As investors have sold off in the oil and gas sector this year, renewables have been unexpected collateral damage.
Wall Street analysts are looking for a way to explain how "yieldcos," the investment vehicles that have been renewables’ rocket ship in the last two years, have dropped even more than their hydrocarbon peers.
The simplest answer, for many, is that markets are currently frightened of all things energy, even those companies that don’t play in the volatile worlds of oil and gas.
"This emerging asset class was very hot from late 2013 through mid-2015. However, just about all solar stocks — yieldcos and otherwise — are among the clean tech names that have been caught up, as a pure sentiment trade, in the latest oil market meltdown," Pavel Molchanov, an analyst with Raymond James Financial Inc., wrote in a report yesterday.
Yieldcos had a market capitalization of $32 billion last quarter, according to Bloomberg New Energy Finance’s most expansive definition. This week, it’s closer to $23.3 billion.
BMO Capital Markets, which tracks five yieldcos, said it fell 15.6 percent from January through mid-August, while the S&P 500 grew 1.2 percent.
Yieldcos are public companies that own power plants, usually mostly renewables. They make money by selling this power to utilities through long-term contracts. Then, they send most of their profits directly to investors. The aim is to present markets with a steady, low-risk investment.
While the vehicle has been around for years, they erupted in 2013 when large renewable-energy developers realized they’d make a fine package for wind, solar and other renewable assets. Seven yieldcos have gone public since July 2013, by Latham & Watkins LLP’s count.
But the sector has reacted wildly to the crash in oil prices, sowing doubt among investors for the first time and leaving analysts puzzled. Why would cheap oil hurt renewables?
"Significant investing losses have caused many investors to wonder whether there are fundamental problems with the Yieldco model," Stephen Byrd and a team of Morgan Stanley & Co. LLC analysts wrote last month. "We have rarely seen such extreme concern, bordering on panic, among investors in this sector.
"We believe the fundamentals driving the growth of Yieldcos have been overlooked," they wrote.
Another case of irrational exuberance?
But even if there’s a touch of irrationality in the markets, there could be rational factors behind yieldcos’ nosedive, too.
The Federal Reserve is increasingly looking like it intends to raise interest rates later this year. That would reduce the appeal of yieldcos, since its whole business model is based on raising money as cheaply as possible.
Others have said that yieldcos have ridden a classic wave of market exuberance and that investors are now waking up to it.
As companies crowd into the yieldco world, it can have a double-edged effect, the thinking goes. With all the competition, yieldcos may have to overpay to get new projects. And they may have to sell power to utilities more cheaply than before.
"In general, a lot of people think they might be overexpanding very fast," said Jacqueline Lilinshtein, an associate at Bloomberg New Energy Finance.
She said some yieldcos have been making aggressive acquisitions this year, buying riskier renewable assets and moving away from the lower-risk assets that have been the sector’s bread and butter.
Haresh Patel, CEO of investment-advisory firm Mercatus Inc., said the sector should take this moment to become more choosy and more transparent.
Getting too loose with the sector, he wrote in July, could damage its long-term prospects.
"The early Yieldcos and their performance and reputation pave the way for more [Yieldcos] to enter the market," he wrote in Renewable Energy World. "This puts a lot of pressure on the incumbents to avoid any missteps."