Yieldcos and Securitization in Solar Pv

Table of Contents

Abstract        3

Executive Summary        4

Abstract

For installed solar PV capacity to grow by an order of magnitude, it will need massive amounts of new capital investment, on the scale of many trillions of dollars. This project seeks to understand with the current capacity and future projections what is necessary for solar PV to power the globe at 50% by mid centaury and explore the financial instruments to finance Solar PV projects at cheap cost of capital. The two financial instruments that we focus in this projects are Yieldcos and Securitization in Solar PV. We try to understand in depth how these instruments work and the benefits it adds in financing solar PV. In this process we also try to understand what caused the turbulence in very short span of yieldcos history and what happened after that. This assessment in final gives an idea of how these financing vehicles can help to meet the demand towards financing Solar PV.

Executive Summary

For 3,000 years, civilizations have yearned to harness the sun—an inexhaustible fireball that could power the world’s energy needs thousands of times over. Solar came of age. Two winners emerged from the brief and brutal price war that destroyed most solar producers across the United States and Europe. One was China, which established unchallenged dominance in the production of solar panels; it also became the world’s largest market for their deployment. The other was silicon—long considered a stand-in material waiting to be replaced by a superior one1. In 2018, investors sank more than $100 billion into solar projects around the world. In the face of relentlessly falling costs and declining public subsidies, companies are just trying to stay afloat while expanding quickly enough to keep up with global market growth. Throughout all the upheaval, bankruptcies, and price swings of recent decades, the solar industry and market has grown consistently and rapidly. Over the two decades leading up to 2016, global annual PV production grew at an annual pace of roughly 40 percent1. Solar now supplies more than 2 percent of global electricity demand. 

 

For installed solar PV capacity to grow by an order of magnitude, it will need massive amounts of new capital investment, on the scale of many trillions of dollars. For capital, projects rely upon an old- tax equity, bank debt, and private equity where rates of return can be as high as 15 percent 
Kauffman is suggesting that by tapping public capital markets, the solar industry can finance projects at a lower cost of capital—the rate of return demanded by the investors who provide the capital—than it can using funds from its existing, private sources2. To deploy solar projects, the industry needs to recruit two types of capital: equity capital and debt capital. The cheapest equity capital can be raised on public stock markets, through which investors purchase stakes in listed companies and earn returns through increases in share prices or dividend payouts. The cheapest debt capital can be raised on public bond markets, through which investors can make loans for a predetermined period and receive interest payments in the meantime. 

To tap public stock markets, the industry can emulate a yieldco strategy and to tap debt markets the industry can emulate a securitization strategy.

This project seeks to understand if the uncertainty surrounding the long-term viability of the YieldCo as a financing vehicle for renewable energy is well founded. Our objectives can be summarized by these key questions:

What caused the turbulence in YieldCo market during the summer of 2015?

Yieldco performance since 2015 and Is YieldCo an unsustainable structure?

Since the summer of 2015, the YieldCo sector as a whole has been turbulent. Low oil prices have had an unexpected impact as MLP investors, seeking higher yield, demanded the same of YieldCos. There has also been a general trend of diversifying away from energy market exposure across investors. And perhaps most saliently, there were a series of negative company specific events during this time period, most notably from SunEdison, that gave investors reasons to be skeptical. Uncertainty also remains surrounding future growth expectations and if YieldCos will be able to maintain their yields as access to capital becomes increasingly uncertain. If growth slows, yields will increase and the ability to fund accretive acquisitions will be hampered. As investors began to feel the impacts of macroeconomic and microeconomic shocks during the

summer of 2015, the viability of the YieldCo financing vehicle was put into question.

We explore several explanations for the sector's turbulence since 2015 to explain what factors caused the YieldCo market collapse in 2015 and whether the devaluation was a one-time market correction or a signal of an inherently flawed corporate structure. Our findings show that YieldCo performance was significantly correlated with negative sponsor events, and MLP performance (and concurrently oil prices), but that these correlations have decreased over time.

Post-summer, the YieldCo market stabilized and has begun to recover as investors and analysts focus on the firm-specific characteristics of each YieldCo, rather than treating all firms as equivalent entities..

Our overall view is that YieldCos are not inherently flawed and that the events of 2015 were temporary setbacks. However, we propose improvements project valuation methods, and project expiration valuation of YieldCos that may significantly improve the structure. This assessment of the YieldCo financing vehicle can be used to inform future action in the sector, as well as renewable energy financing more broadly.

Current Solar PV scenario

Worldwide growth of photovoltaics has been close to exponential between 1992 and 2018. By the end of 2018, global cumulative installed PV capacity reached about 512 gigawatts, which is sufficient to supply about 3% of global electricity demand3. Solar PV showed record 40% growth in power generation in 2017 and is well on track to meet its (SDS) target, which requires average annual growth of 17% between 2017 and 20304. Solar has ranked first or second in new electric capacity additions in each of the last 6 years5.  Following is the graphs showing the installed solar capacities till 2017 and the projections for the two years taken from Bloomberg New Energy Finance.  

[pic 1]

After stating some facts and current trends about solar PV let’s move to what actually it takes to power this world with Solar PV. To get a sense, let’s get to what Elon Musk said “If you wanted to power the entire U.S. with solar panels, it would take a fairly small corner of Nevada or Texas or Utah; you only need about 100 miles by 100 miles of solar panels to power the entire United States. The batteries you need to store the energy, to make sure you have 24/7 power, is 1 mile by 1 mile. One square-mile. That’s it.” This just an idea in terms of area of land and storage that is fundamental. To depict in a global picture let’s get to what Mehran Moalem Professor  at UC Berkeley cited in an Forbes article-The total world energy usage in 2015 was 13,000 Million Ton Oil Equivalent (13,000 MTOE) - see  This translates to 17.3 Terawatts continuous power during the year. Now, if we cover an area of the Earth 335 kilometers by 335 kilometers with solar panels, even with moderate efficiencies achievable easily today, it will provide more than 17.4TW power. This area is 43,000 square miles. The Great Saharan Desert in Africa is 3.6 million square miles and is prime for solar power (more than twelve hours per day). That means 1.2% of the Sahara desert is sufficient to cover all of the energy needs of the world in solar energy. The cost of the project will be about five trillion dollars, onetime cost at today's prices without any economy of scale savings.