfavorable terms.
Some of the recent criticisms of yieldcos today are based on things that were initially considered a benefit. For example, yieldcos typically do not have employees of their own. This was initially considered a virtue because it kept overhead costs low, Crane said.
However, in the more extreme case of SunEdison, the shared management and resources could mean that the parent company has undue influence over the yieldco and may not always act in its interests, as has been alleged in many of SunEdison's lawsuits.
Crane also spoke of criticism of yieldcos in which skeptics say that they are the piggy banks for the sponsor. Yieldcos were designed to be a financing vehicle for the sponsor company, Crane said, though he added that the "piggy bank" was not designed to be raided.