From their emergence in the market in the latter half of 2013 until early summer 2015, North American power yieldcos played a major role in the sustained growth of renewable power mergers and acquisitions activity. Complemented by renewable project development that was, in turn, spurred by the only recently salvaged expiration of production tax credits ("PTCs") and investment tax credits ("ITCs"), the yieldco participation—fueled both by sponsor drop-down activity and third-party acquisitions by yieldcos—brought significant buying power to the renewable power market.
That role was stymied somewhat beginning late in the second
quarter of 2015 by a significant decline in value of many of the
publicly traded yieldco vehicles, which negatively affected the
access those yieldcos had to the currency that drove their
acquisitions across the prior 24 months. As a consequence of an
inability quickly to access relatively inexpensive sources of
capital, yieldcos will likely go missing to a large extent as a
primary driver of the renewable energy M&A market for much of
2016. That is not to suggest that the model itself lacks viability.
In fact, the fundamentals of most yieldcos remain very sound
insofar as they are the holders of high-quality, long-term,
contracted power assets with creditworthy off-takers as
counterparties. Rather, it poses the question of what players, if
any, will step in to drive renewable power transactions for the
foreseeable medium-term future.
Some of the slack created by the absence of yieldcos in the
renewable project acquisition pipeline will likely be made up by a
mix of utility companies, infrastructure funds, traditional private
equity funds, and even direct investment by pension funds. The
former—in an effort to digest the Clean Power Plan, meet
existing and evolving state
renewable portfolio standards, and navigate the volatile home
solar market in many jurisdictions—could find themselves
buyers and, subject to overcoming some hurdles presented by
normalization, may be able to finance renewable asset acquisitions
with tax equity and include those assets in rate base.
Infrastructure investors could also benefit from a yieldco retreat
and may, with lower return thresholds than traditional private
equity fund investors, discover themselves advantageously
positioned to acquire high-quality contracted assets if the price
is right. Similarly, as pension funds continue to increase their
direct participation in the power asset class generally, they too
may become buyers of renewable projects or portfolios.
Finally, the level of certainty and predictability brought about by
the extension of the PTC until 2020 and the ITC indefinitely
(albeit tapering down to 10 percent in 2022) should spur meaningful
and sustained renewable power project development over the next
four or more years, setting up what should be a robust renewable
power M&A market for any and all potential participants. Who
those participants will be in the short term, and how aggressively
the market will heat up, remain to be seen.
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