Up on the main stage at the BNEF Summit, there was no buzzier term than “resilience”. But in the side sessions among finance professionals, another catch-phrase was making the rounds: “investment yield vehicles.”
For some time now, one of the conundrums for clean energy fundraising has been finding ways for large institutional investors, such as pension funds, and small retail investors (individuals) to put their money into clean energy projects. Certainly, opportunities exist to back individual companies trading on the stock exchanges that make solar modules or wind turbines. But the performance of these firms has been wildly erratic and hardly the kind of thing grandma would want to put her life savings into.
Meanwhile, actually investing in an operating wind, solar or geothermal project can represent a relatively low-risk opportunity with a decent yield, particularly compared to yields offered today on supposedly “risk-free” 10 year Treasury bills.
Enter the yield vehicle, an opportunity for an investor to put his or her money into a portfolio of operating projects with stable, reliable cash flows. Depending on how you ask, these kinds investment opportunities represent the true long-term opportunity for clean energy fund raising or merely the flavor of the month.
Recent weeks have seen a flurry of activity in this area with two yield cos. of different flavors getting floated on North American exchanges and Congress now considering a tweak in the law that could make yet a third kind of clean energy yield co. available to investors.
On Tuesday, Bloomberg reported that power generator AES and private equity firm Riverstone planned to float on the Toronto Stock Exchange a new vehicle known as Silver Ridge, a portfolio of projects that will eventually consist of 522MW when all its projects are online. Shareholders are being asked to put up $171m to own shares in the projects and will receive dividends from the cash flows they generate.
The key to a yield co. is, of course, to offer the investor the highest possible rate of return against the lowest level of risk. One way to raise return levels: lower the overall rate of tax paid on any profits these portfolios earn.
Along those lines, two other legal structures are on the table for clean energy: Real Estate Investment Trusts and Master Limited Partnerships (MLP’s). Both offer “single taxation” of profits meaning that whatever these entities earn they can pass straight to shareholders who pay tax on those dividends. The yield co. is not subject to the corporate tax a typical company must pay.
In February, investment firm Hannon Armstrong filed to IPO a clean energy REIT and now is now seeking $250m from investors to put into energy efficiency and renewable energy projects.
For their part, MLP’s have long been popular in the oil & gas industry where they have been used to bankroll pipelines and other infrastructure projects. But under US law, most renewables projects were not eligible to form MLP’s.
An effort is now afoot to change that and this week saw important developments toward that end at the Bloomberg New Energy Finance Summit. On Tuesday, Senator Lisa Murkowski, the ranking Republican on the Senate Energy & Natural Resources Committee, told Summit attendees that she supports legislation that would allow clean energy projects for the first time to use MLP’s for fundraising. Perhaps even more significantly, the next day American Petroleum Institute CEO Jack Gerard (pictured below left, with Bill Richardson and Bill Ritter) told attendees that the oil industry actually supports the idea. Such a move from the powerful oil lobby plus Murkowski’s support could provide the cover that oil state members of Congress need to support an extension of MLP’s to renewables.
Still, not all Summit attendees were buying that MLP’s could change the world by allowing many more projects to get built in the US. Michael Bernier of Ernst & Young told attendees at a panel on US tax equity financing that MLP’s are “not the panacea that I think some people make it out to be.” He noted that while these structures might make more equity available to certain projects, they would do little to expand the pool of “tax equity” needed by projects.
(Photo: Peter Foley/Bloomberg)