european utilities: renewables offer selective value
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PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 150.
Equity Research
12 May 2021
Re
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In
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European Utilities
Renewables offer selective value
We initiate on four renewable stocks, Encavis (OW), Grenergy (OW), Solaria (EW) and
Orsted (UW), and we upgrade SSE to OW. Engie remains our Pan-European Top Pick.
The European renewable sector has fallen nearly 30% year to date, and we believe the
recent sell-off has created some selective value in some names. However, overall, we
continue to prefer the vertically integrated renewable utilities over pure-play renewables.
Within the vertically integrated sub-sector we prefer SSE (upgraded to OW), RWE,
Iberdrola and Enel – all of which have less than three years’ implied pipeline value priced
into current share prices, more than covered by secured projects. In pure-play renewables
we initiate with Overweight ratings on Grenergy (nearly 100% implied upside) and Encavis.
We believe Orsted (UW) is still pricing in over 11 years of pipeline, of which it has secured
less than half with aspirational projects still needed to meet 2030 capacity estimates.
There is no question on the scale of the decarbonisation of the power sector – where
we see potentially the need to build 6,000GW of renewable capacity (c.€5,000bn cost) in
OECD countries alone over the coming 30 years. We see enormous increases in capacity
additions across the utility sector with installed capacity nearly tripling by 2030.
Expected returns on this pipeline are more open to debate. There remain significant
longer-term risks to the returns for both current and new-build projects (e.g. technology
risks, market power achieved price deflation, future deflationary new-entry pricing for
renewables, overly-competitive auctions), and whilst we are cautious on pricing in
positive return spreads out to the end of the 2050 energy-transition period, we believe a
positive ROIC-WACC spread will be achievable this decade as our base case.
We use a consistent renewables valuation methodology. We split our renewables
valuations into ’commissioned’, ‘secured’ and ‘aspirational’ pipeline values. Our ‘base-
case’ estimates include both secured pipeline as well as aspirational capacity estimates
to 2030. Our ‘blue-sky’ renewables scenario uses a 2050 capacity estimate and our
‘black-sky’ scenario uses commissioned / under construction and secured projects only.
The highest-quality renewable companies are those with the highest ‘secured’ pipelines
versus ‘aspirational’ and those with the fewest implied pipeline years priced into the
current share price. Overall, we see a number of vertically integrated utilities with less
than three years’ pipeline priced into the current share price – and nearly all are already
covered by secured projects. Pure-play renewables have significantly higher levels of
aspirational projects and we think need significant levels of aspirational projects in their
implied pipeline valuation.
Engie remains our Top Pick, with RWE, SSE and Iberdrola preferred names. Grenergy
and Encavis are our preferred pure-plays.
INITIATING COVERAGE
European Utilities
POSITIVE
Unchanged
For a full list of our ratings, price target and
earnings changes in this report, please see
table on page 2.
European Utilities
Dominic Nash
+44 (0)20 3134 2364
dominic.nash@barclays.com
Barclays, UK
Peter Crampton
+44 (0)20 3555 0125
peter.crampton2@barclays.com
Barclays, UK
Jose Ruiz
+44 (0)20 3134 3140
jose.ruizfernandez@barclays.com
Barclays, UK
Georgia Dawson
+44 (0)20 7773 2766
georgia.dawson@barclays.com
Barclays, UK
Barclays | European Utilities
12 May 2021 2
Summary of our Ratings, Price Targets and Earnings Changes in this Report (all changes are shown in bold)
Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E)
Old New 10-May-21 Old New %Chg Old New %Chg Old New %Chg
European Utilities Pos Pos
Encavis AG (ECV GY / ECVG.DE) N/A OW 14.92 N/A 18.00 - N/A 0.45 - N/A 0.51 -
Grenergy Renovables (GRE SQ / GREG.MC) N/A OW 24.70 N/A 45.20 - N/A 0.60 - N/A 1.10 -
Iberdrola (IBE SM / IBE.MC) OW OW 11.47 14.00 15.00 7 0.59 0.59 - 0.64 0.64 -
Orsted (ORSTED DC / ORSTED.CO) N/A UW 864.60 N/A 800.00 - N/A 26.85 - N/A 18.72 -
RWE (RWE GY / RWEG.DE) OW OW 31.58 41.00 42.00 2 1.42 1.42 - 1.79 1.79 -
Solaria Energia y Medio Ambiente (SLR SM / SLRS.MC) N/A EW 15.24 N/A 16.70 - N/A 0.16 - N/A 0.49 -
SSE (SSE LN / SSE.L) EW OW 1479 1575 1770 12 87.2 88.3 1 87.0 105.1 21
Source: Barclays Research. Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.
