In recent months, crude oil’s massive decline has dominated the commodity headlines. But in 2015, one corner of the energy market has managed to log in impressive returns.
Solar Energy on the Rise
The solar power industry is well known for its volatility, frustrating traders and investors alike wanting to place bets on the alternative energy. But thus far in 2015, solar energy firms have gained significant momentum, as well as the ETFs that track them.
Below is a chart of two popular Solar ETFs year-to-date performances- the Solar ETF (TAN) and the Market Vectors Solar Energy ETF (KWT). Please note that data is as of 3/9/2015:
Both of these funds have vastly outperformed the broader equity market, gaining over 20% year-to-date. It should be important to note, however, that these ETFs, along with the companies they track are still well off from their 2008 peak.
Yieldcos Attract New Investors
One of the biggest drivers for recent gains has been the introduction of a new breed of income-producing alternative energy stocks – called “Yieldcos.”
Yieldcos operate alternative energy power-generation facilities, which provide services to long-term customers. These long term contracts allow yieldcos to bring in a steady stream of revenues, which in turn can be distributed via dividends to shareholders. Many energy companies have started to spin-off their alternative energy facilities into yieldcos, which in turn provide tax-deferred distributions to shareholders and cheap equity capital.
Essentially, these investment vehicles are like the master limited partnerships of alternative energy. There are some key differences however; for example, yieldcos are not exempt from corporate income tax. Yieldcos do have some tax benefits though, which include accelerated depreciation provisions which allow the company to report net losses while at the same time be able to pay out positive cash flow to investors.
Investors will be happy to note that there is currently a proposal called The Master Limited Partnerships Parity Act, which would extend MLP’s tax break to renewable energy producers.
The Bottom Line
Solar energy equities have thus far made a strong comeback in 2015, logging in impressive returns and outperforming the S&P 500. For those interested in tapping into this sector, be sure research the new breed of alternative energy stocks – yieldcos – which could potentially provide a lucrative and steady stream of current income.
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Disclosure: No positions at time of writing.
