Global experience with yieldcos over the last decade has shown that as with any capital-intensive and fast-growing industry, there is a risk that the company grows too quickly, affecting its ability to manage its debt and pay its shareholders (IRENA, 2016). Yet, if operative assets (or a portfolio of different grade assets) are of good quality, are diverse and produce distributable cash flow (once capital expenditures to maintain the assets are taken into account), then this cycle can continue, helping to attract new investors and increase flows of finance to renewable energy projects.
A number of good practices in the design and operation of a yieldco can allow it to grow and meet investor expectations. Importantly, a manageable growth strategy is critical to avoid volatility in the yield valuation, which was a factor in the SunEdison crash (Mitidieri, 2020). As with structured finance, diversity of assets can also address potential associated risks. For instance, a portfolio of renewable energy asset types and locations can help manage issues like hydrological risks from droughts or periods of low electricity output from wind and solar farms.
In India, the opportunity for yieldcos as a way to manage operative assets while raising capital for new projects is not unprecedented. In 2014, the Securities and Exchange Board of India (SEBI) issued regulation for Infrastructure Investment Trusts, which allow companies to unlock tied up capital by transferring operating and revenue-generating infrastructure assets to a newly created trust (UNESCAP, 2017). Similar to the yieldco structure, these trusts (e.g. the Greencoat Capital renewable investment trust in the United Kingdom) create investment opportunities for certain investor classes looking to avoid risks associated with project development. Though, the SEBI rules for these trusts have a stronger requirement than yieldcos, as the capital raised has to be used to repay at least 50% of the debt.
To date, these infrastructure trusts in India have had limited number of applications for renewables, but their experiences from the overall growing use of investment trusts in India may provide useful insights for using the yieldco model for renewable energy projects. This could help to attract new capital, for instance from institutional investors. Recent developments by Powergrid and NHAI, two prominent public sector entities in the renewable energy space planning to monetise assets through Infrastructure Investment Trusts, may also help build momentum in the market (Jai, 2021; Ray, 2021).
Key findings of an OECD 2020 empirical investigation* found that around USD 150 billion of institutional investment in green infrastructure (not exclusively renewable energy assets) globally was already held through yieldcos, highlighting the important role of these securitised products. Further information on the emergence of yieldcos in institutional investor activity can be found in the OECD 2015 report on Mapping Channels to Mobilise Institutional Investment in Sustainable Energy. Additional information will also be included in the OECD 2021 Progress Update on De-risking Institutional Investment in Green Infrastructure (June 2021).
* Note: the report focuses on real economy investments, which in consequence exclude most corporate stock holdings as well as corporate bonds.