FY1(E): Current fiscal year estimates by Barclays Research. FY2(E): Next fiscal year estimates by Barclays Research.
Stock Rating: OW: Overweight; EW: Equal Weight; UW: Underweight; RS: Rating Suspended
Industry View: Pos: Positive; Neu: Neutral; Neg: Negative
Barclays | European Utilities
12 May 2021 3
The Story in 9 Charts
FIGURE 1
The renewable sector has fallen by nearly 30% year to date,
underperforming the utility index. We see selective value.
FIGURE 2
Growth in renewable GW will be enormous with a maximum
10x increase in capacity in OECD countries by 2050
Source: Bloomberg, Barclays estimates Source: IEA, Barclays estimates
FIGURE 3
We see returns drifting down, but still +ve spread to WACC…
FIGURE 4
…leading to a c.0.2-0.4x invested capital NPV for pipeline
Source: BNEF, Barclays estimates Source: Barclays estimates
FIGURE 5
Our ‘base-case’ valuation uses a three-stage valuation: i) commissioned/under construction, ii) secured pipeline and
iii) aspirational pipeline to reach 10 years. Our ‘black-sky’ ignores aspirational, and ‘blue-sky’ is a 2050E NPV
Source: Barclays estimates
70
90
110
130
Jan 2021 Feb 2021 Mar 2021 Apr 2021 May 2021
Ind
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Integrated Regulated Renewables
Generators Waste0
2,000
4,000
6,000
8,000
10,000
2017 2022 2027 2032 2037 2042 2047
GW Development Dynamism Deadlock
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
2015 2017 2019 2030
RO
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)
WACC range ROIC average
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Onshore Wind Offshore Wind Solar
€/M
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Capex/MW NPV/MW
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% o
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Operating Secured Aspirational
Barclays | European Utilities
12 May 2021 4
FIGURE 6
Our preferred renewable strategy has focus – but not single
country/technology risk
FIGURE 7
Upside from current share price for base, blue and black
Source: Barclays estimates Source: Barclays estimates
FIGURE 8
The implied pipeline valuation in the share price range from 12 years (Orsted) down to zero for the vertically integrated
utilities, and the secured pipeline is longer in these stocks too
Source: Barclays estimates
FIGURE 9
RWE, Grenergy and Encavis are our renewables preferred names. In vertical integrated utilities Engie remains our Top Pick,
with SSE, Enel, and Iberdrola preferred
Source: Barclays estimates
-60%
-40%
-20%
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20%
40%
60%
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Implied pipeline Secured pipeline
OWEWUW
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Integrated Regulated Renewables Generators French Environment
Barclays | European Utilities
12 May 2021 5
CONTENTS
The Story in 9 Charts .................................................................................................................................... 3
Stock summary: Selective value – still prefer vertical integrated renewables ...................................... 6
Renewables summary ................................................................................................................................ 10
CATALYST CALENDAR FOR EUROPEAN RENEWABLE STOCKS ........ 19
Renewables investment summary ............................................................................................................ 20
1) Enormous global renewable capacity requirements ................................................................ 23
2) But what returns will these assets make? ....................................................................................... 32
COUNTRY SUMMARIES ................................................................................ 44
France – Major renewables push should benefit EDF & Engie ........................................................ 45
Germany – E.ON and RWE future growth capex not reflected ....................................................... 47
Italy – Enel best positioned for renewables growth ........................................................................... 50
Iberia – Iberdrola and Endesa our growth stock picks ...................................................................... 52
