U.S. solar companies that have exploded with growth at the cost of profitability altogether have received a loud message from Wall Street-  “It’s the profitability, stupid.”

 

Over the last few months, some of the most prominent U.S. solar companies have experienced a meltdown in their stock prices.

 

In response, solar major SunEdison reset investor expectations by announcing substantial reductions in growth projections and articulated a strategic shift away from their YieldCo, TerraForm. While this costly investor sentiment appears to be a step back for the industry, strategic reforms that address operational efficiency could produce long-term benefits with massive dividends. Fighting for a structural cost advantage would be a giant leap forward that moves the industry toward sustained profitability.

 

The pressure a YieldCo places on its parent company to rapidly grow pipeline can strain operations and the ability to scale in an efficient manner. The requirement of growing a massive pipeline and creating trust and transparency around the underlying value of the assets being fed into a YieldCo can pull corporate resources in opposing directions. Read More here

 

Does this mean that YieldCos should be abandoned?

 

Looking at the big picture, public markets are still a relatively untapped opportunity for financing the massive investment into advanced energy technologies that will occur in order to meet growing energy demand over the next 20 years. Seeking low-cost capital will be necessary over the long run. The issue is not with the underlying strategy that the YieldCo serves, it’s about creating execution strategies that can support the pressures associated with growth and transparency at the same time.

 

sourceREFinance

 

The problem is not really with growth either. The hard costs associated with advanced energy technologies have been, and continue to be, dropping rapidly; opening new markets everyday. The fundamentals of these technologies are extremely strong in many markets. The real issue is that a growth-focused sector has expanded at the expense of efficiency; as a consequence, companies are not improving profitability, which is clearly no longer acceptable to the capital markets.

 

Growth, therefore, needs to be increasingly obtained through an internal focus on business processes that yield structural cost advantages over competitors, as opposed to seeking a cost advantage solely through innovative financing vehicles like YieldCos. Companies that can obtain a competitive advantage by running a tighter business with excellence in operational efficiency will be able to penetrate new markets and access low-cost capital at the same time.