Towards a better understanding of renewable energy YieldCos

For Renewable Energy YieldCos to disburse high and growing present-day dividends at the cost of delayed debt-service and avoided capital expenditure is clearly unsustainable. Expecting to issue new stock at ever-higher prices to pay incumbent investors ever-higher dividends represents the foundations of a pyramidal scheme, which is most likely to unravel sooner rather than later. In the medium-term, YieldCos may be expected to offer positive and reasonably stable annualized returns, certainly not entirely “risk-free” as frequently perceived though, displaying characteristics of a bond rather than those of an equity share. This paper also demonstrates the application of the real option valuation framework to prioritize investments into YieldCos with stocks classified in order of the returns they offer, and conditioned by the volatility of such returns.