Three years ago, renewable-energy project development was supposed to be dominated by renewable-energy companies and their yieldcos. First Solar (FSLR 1.50%) and SunPower (SPWR +0.00%) were launching 8point3 Energy Partners (CAFD +0.00%); SunEdison's TerraForm Power (TERP +0.00%) was a hot stock; TerraForm Global was about to hit the market. Canadian Solar was collecting assets for its own yieldco. And manufacturers Trina Solar, JA Solar, and JinkoSolar were expanding their own development businesses, potentially with an eye on the yieldco market.
But by the end of 2017, most yieldcos were in trouble. 8point3 Energy Partners recently agreed to be sold for its asset value, TerraForm Power and TerraForm Global were sold after their parent went bankrupt, and NRG Energy sold off its stake in NRG Yield. Today, utilities are dominating the renewable-energy finance business, and that has everything to do with their scale and access to cheap capital from Wall Street.
Image source: First Solar.
Low financing costs win every time
Buying renewable-energy projects comes down to which company has the lowest borrowing costs. If one company has a cost of capital -- the cost of any combination of debt and equity used for investing in a project -- of 6%, and the next company has a cost of capital of 10%, there's no question the first will win. Solar manufacturers that launched their own yieldcos were operating under the assumption that yieldcos would have a low cost of capital long term, and could be large buyers of solar projects as a result. For the most part, that was wrong.
What's ended up happening is that utilities and finance firms have used their low costs of capital to be buyers of renewable-energy projects. NextEra Energy Partners (NEP +1.81%) is one of the few successful yieldcos, largely because it has utility NextEra Energy (NEE +0.78%) as its sponsor. NextEra Energy provides both financial backing and a flow of renewable-energy projects that the utility's development arm builds or acquires on the open market. Brookfield Asset Management has used a similar strategy with TerraForm Power, ensuring low borrowing costs for the yieldco as it buys projects.
At the same time, utilities like Southern Company, Duke Energy, and AES are using their low cost of capital to acquire more renewable-energy projects. Even without yieldco arms, they're able to remain competitive because of their scale in the traditional utility business.
Keeping borrowing costs low is crucial. It's become apparent that independent renewable-energy companies haven't been able to maintain the low cost of capital needed to stay at the top of the market. Utilities have a better shot at sustaining their advantage.
A path forward for U.S. utilities
It's become clear that utilities, not renewable-energy manufacturers and independent developers, will be the power players in renewable-energy asset ownership; the players in the industry have had to change their business models. We've seen SunPower and First Solar transition to primarily selling solar components, away from self-development and ownership of solar assets. Tesla is also designing its solar and energy storage business to sell solutions to customers, not finance projects itself (which was SolarCity's business model).
Utilities are also becoming more aggressive in both development and acquisition of renewable assets, with almost every major utility in the country expanding its renewable-energy presence in one way or another. Electricity usage is growing slowly, and the costs of running fossil-fuel plants are rising; it's no wonder utilities are using their low cost of capital to dominate renewable-energy financing, an area where they may have a long-term competitive advantage.