UK – best positioned on energy transition theme .............................................................................. 54
COMPANY SUMMARIES ............................................................................... 59
ESG OVERVIEW: ENCAVIS (ECV GY) ......................................................... 60
Encavis (OW, PT €18.0) ............................................................................................................................. 61
ESG OVERVIEW: GRENERGY (GREG.MC) ................................................. 66
GRENERGY ....................................................................................................... 67
We initiate coverage on Grenergy at OW, PT €45.2/sh .................................................................... 67
ESG OVERVIEW: IBERDROLA (IBE.MC) ..................................................... 80
IBERDROLA ...................................................................................................... 81
Reiterate OW rating – increase PT to €15/sh (from €14) ................................................................ 81
ESG OVERVIEW: ORSTED (RWE DC) ......................................................... 87
Orsted – initiate with UW; PT 800DKK ................................................................................................... 88
FINANCIAL SUMMARIES ........................................................................... 109
ESG OVERVIEW: SOLARIA (SLRS.MC) ................................................... 110
SOLARIA ........................................................................................................ 111
We initiate on Solaria with EW, PT of €16.7/sh ............................................................................... 111
ESG OVERVIEW: SSE (SSE LN) .................................................................. 121
SSE – upgrade to OW PT 1770p ........................................................................................................... 122
Barclays | European Utilities
12 May 2021 6
Stock summary: Selective value – still prefer vertical integrated renewables
The European renewable sector has fallen nearly 30% year to date. We see selective value.
In this note we have initiated on 4 renewable stocks and used a common methodology to
value renewable pipelines across the entire utility and renewable sector.
Orsted, UW DKK 800 PT
Grenergy, OW €45.2 PT
Encavis, OW €18.0 PT
Solaria, EW €16.7 PT
We believe the recent sell-off has created selective value in some names. Overall we still prefer
the vertically integrated names over pure-play renewables even after the renewable sell-off.
We have updated the following stocks:
SSE, PT from 1575p to 1770p, upgraded from EW to OW
RWE, OW, PT €42.0 from €41.0
Iberdrola, OW €15.0 PT from €14.0
Engie OW, €16.0 PT
FIGURE 10
Renewables have been the worst performing utility sub-sector through 2021 – down nearly 30% ytd
Source: Bloomberg, Barclays estimates
Engie remains our Pan-European Top Pick, and within the vertically integrated names we
prefer SSE (upgraded to OW) RWE, Iberdrola and Enel – all of which have less than 3 years
implied pipeline value and all are covered by secured projects. In pure-play renewables we
initiate with an OW on Grenergy (nearly 100% implied upside) and Encavis. We believe Orsted
(UW) is still pricing in 12 years of pipeline of which it has secured less than half.
70
80
90
100
110
120
130
Ind
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Integrated Regulated Renewables Generators Waste
Barclays | European Utilities
12 May 2021 7
We initiate on four renewable names:
Orsted (UW, PT DKK800)
We initiate on Orsted with a DKK800 price target and an UW rating. Orsted has developed a
global leading portfolio of offshore wind assets and pipeline, but we see the relative implied
valuation of this pipeline as too high versus its renewable peer group.
Orsted’s ambition is to develop 15GW of offshore wind and 5GW of onshore by 2025, and
develop 30GW, both onshore and offshore, by 2030, as set out at their 2018 Capital Markets
Day. We expect these targets to be raised at their 2 June 2021 Capital Market day. Our base
case scenario is that Orsted owns/develops 32.5GW of offshore wind by 2030 as well as
15GW of onshore technologies with EV returns of 6.5-7% ROIC.
