Editor’s Note: Recently, Haresh Patel posted on article for Mercatus regarding the industry’s most effective strategies to address problems created by opening up capital markets with YieldCos. The article is re-posted below.
Opening up to the capital markets with a YieldCo introduces a whole menu of new business challenges for IPPs and Project Developers. Attracting new equity investors, dealing with the SEC, and managing internal operations puts a lot of weight on data management; the need to feed a YieldCo with a constant stream of good projects requires extremely efficient origination, screening and diligence processes. Below are the industries most effective strategies to address these obstacles:
Process, process, process – The most mature IPPs operating in the DG space are laser focused on perfecting their investment process because of the volume of projects needed to get consistent wins. A YieldCo only enhances the pressure to acquire or develop projects. Define a process and administer it, regardless of turnover in the workforce. Scaling with ‘workflow documents’ is not enough.
Start with the end in mind – Supporting a YieldCo means iteration of a lot of moving data. Identify which data will be needed to sell an asset into the YieldCo, or even better, which data is important to equity investors. Then standardize reporting around those data points within the investment workflow from the very beginning of origination. For many companies, consolidating the key data points tends to happen when a finance team is under the gun to roll up a portfolio, which is way too late.
Put controls in place through advanced systems that have well thought out embedded business workflows – Misuse of Excel, Word, Email, etc. isn’t the tools’ fault but rather, it stems from a belief that they are entirely sufficient for a complex organization. The tools you implement need to optimize a workflow and organize data effectively. Excel, for example, is a powerful tool but it tends to keep information in silos, makes updates across multiple financial models extremely cumbersome and, when each project is modeled uniquely, project comparisons become meaningless. Companies that empower excel to do more with complementing technologies tend to have more efficient screening processes and can improve investment decisions across a project pipeline.
Break Project Finance into multiple roles and shift redundant work to a lower cost resource – Project Finance is expensive because of the time and the price of the labor. A YieldCo requires a high volume of projects to be assessed, so it’s important to make sure an expensive resource isn’t clocking-in on dead-end projects. Effective teams take the 50-80% of Project Finance that can be automated or done by very low-cost resources and implement an established, repetitive process for project screening.
Be Prepared to Diversify – YieldCos are ravenous, and will consume projects rapidly. The YieldCos of the future will continue to diversify across different segments and technologies.
Invest in Reporting Tools – Be ready to provide equity investors with accurate data, or they will move their money somewhere else. Be prepared for the SEC to want data, or you will be dinged with heavy fines.
While the success of YieldCos has been largely unchallenged so far, a quick shift in market conditions could easily undermine the gains made by this innovative financing mechanism if the underlying processes that are supporting these companies are not driving good, repeatable investments. On the other hand, if the energy industry – solar in particular – can deliver more and more financial and performance data, the promise of YieldCos could be un-bounding.
By: Haresh Patel of Mercatus
Filed Under: News, Policy