Alternative energy is a fast growing and exciting industry that promises to provide renewable, clean, and cheap electricity that will create jobs and fuel economic growth.
Over the last decade US solar and wind generation have experienced annual growth of 20% and 31% respectively. Globally, the growth prospects for renewables are even better.
IHS estimates that through 2020 537 GW of solar installations will account for $1 trillion in new investments. Meanwhile total renewable energy spending is estimated at $200 billion/year. Investors wanting to take part in the boom have traditionally had to resort to riskier investments such as solar panel makers, which can often be fraught with peril.
YieldCos: a safer, income-generating alternative
Solar and wind assets cannot be structured as MLPs under current tax rules. However, companies such as NextEra Energy (NYSE:NEE) and Brookfield Asset Management are able to offer limited partnerships and yieldCos that act in much the same way. YieldCos such as NextEra Energy Partners (NYSE:NEP) are able to use tax rebates and accelerated depreciation to avoid taxes for up to 15 years and generate predictable cash flows via long-term power purchase agreements (PPAs). They then use this cash flow to pay distributions, manage debt, and make accretive acquisitions to grow their distributions.
Sponsors of yieldCos own incentive distribution rights (IDRs), which means past a predetermined distribution, a greater portion of distributable cash flow flows to them. This creates an incentive to drop down, or sell, long-term contracted assets to the yieldCo. This provides cash and increasing IDR fees to the sponsor and creates a symbiotic relationship that benefits investors in both.
This slide show highlights four less risky, high-yielding companies/yieldCos and limited partnerships, that offer income-seeking investors a way to cash in the renewable energy boom. These companies are: NextEra Energy, NextEra Energy Partners, Pattern Energy Group Inc (NASDAQ:PEGI) and Brookfield Renewable Energy Partners (NYSE:BEP).