If assets commissioned and under construction only are valued, then we value Orsted at
458DKK, rising to 560DKK if the secured pipeline only is included (our ‘black-sky’ valuation).
Our base case is an 800DKK valuation, using the same methodology as we use for other
renewable companies (i.e. a 10-year pipeline). Our ‘blue-sky’ valuation is a 1,265DKK
valuation – essentially assuming a 6.5-7% ROIC versus a 4.3-4.8% WACC – a 200-250bp
ROIC-WACC spread on a 2050 estimated development of 140GW of offshore wind and 50GW
of onshore renewables.
Every 1% change in WACC (assuming ROICs remain the same) changes our base case
valuation by between 30-40% and every €10/MWh change in power prices (c.20%) changes
valuation by 20-30%.
We estimate the current share price implies a pipeline length of 12 years being priced into
Orsted. With less than 4 years of secured pipeline in order to reach 2030 targets Orsted
contains significant risk that it will not secure enough projects to meet its demanding
valuation.
Solaria (EW, PT €16.7)
We initiate Solaria with an EW rating and a €16.7 PT. We think Solaria will deliver above
average growth in the European utilities sector, but its demanding multiples already price in
most of its growth potential. We also think there is mounting pressure on its past policy of
high returns, given the increasing competition for retail margins in Spain. Our downside case
(€13.9) anticipates a greater-than-expected slowdown in the Spanish new capacity
installation rate and lower achieved Iberian power prices. Our upside case (€21.6) considers
a scenario of maintaining achieved prices in new PPA contracts and new project pipelines
added after the lifting of the Spanish renewables moratorium in July.
Grenergy (OW, PT €45.2)
We initiate Grenergy with an OW rating and €45.2 PT. We estimate Grenergy offers double-digit
growth over the next five years, which is not reflected in the share price. We think a discount
would not be justified due to its high exposure to Latin America. We think the share price is not
taking into account the transformation in its geographical mix, with future higher weight in
strong currency markets like Spain. Our downside case (€29.4) anticipates a greater-than-
expected decline in achieved power prices in Spain and a slowdown in the installation rate of
new capacity.
Encavis (OW, PT €18.0)
We initiate on Encavis with an Overweight rating and a €18.0 price target. Our Overweight
rating is based on our view that the current Encavis share price undervalues its sizeable
renewables growth pipeline and existing renewables assets (Encavis is looking at doubling
the size of signed own capacity to 3.4 GW in 2025 from 1.7 GW in 2019A).). A win by the
Green Party in the 26 Sep 2021 German Federal elections could also be a significant positive
for Encavis. Our positive assessment is also based on our view that Encavis’ ~31% year-to-
Barclays | European Utilities
12 May 2021 8
date share price underperformance against the European utility sector SX6P is overdone.
This underperformance is mainly related to a lower weighting of Encavis in the Ishares
Global Clean Energy index, which is now complete since 19 April 2021.
Key OW ratings – Engie remains our Pan-European Top Pick
FIGURE 11
We see significant upside in Grnergy, Engie, RWE, SSE, Iberdrola, Enel. We still see pure play renewables as relatively
expensive with some selective value exceptions
Source: Barclays estimates
Engie (OW, PT EUR 16.0)
In this report we re-iterate our Overweight and Top Pick designation for Engie within the
European utility sector. In our view, Engie’s share price is not representative of its asset quality,
cash-generation power and medium-term EPS outlook. We see past near-term issues (new
CEO nomination, Suez stake sale and FY20 results) and view future catalysts (strategic update
& mid-term guidance on 18 May 2021, part-sale of Client Solutions) as supportive of the
recent share price outperformance trend (Engie +14% since 1H20 vs. SX6P +10%). We also
believe that the group’s renewable ambitions are currently underappreciated. Engie remains
significantly undervalued, in our view, trading at ~11.4x and ~10.7x PEs in 2021E and 2022E
(>25% discount vs SX6P) with a superior medium-term dividend yield of ~6-7% (vs. SX6P on
4-5%).
