How Green Bonds Work

The energy business is one that is extremely capital intensive. Conventional energy companies have capital budgets that are in the tens of billions of dollars. Globally, the International Energy Agency has estimated that total capital investment in energy infrastructure over the past four years ranged from $1.5 to $1.8 trillion each year.

Likewise, the global transition to renewable energy has required – and will continue to require – large capital investments. According to BloombergNEF, over the past decade, globally those investments have ranged from $250 billion to $350 billion each year. However, that number is expected to increase dramatically in the next three decades as the world attempts to rein in rising carbon dioxide emissions.

Where will this money come from? A major oil company will pay for capital expenditures out of existing cash flow. But that isn’t an option for a smaller renewable energy company that is trying to make a multi-billion dollar capital expenditure.

To date, sources like conventional debt and equity have provided the bulk of financing for renewable energy projects. But those sources can take many forms.

worms eye view of forest during day time

Source: Unsplash 

The Rise and Fall of the Yieldco

Several years ago, an instrument called a yieldco gained in popularity as a financing tool for renewable energy projects. The yieldco was created as a renewable energy investment analogue to the master limited partnership. U.S. Internal Revenue Code Section 7704 states that at least 90% of an MLP’s income must come from qualified sources, and Section 613 further requires qualifying energy sources to be depletable resources or their derivatives such as crude oil, petroleum products, natural gas, and coal. Renewable energy is not considered to be a qualifying energy source, therefore the yieldco structure was formed as a pseudo-MLP.

Like MLPs, yieldcos were meant to provide a predictable tax-deferred yield in exchange for cheap equity capital. They differed from MLPs in that they were not automatically exempted from corporate income taxes, but accelerated depreciation provisions of the tax code and other tax breaks offered to renewable power producers would mean that they were able to report net losses for five years at least while using cash flow to pay investors.

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