Monday, April 4, 2016

More on the solar bubble

SunEdison, the US-based solar developer which had set the cat among the pigeons by quoting Rs 4.63 for solar power in Andhra Pradesh in November 2015, is teetering on the verge of bankruptcy with its stock being reduced to a penny share. 
The company, the poster-child of clean energy firms, was among the progenitors of the yieldco structure of financing renewable energy projects.
A yieldco is a growth-oriented publicly traded corporation formed to hold operating assets that generate long-term, low-risk cash flows. The cash flows are distributed to investors as dividends. Corporate level tax is shielded in whole or in part by the developer's retained share of accelerated depreciation and, in some cases, tax credits, and may also be offset by interest deductions on project acquisition debt. Additionally, yieldcos tend to attract investors that may be tax indifferent, such as tax-preferred pension plans. Because the yieldco sponsor is a developer, yieldcos usually have access to the developer's project pipeline through a right of first refusal. This provides the developer with a ready repository for its completed projects to replenish its capital and gives the yieldco the promise of growth...Yieldcos have drawbacks, including the high cost of an IPO and the need to keep acquiring projects to maintain cash flows and stock value... because they are publicly held, the public yieldco structure does not permit the most nimble decision-making processes.
Apart from the risks associated with such financing engineering, large solar developers may be expanding far faster for their own good. SkyPower, another one of the large investors in India, has very aggressive plans to enter other markets too. They include large investments in Panama and Kenya. These are doubtless risky investments with very high likelihood of lack of complementary (mostly public) investments and potential failures.

Finally, especially in  the US, the industry has thrived on the back of fiscal incentives - income tax credits and accelerated depreciation - which helped leverage tax-equity financing. Such incentives, while essential to catalyze the development of a market, may not be the most efficient way of financing post-maturity market expansion.

On the positive side, solar plants, unlike roads and thermal power plants, have smaller construction periods and can start generating revenues pretty quickly. But this is critically dependent on the availability of land and evacuation facilities. 

No comments: