Two years ago, yieldcos were all the rage in renewable energy. SunEdison launched TerraForm Power and TerraForm Global to grow its asset ownership arm, aiming to develop projects and then drop them down to the yieldcos. SunPower and First Solar launched 8point3 Energy Partners (CAFD) to do the same, and most large solar companies at least explored the yieldco path. Utilities like NextEra Energy and NRG even launched their own yieldcos to house renewable energy assets.
Two years of turmoil then hit the yieldco market, driven in part by SunEdison's bankruptcy. As yields rose, the yieldco model of using new debt and equity issuance to buy projects that are accretive to the dividend fell apart. And most companies abandoned their yieldco dreams. But yieldco stocks have made a nice recovery in 2017, and the model doesn't appear to be dead for companies with assets to drop down and a long-term vision of renewable energy. And with 8point3 Energy Partners looking for a buyer, here are five utilities who should buy 8point3 or another yieldco.
Dominion (D 2.22%) is one of the country's largest utilities, with 26.2 GW of generation assets and regulated utilities in North Carolina and Virginia. It's resisted renewable energy for a long time, but in its most recent integrated resource plan it increased its plans for solar from 949 MW in 2016 to 4.1 GW in 2016. And it will grow more beyond that with solar assets in California, Utah, Georgia, and other states across the country.
As Dominion moves more into renewable energy, it will need a way to own assets held outside of the regulated utility. A yieldco would be a great place to drop down assets it develops across the country, providing a new source of funding and allowing more flexibility in Dominion's fully owned asset base.
Southern Company (SO -0.46%) is a utility that needs some good PR right now. It owns the massively over-budget Vogtle 3 and 4 nuclear plant units and the Kemper plant that was supposed to be "clean coal" but is now being transitioned to natural gas as the clean-coal equipment failed after being years late and billions over budget.
Investors and regulators would welcome Southern Company taking less risk by developing renewable assets and then dropping them down to a yieldco. And with 4 GW of new renewable generation announced since 2012, the company would be a favorable partner for 8point3 Energy Partners.
AES (AES 0.25%) has aggressively built an energy-storage business and recently acquired nearly half of sPower, one of the biggest solar developers in the country. What it doesn't have is a yieldco to own the assets it's developing. sPower is a project developer, but it's not structured to own the projects long-term, so if AES wants to maintain some value in any of the projects, it could use a yieldco.
AES and sPower may not have enough deal flow, or enough projects to drop down to a yieldco to keep their own yieldco afloat. Thus, buying First Solar's half of 8point3 Energy Partners would make sense for all parties involved.
Duke Energy (DUK -0.46%) was once the biggest owner of coal power plants in the country, but it's been talking about building more renewable energy for over a decade. And with 2.9 GW of wind and solar operating assets on the balance sheet, it has the projects a yieldco could buy. As the yieldco buys assets, Duke could use the funds to build more projects, pay a dividend, or pay down debt.
It's possible Duke Energy could be big enough to support its own yieldco, in the mold of NextEra and NRG Energy, but the company would also be big enough to be a great partner if it wants to jump into 8point3 Energy Partners.
Power producer Exelon (EXC -0.57%) has bet its future on nuclear power, but it doesn't appear that nuclear energy has much of a future in the U.S. New power plants are coming in way over budget, and older power plants are facing an uphill battle extending their licenses.
Exelon's 2.0 GW of wind and solar assets are small in the context of the company's 33 GW portfolio, so Exelon isn't big enough to support a yieldco on its own right now. However, being a partner in a yieldco could give the company a focus on renewable energy, and a brighter path to the future.