In the last six months, YieldCos have fallen from stock market darlings to pariahs. 

YieldCos are companies that buy clean energy projects such as solar and wind farms, and use the majority of free cash flow from these projects to pay dividends to investors. Many are listed subsidiaries or carve-outs of large developers of clean energy projects.

Last year, investors repeatedly punished leading solar developers and manufacturer First Solar and SunPower for their reluctance to launch YieldCos. When they finally relented and formed a joint YieldCo (later called 8point3 Energy Partners), both were instantly rewarded. Their stock prices each rose 20 percent over the course of two weeks.

Now, the situation is reversed, with many YieldCos trading at half their peak prices. The Global X YieldCo ETF (YLCO) is trading around $10, down one-third from its $15 launch near the peak of the YieldCo mania in May.

Is the YieldCo model broken?

Many market observers are questioning if the YieldCo model is broken.

The YieldCo model has no official definition, but its detractors typically point to the rapid dividend growth targeted by many of the ones based in the United States when making their point. This dividend growth was achieved (as I explained at the time) by public offerings of stock at successively higher prices, which produced more capital per share to invest. More capital per share allowed dividend growth and higher share prices.

Each link in this virtuous cycle depended crucially on the last, and when share prices broke down, the ability to raise cheap capital did too. 

What managers are saying

If the YieldCo model is broken, it is only this aspect of the model that’s a problem. How YieldCo managers are confronting the new environment depends on how much they intended to rely on stock market capital before the crisis.

Below is what a selection of YieldCo managers said in their recent third-quarter conference calls. How bullish they are depended directly on how much they were relying on stock market capital for their growth plans, but all emphasized how they remain sustainable businesses even without growth.

Independent YieldCos, which often have other ways to access capital and less pressure to buy projects from their sponsors, were also generally more sanguine about the market turmoil.

Subsidiaries of clean energy developers

NextEra Energy Partners: “The YieldCo model can work and work well”

NextEra Energy (NEE) is widely seen to be the strongest of YieldCo sponsors, and many investors appreciate this strength. Although NextEra Energy Partners (NEP) shares have fallen significantly, Jim Robo, chairman and CEO of NEP, said, “The YieldCo model can work and work well for our partnership like NEP that has the right structure and the support of a world-class sponsor.” 

He thinks “the capital markets’ re-evaluation of the YieldCo space can play to our competitive advantage.”

But even NEP is cautious about raising new capital in the current market conditions. “We continue to evaluate the optimal capital structure for NEP. As it has some additional debt capacity that can help finance future transactions.” The YieldCo “plan[s] to issue a modest amount of NEP public equity” in 2016, but will both buy and sell NEP units based on market conditions.