The Yieldco Virtuous Cycle

While a new Yieldco boom is likely, it is not certain.  The most likely event to derail the Yieldco growth train would be a US market crash.  Given the current high valuations and the worsening pandemic, a crash is impossible to rule out.   If this happens, the best Yieldcos to own today are the ones that have the highest yields and/or are retaining the most cash to invest in new projects and pay down debt.  These cheaper Yieldcos will also do well if a new Yieldco boom materializes, but not as well as the leaders.

Since I’m more interested in avoiding losses than going for the big win, the Yieldcos in the 10 Clean Energy Stocks for 2021 model portfolio are: Covanta Holding (CVA), Green Plains Partners (GPP), Avangrid (AGR), and Brookfield Renewable Energy Partners (BEP). Covanta, Green Plains Partners, and Avangrid did not appreciate as much as other Yeildcos in the past six months because they are not the pure solar and wind power owners that many investors will be looking to as a replacement for fossil fuel stocks. Covanta is a leader in Energy from Waste, Green Plains Partners is a Master Limited Partnership (MLP) that owns ethanol storage and transportation assets.

Avangrid (AGR) is not completely fossil fuel free, since it owns some natural gas utilities, which is why it has not run up with the purely renewable Yieldcos.  Nevertheless, it is a leader among electricity generators in the US, with its CO2 emissions per kWh in 2018 at 15% of the US average.  Its utility networks are 77% electric and 23% gas. 

That picture is being made somewhat worse by its planned purchase of PNM Resources.  After the PNM merger, its electricity generation also includes 22% to 32% fossil fuel (depending on if you measure by electricity capacity or production – see chart), but planned generation investments will be almost entirely renewable, while it phases out coal.  While Avangrid’s valuation remains low compared to its more renewables-focused peers, it could benefit if a Yieldco investment boom materializes.  Its existing and new renewable generation assets will become more valuable as the increased demand by Yieldcos drives up prices.  

It could also take advantage of the boom by selling its fossil fuel assets and becoming a truly fossil fuel free company, although management seems committed to its natural gas utilities, at least for the moment.  

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Disclosure: Long CVA, GPP, AGR, BEP, BEPC. Short calls on BEPC.

Disclaimer: Past performance is not a guarantee or a reliable indicator of future results.  This ...

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