Description
Yieldco (also known as Yield co) is a company formed to own operating assets that produce a predictable cash flow, primarily through long-term contracts. This instrument is well suited to renewable energy investment.
Instrument category
Debt financing
Implementation status
Moderate - tried and tested
Enabling conditions and success factors
- Requires a good understanding of the real risks in the market and sector.
Instrument benefits
- Separating volatile activities (such as development, research and development and construction) from regular activities of operating assets can lower the cost of capital.
- Yieldcos are expected to pay a major portion of their earnings in dividends, which may be a valuable funding source for parent companies that own a sizeable stake.
- YieldCos can overcome three important barriers that prevented many yield-seeking investors from investing directly in renewable energy projects: 1. The high transaction costs of buying large-scale, physical assets; 2. The illiquidity, or difficulty of selling these assets if the need arises; and 3. The concentration of risks that comes from buying single investments that are large compared to an investor’s overall portfolio.
Challenges and risks to implementation
- Project development is much riskier than owning operating assets. By including future growth through an undeveloped portfolio in their value proposition, yieldcos were no longer the low-risk, high-yield investment vehicles that investors sought.
- Risk of project developers trying to gain too much growth too quickly and taking on a dangerous debt.
