Renewable-focused YieldCo finance will outstrip oil & gas equivalents

A new Deutsche Bank report has predicted renewable energy finance vehicles  – known as “YieldCos” – will rapidly outgrow their oil and gas industry equivalents, and become and order of magnitude bigger than their fossil fuel rivals.

YieldCos – listed vehicles that offer a high rate of return for investment in large-scale solar and wind farms, in much the same way as real estate investment trusts and the oil and gas industry’s mutual limited partnerships – currently account for less than one per cent of renewable energy financing.

But Deutsche Bank expects this to change rapidly, growing from more than $30 billion in market cap now to more than $1 trillion.

In doing so, it will further reduce the cost of finance for renewable energy projects, and highlight the massive shift in global investment trends, from the floundering fossil fuel industry to the clean energy sector.

“We expect YieldCos to not only increase the availability of capital, but also provide significantly lower cost of capital to the renewables sector,” the Deutsche Bank analysts write.

“Just like the MLPs acted as a key growth enabler of the oil & gas sector in the US, we expect YieldCos to be a significant growth enabler of the renewables sector. “

MLPs in the US underpinned the massive growth in the US oil and gas industry because they offered investors significant opportunities for wealth creation. They now have a cumulative market capitalisation of more than $US700 billion, after showing compound annual growth rates of 27 per cent over the last 24 years.

But Deutsche says those opportunities in renewable energy YieldCos will be even greater, because “the YieldCo phenomenon is global, growth rates are likely to be much faster than MLPs and the size of the market is likely to be much larger than the oil and gas sector.”

“We expect the market cap of YieldCos to grow at an ever faster rate as a greater percentage of renewables financing gets done by YieldCos over the next 10 years.”

In turn, this is expected to rapidly expand the opportunities for large-scale renewable energy projects, buoyed by a huge flows of capital that can provide low-cost financing. Investors are getting returns of 15 per cent or more per annum.

© 2015 Solar Choice Pty Ltd

Giles Parkinson

Giles Parkinson regularly contributes unique content to Solar Choice News. Giles is the founder and editor of clean energy industry news service RenewEconomy. He is a journalist of 30 years experience, a former Business Editor and Deputy Editor of the Financial Review, a columnist for The Bulletin magazine and The Australian, and the founding editor of Climate Spectator.
Giles Parkinson