What it means for the future of Solar Energy…
Nearly a decade and half before Sun Edison went bankrupt another quasi-power company by the name of Enron had also filed for bankruptcy. Like the modern day Sun Edison, Enron too was a darling of the stock markets and had notched up phenomenal growth in its last few years of its existence. But the biggest similarity between the two companies was in the way they both employed financial engineering, which eventually led to their demise.
Enron versus Sun Edison
The differences between Enron and Sun Edison are hard to miss. Over the last year, the market capitalization of Sun Edison fell from $10 billion to way below $100 million. Enron used derivatives extensively to hide the true nature of its risk in the balance sheet. Most of the liabilities were reported as off-balance sheet items in the case of Enron. The bankruptcy of Enron eventually led to the passage of the Sarbanes Oxley Act in 2002 to regulate off-balance sheet items more rigorously.
Sun Edison used a different form of financial engineering in its balance sheet. It used a strategy called Yieldcos (Yield companies). These Yieldcos were floated as a subsidiary of the parent company with the sole purpose of buying out the parent company’s assets at a substantial premium. The parent company was effectively able to hive off its risk from the balance sheet and this assured model made these companies extremely valuable. The Yieldcos, on the other hand managed to raise funds from the public by assuring an attractive dividend yield. With interest rates at historic lows and investors starved for yield, this was the perfect foil. It was this frenzy that actually fed the demand from investors and managed to catapult Sun Edison into the big league. Effectively, it ensured unfettered and unlimited growth for Sun Edison.
Future of solar after Sun Edison…
Sun Edison has fairly large investments across the world, including India and the key question is what happens to these projects. Frankly, the impact may not be too great as the good projects will anyway find buyers. However, three inferences can be drawn from the demise of Sun Edison. Firstly, the strategy of using structures to fund sub-par projects may not work much longer. We have seen that in case of shale oil through junk bonds and now we are seeing solar through Yieldcos. Secondly, this will definitely raise some concerns over the financial viability of solar and wind energy and to that extent it will be a boost for fossil fuels and the price of crude oil. Lastly, India has aggressive plans on solar and wind harnessing and will have to seriously look at distribution and storage before expanding solar capacity. Germany has done that to perfection. That may be the big lesson for India from Sun Edison. ©
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