RWE (OW, PT increased to €42.0 from €41.0)
As discussed in this report, RWE is one of our key Overweights in the pure-play renewables
segment based on valuation. In our view its share price undervalues its renewables growth
prospects, and even more so following the recent overdone YTD underperformance (RWE
shares have underperformed the European utility sector SX6P by ~9% YTD). RWE actually
got 3 GW in the recent UK offshore leasing round and 350 MW in this Polish offshore wind
auction. This is further underlined by RWE’s ~30% and ~35% valuation discount on 2022E PE
and EV/EBITDA versus its renewables subsector peers.
We see a very favourable catalyst timeline for RWE after this summer. With German Federal
elections on 26 Sep, a Green Party involvement in the next government, we believe would be
viewed positively for RWE as Germany’s “Renewable energy champion”. In our view, RWE’s
next Capital Market Day (CMD) in 4Q21 after the German elections could be a major positive
event. This is because we see the company communicating a 10-year renewables growth
pipeline with 2030 targets. In addition, we see the provision of more information on an
accelerated exit from coal/lignite (potential sell-down or demerger). This would significantly
improve RWE’s ESG credentials. In our view, such a reduction in RWE’s coal exposure
36.9% 34.0%
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Integrated Regulated Renewables Generators French Environment
Barclays | European Utilities
12 May 2021 9
wouldn’t be too hard to achieve as there is no understated/unfunded liability issue of the
mining provisions. More importantly the coal phase-out liabilities are ring-fenced and fully
covered by assets next to the signed German coal contract with the government providing
legal provisions that reference RWE to be allowed to either sell, change RWE Power’s set-up
or legally separate and transfer its German lignite operations and/or mines (both separately
or in entirety).
Iberdrola (IBE SM, OW, PT EUR15.00)
We reiterate our OW rating for Iberdrola and we increase our PT to €15 (from €14). The key
drivers of value will be the execution of the organic growth pipeline and potential cost
synergies from acquisitions both in the US (PNM Resources) and in Brazil (CEP). Iberdrola has
reinforced its vertical integration structure, and it should benefit from it as a protection
against power price deflation in the future. Iberdrola has not yet priced in all the benefits from
the integration of CEP and PNM Resources and value creation from project pipeline execution.
Our upside case (€17.2) contemplates a scenario with: 1) an improvement of 3% in achieved
power prices for renewables, 2) a 50 bps decline of the Spanish risk-free rate and 3) improved
load factors for renewable activities.
SSE (Raised to OW from EW, PT 1770p from 1575p)
We update our valuation for SSE and increase the PT from 1575p to 1770p, and upgrade from
an EW to an OW rating with nearly 25% implied share price upside and a 5.7% dividend yield;
we see a TSR of nearly 30%.
SSE is now two asset classes: regulated networks and renewables, with 92% of its EV derived
from these two. Both these asset classes are undergoing particularly strong growth driven by
the energy transition story. We expect RAB growth of 6-7% annual growth with Ofgem‘s Net
Zero 1 scenario, and we expect to see net renewable output tripling from 10.7TWh to
>30TWh by 2030 and gross renewable (pre sell-downs) nearly 5x to 50TWh.
On regulated networks we see the potential for SSE to achieve a RORE of 9.0% in their
regulated networks versus a cost of equity of 6.8%, and coupled with strong long-term
growth we estimate a 34% premium to RAB valuation, and a significant discount to the recent
WPD acquisition (c.60% premium).
SSE has one of the strongest offshore wind pipelines in European utilities, with a total of
4.6GW of secured offshore and onshore wind renewables. We estimate SSE will secure 5.9GW
of further capacity by 2030 to meet our 17.2GW of total renewables by 2030.
