Yieldcos in the US are unlikely to be severely impacted by the reduction in the investment tax credit (ITC) from 30% to 10%, according to a Deutsche Bank research note.
The tax credits for solar projects are currently scheduled to fall by 20% at the end of 2016 with developers expected to curtail utility-scale development significantly.
But Vishal Shah of Deutsche Bank is confident that many yieldcos will feel little impact. He claims many have already untangled themselves from their tax equity partner and replaced their contribution with increased debt.
“While the cash on cash yield is potentially lower than using a tax equity partner, the yieldco certainly benefits from a higher tax shield by not including the tax equity provider,” wrote Shah. “Besides, the yield is still well above the cost of equity for the yieldcos. Second…once the ITC steps down to 10%, the CAFD [cash available for distribution] only steps down from ~US$10.56 million per 100MW to ~US$8.57 million per 100MW and the yield is still above the cost of equity.”
While increased interest payments on larger debt eat into the funds available to pass onto shareholders, some may choose to increase their own equity investment alongside a more modest debt increase, Shah said.
The research note also predicted a compound annual growth rate (CAGR) for yieldcos of 50% for the next five years, outpacing the 30% CAGR of the global solar market in the same period.
“Considering the fact that yieldcos (especially some of the first movers) may have a cost of capital advantage over smaller local developers, we expect the solar pipeline of yieldcos to grow at an even faster rate,” Shah wrote.
Any shortfall in the supply of US projects is likely to be at least partially offset by growth in emerging markets.
Shah also claims that investors have not recognised the full value of yieldcos during the early stages of their development. In particular, he said Chinese firms that had launched IPOs for downstream companies were not being credited for their efforts and investors were assigning too high a level of risk.
Unlike their US counterparts, Hong Kong-listed Shunfeng releases quarterly generation data from its solar plants offering full transparency on their performance. This offers would-be investors an indicator of their ongoing output that should go some way to making investors more comfortable with investing in them.