There's a recovery brewing in the renewable energy yieldco industry and it hasn't received a lot of attention from investors. But stock prices are on the rise and that could have a cascading effect for companies from solar manufacturers to project owners themselves. 

You can see in the chart below that 8point3 Energy Partners (NASDAQ:CAFD), Pattern Energy Group Inc. (NASDAQ:PEGI), NextEra Energy Partners (NYSE:NEP), and NRG Yield, Inc. (NYSE:NYLD) have outperformed the market and there's momentum behind the industry again if these trends hold. 

CAFD Total Return Price Chart

CAFD Total Return Price data by YCharts.

Interest in renewable assets is up

There are a number of factors that could be at play here. There have been small indications recently that renewable energy project values are ticking higher. During First Solar's (NASDAQ:FSLR) first-quarter conference call management increased guidance, in large part because it's expected selling price for projects is going up. When Brian Lee at Goldman Sachs upgraded his price target on Vivint Solar and Sunrun he cited the potential for a buyout of either company, in large part because of their valuable underlying assets. 

If the assets companies like First Solar, Vivint Solar, and Sunrun own are becoming more valuable, it makes sense that yieldcos whose business it is to own renewable assets are becoming more valuable as well. 

Utinity scale solar installation.

Image source: First Solar.

Interest rates are down

There could be higher interest in renewable energy projects in 2017 overall, but part of the increased value could be falling interest rates. The 10-year Treasury yield is often used as a benchmark and you can see that it's been declining all year.

10 Year Treasury Rate Chart

10 Year Treasury Rate. Data by YCharts.

Lower debt yields indirectly drive the price of assets with long-term cash flows higher. As assets with decades of cash flows ahead, renewable energy projects should see a bump in value as interest rates fall. 

There's potential new buyers are emerging

Another factor that's harder to track is the number of buyers in the market. Utilities like Dominion are increasing their renewable energy plans, which means both developing and buying more wind and solar projects. If utilities become big renewable energy buyers on top of yieldcos and investment funds, there could be more demand than supply. Naturally, the value of wind and solar projects would push higher, meaning rising yieldco values.

The downside for yieldcos is that higher project values could make it harder to buy projects that are accretive to their dividend. A yieldco intends to buy projects with newly issued debt and equity and if the rate of return on the project doesn't exceed the cost of capital then acquiring it doesn't make sense. Depending on how high project values go and how low dividend yields are yieldco growth could stall if acquisitions aren't accretive, even if existing projects on the balance sheet become more valuable. 

What the yieldco recovery means for solar companies

Rising yieldco stocks is in and of itself good for yieldcos, their investors, and their sponsors. Lower dividend yields will allow the yieldcos to issue equity at a reasonable yield so new projects can be purchases that are accretive to the dividend. And while rising project values may make rates of return lower, I think a dividend yield dropping 50 or 100 basis points combined with lower interest rates on debt will more than offset a slightly lower rate of return on projects. 

For solar developers and yieldco sponsors, there may be an even bigger impact. I mentioned that First Solar sees higher sale prices for assets, but SunPower (NASDAQ:SPWR) and Canadian Solar (NASDAQ:CSIQ) should see the same and they need to sell assets to raise cash in 2017. If projects are sold for more than they anticipated, we could see rising expectations and stock prices. 

Higher valuations for renewable projects could also lead to lower power purchase agreement prices for new contracts signed in 2017. Developers price energy sale prices based on what they think they can build and sell a project for. If valuations are up because interest rates are down and the pool of buyers is increasing, they'll lower what they're willing to bid in power purchase agreements. And as prices for solar energy fall, it should lead to a larger market overall. That should result in more demand for First Solar, SunPower, and Canadian Solar components (SunPower and First Solar are moving away from system development to component sales). 

It may not seem logical, but the recent rise in yieldcos and the drivers of that rise should help solar manufacturers the most in the long term. They're dealing with an oversupplied market and a year of relatively weak demand. This could be just the kind of news they need for investors to get bullish on their performance in 2018 and beyond. 

Travis Hoium owns shares of 8point3 Energy Partners and First Solar. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.