PERSPECTIVE
WORLD-GENERATION MAY/JUNE 2015 V.27 #2
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the benefit of a lower cost of capital.
Despite some recent favorable U.S.
Department of Treasury regulations and
legislative initiatives, the renewables indus-
try has largely come up empty on this front.
Yieldcos can then be viewed as a self-help
measure where sponsors use the tax bene-
fits from renewable energy assets to syn-
thetically create an entity that is not bur-
dened by the corporate income tax. In their
offering documents, most yieldcos have
promised their shareholders a 10-year
income stream that will be free from corpo-
rate level taxes.
YIELDCOS AND RENEWABLE ENERGYTAX
BENEFITS
The tax benefits available to most
renewable energy projects include tax cred-
its and accelerated depreciation. Solar proj-
ects are entitled to an investment tax credit
equal to 30% of project cost in the year it is
placed in service. Wind, biomass, geother-
mal and other projects that began construc-
tion by the end of 2013 are eligible for
either the investment tax credit or the pro-
duction tax credit, a credit based on the
amount of power produced. Most renew-
able energy projects are also eligible for
accelerated depreciation, permitting a
deduction for almost all of the cost of these
projects over the first five to seven years of
operation.
Most developers are unable to use all
of the tax benefits and commonly finance
their projects through various tax equity
investments where they effectively barter
these tax benefits to banks and insurance
companies that can use them on a current
basis. As explained previously, yieldcos can-
not trade away all the tax benefits from
their assets because they need enough to
shelter their income from the corporate tax.
Yieldcos therefore are typically interested
in holding some of their assets outside of
tax equity financings, or structuring tax
equity arrangements where some share of
the tax benefits are retained.
Most renewable energy assets current-
ly held by yieldcos have largely avoided the
challenges of tax equity by acquiring proj-
ects that previously claimed the Treasury
cash grant. The Treasury cash grant pro-
gram expired at the end of 2011 with gener-
ous grandfathering rules. While this pro-
gram was in effect, most developers elected
to take a cash grant from the Treasury
equal to 30% of the cost of a solar or wind
project rather than entering into complex
tax equity transactions with banks and
insurance companies. A project that
claimed the cash grant is ideal for a yieldco
because the tax credit has already been
monetized through the grant program, but
the depreciation tax benefits remain avail-
able to the yieldco to shelter its income
from the corporate tax. When the yieldco
acquires the project, it will typically step-up
the tax basis of the assets to its purchase
price and then write off the purchase price
over the next five to seven years. These
assets are also not subject to the tax credit
recapture rules that apply to projects that
claimed the investment tax credit, making
them easier to move in and out of a yieldco.
While yieldcos are expected to contin-
ue acquiring projects that claimed the cash
grant, the availability of these projects are
rapidly drying up, forcing yieldcos to find
suitable investment products within the tax
equity markets.
WHICHTAX EQUITY STRUCTURES WORK
BEST FOR YIELDCOS
The three most common tax equity
structures are the partnership flip, the
lease pass through and the sale-leaseback.
Yieldcos are likely to gravitate towards
lease pass-through structures and modified
partnership flip transactions while largely
eschewing sale-leasebacks.
LEASE PASS-THROUGH
In a lease pass-through structure, the
developer owns the asset and leases it to a
tax equity investor. The tax equity investor
typically agrees to make a large upfront
rental payment to the developer and to then
pay periodic rental payments under the
lease as the project generates free cash
flow. The developer and tax equity investor
then elect to pass the tax credit thorough to
the tax equity investor. While the tax credit
may be passed through with this election,
the depreciation deductions remain with
the lessor who is considered the asset’s
owner for tax purposes. In some variations
of this structure, the tax equity investor
may also acquire an ownership interest in
the lessor entity, thereby enabling it to
claim some portion of the depreciation
deductions.
The popularity of the lease pass-
through structure has been increasing
among yieldco investors. This structure fits
well with the yieldco because it enables the
yieldco to monetize the tax credits while
retaining the less valuable depreciation
deductions that can be used to shield its
investors from the corporate income tax. In
situations where the yieldco does not
require all the depreciation deductions, it
can divert some of these tax deductions to
the tax equity investor by selling a share of
its interest in the lessor entity. Moreover,
the lease pass-through structure enables
the yieldco to rely on a steady and predict-
able stream of cash flow from the rentals
paid under the lease, with little risk of the
cash being diverted away to service the tax
equity investor.
PARTNERSHIP FLIP
The partnership flip structure has also
drawn considerable interest from yieldcos,
although the structures have changed
somewhat to accommodate the needs of
yieldcos.
In a typical partnership flip transaction,
the investor is allocated 99% of the tax ben-
efits during the first six years of operation,
which amounts to nearly all of the tax cred-
its and depreciation deductions available to
the project. After the investor achieves an
agreed upon yield, or in some deals, after a
set period of time, the investor’s share of
the tax benefits is reduced to as low as 5%.
Cash flow from the project is distributed
among the tax investor and sponsor accord-
ing to a specified formula that may vary
widely from deal to deal. In some transac-
tions, it is common for the developer to
GROWTH OFYIELDCOS
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