It was during a tour of a wind farm in Tehachapi, CA that I heard one of the smartest things I've ever heard an engineer say.
After stepping inside a massive 1.5 MW wind turbine, my guide, a 22-year veteran in the wind energy industry, pointed to a meter that indicated output. The numbers were getting higher and higher, faster and faster.
“Do you know what this is?” he said.
To which I responded, “Yeah, it's your output.”
“Nope,” he said. “That's money.”
Back in 2007, while most folks were still getting comfortable with the idea that renewable energy was no longer the domain of just wealthy eccentrics and wide-eyed hippies, this guy was raking it in. Sending a steady supply of electrons to California's grid, he was set.
In fact, he only came to the farm to show me around. Normally he spends his time in Mexico, taking weeklong fishing trips on his luxury Riva yacht.
At the time, I was very bullish on wind development companies. While there was still money being made in the turbine manufacturers, the longer-term and safer play was with the actual developers — the guys that had locked in long-term power purchase agreements with the utilities and had a guaranteed 20-year stream of revenue coming in.
I made a lot of money in this space, although the options were few and far between. Most developers were quite small, and nearly all were private.
But a lot has changed over the past six or seven years, and today there are a number of developers that are not only publicly traded, but insanely successful as well.
In fact, what was once just a handful of small developers has actually transformed into a handful of much larger yieldcos that own multiple alternative energy assets that produce steady cash flow. They're essentially businesses that own and operate various power plants.
Yieldcos are Attractive
Although there's still plenty to be made by playing individual solar tech companies or energy efficiency firms, I find renewable energy yieldcos to be quite attractive right now.
The renewable energy market continues to grow rapidly. Even those who are loyal oil and gas investors must admit that the growth potential in the renewable energy space — particularly solar and wind — is absolutely astounding. And this is not a trend that will peter out any time soon.
In fact, according to Bloomberg's New Energy Finance, 70% of new power generation capacity added between 2012 and 2013 will be from renewable energy technologies. This is huge.
Of course, there's still some risk involved in the alternative energy space, particularly when talking about new renewable energy technologies. However, if you want a piece of this action and you're not keen on risk, you may want to consider getting into a renewable energy yieldco.
Here are three standouts...
Pattern Energy Group (NASDAQ: PEGI)
Pattern Energy owns and operates 11 wind power projects in the U.S., Canada, and Chile. Combined, these represent a total owned capacity of 1,434 megawatts.
Pattern has developed, financed, and managed more than $12 billion worth of infrastructure assets. Roughly 3,000 megawatts of this is in wind power, and the company has more than $300 million of liquidity (as of December 31, 2013).
The off-takers of PEGI's projects boast a weighted average credit rating of 'A.' These include the following:
- San Diego Gas & Electric
- NV Energy
- Credit Suisse Energy
- Pacific Gas & Electric
- Morgan Stanley Affiliate
- Ontario Power Authority
- Manitoba Hydro
- Puerto Rico Electric Power Authority
Pattern Energy Group offers a 4% yield.
NRG Yield, Inc. (NYSE: NYLD)
NRG Yield boasts a contracted generation portfolio that includes three natural gas facilities, eight utility-scale solar and wind generation facilities, and two portfolios of distributed solar facilities. Collectively, these represent 1,324 megawatts of generation capacity.
The diversification with natural gas is nice, but quite frankly, I'm less concerned about diversification with renewable energy assets, as there are no issues of resource depletion or energy shocks.
The distribution of solar and wind doesn't change. Yes, it's intermittent, but the energy source itself can always be counted on and can never be affected by geopolitical events or logistical mishaps.
Still, with natural gas so dirt cheap, certainly NRG's natural gas assets are beneficial to the overall portfolio.
NRG has performed quite well this year, starting off 2014 at $39.95 a share and reaching a recent high of $53.19 a share. That's a 33% gain in about six months. Not bad at all.
NRG Yield offers a 2.7% yield.
TransAlta Renewables (TSX: RNW)
TransAlta is primarily focused on wind. Its portfolio contains 92% wind, with 8% in hydro.
With 17 wind facilities and 12 hydro facilities, RNW boasts 1,255 megawatts of installed generating capacity. It also boasts Canada's largest fleet of wind generation.
Management is also focused on aggressive third-party acquisitions, so I suspect it will continue to lead the wind game in Canada. As well, the company is also looking into expanding into solar, gas, and transmission assets.
TransAlta Renewables offers a 6.8% yield.
Going forward, I continue to remain bullish on renewable energy. There really is no greater growth story in the energy sector, and I would recommend that every investor devote at least a small percentage of his portfolio to renewable energy. A renewable energy yieldco is a great and relatively safe way to do this.
To a new way of life and a new generation of wealth...
@JeffSiegel on Twitter
Jeff is the managing editor of Energy and Capital and contributing analyst for the Energy Investor, an independent investment research service focusing primarily on stocks in the oil & gas, modern energy and infrastructure markets. He has been a featured guest on Fox, CNBC, and Bloomberg Asia, and is the author of the best-selling book, Investing in Renewable Energy: Making Money on Green Chip Stocks. For more on Jeff, go to his editor's page.