We estimate the current share price reflects a pipeline length of 3.4 years, of which SSE has
actually secured 4.9 years of projects by EV.
Our upside valuation for SSE is 2585p, which reflects our view that SSE will have over 17GW
of renewables (pre sell downs) by 2030 and 60GW by 2050 – a build rate of 1.1GW by 2030
and an increase to 1.5GW/year thereafter.
Catalysts include the ScotWind auction due September 21, the UK CfD auction later this year,
the CMA referral in Q3 for regulated networks. Scottish politics will continue to provide a
headwind, but we believe this will be more than outweighed by clarity on the UK and Scottish
Governments’ ambitions around COP26 and the energy transition narrative.
Barclays | European Utilities
12 May 2021 10
Renewables summary
The following chart summaries the installed capacity, as well as that under construction, of
European utilities as at the end of 2021.
The top 6 European utilities by installed/under construction capacity are predominantly
vertically integrated, with Enel, Iberdrola, EDF and Engie the biggest players. The largest pure-
play renewable is EDPR with nearly 14,000MW of predominantly onshore wind.
FIGURE 12
The largest renewable names are within vertically integrated names, and the pure players
are significantly smaller
Source: Company data, Barclays research
According to BNEF there were 1,229GW of installed renewable and hydro capacity in the
OECD countries at the end of 2020. This would mean European utilities have a material
market share globally in renewable energy – approaching 20% of global market share. A
summary of global market share in renewable energy is summarised in the pie-chart below.
FIGURE 13
European renewables have a 20% global market share in renewables end 2020
Source: BNEF, Company data, Barclays estimates
-
10,000
20,000
30,000
40,000
50,000
60,000In
sta
lled
MW
Onshore wind Offshore wind Solar Hydro Other
Other, 80.3%Enel , 4.0%
Iberdrola, 3.3%
EDF, 2.6%
Engie, 2.3%EDP, 1.7%
EDPR, 1.1%
RWE, 0.9%
Orsted, 0.8%
Acciona, 0.8%
Endesa, 0.7%SSE, 0.5%
Naturgy, 0.4%
Neoen, 0.3% Drax, 0.3%
Solaria, 0.2%
Barclays | European Utilities
12 May 2021 11
Not all renewable companies are the same….
We have segmented the renewable companies in the chart below, splitting into the categories
of global vs local focus and technology generalisation vs technology diversification.
We prefer companies that are neither too focused – creating a single country risk – nor too
diversified, meaning the likelihood of being spread too thinly. Our preferred strategic shape is
a small number of focused markets, and we see both the pros and cons of being a technology
leader (e.g. Orsted or Drax) versus a more general approach such as Enel or Iberdrola.
Overall, we believe there remains considerable relative value in the vertical integrated utilities
over the pure-play renewable names. The implied pipeline value for these vertical names are
considerably lower than pure-play names, and Iberdrola/SSE/Engie/Enel – all OW – we think
are better value than the pure-play sector where we have only RWE and Grenergy as OW.
FIGURE 14
Positioning of different utilities on geographical and technological focus
Source: Barclays estimates
We adopt a consistent approach in renewable valuation
Historically we would value the pipeline value of a utility for typically 5 years and then we
would imply a fade in achieved return to reach the cost of capital over time. We estimate that
in this investment cycle it will be at least 30 years before policy no longer needs to incentivise
new build which could increase pipeline valuation to unprecedented lengths. Offsetting this,
however, we see medium-long term risks from: 1) technology: either deflationary pressure
from existing technologies or development of new low carbon solutions, 2) falling wholesale
power prices, meaning a potential market re-regulation, or 3) maturing and competitive
industries competing away supernormal returns, and 4) pipeline NPVs should be discounted
at a significantly higher discount rate than operational assets – at the least this value cannot
be levered and demonstrably carries higher risk. We would estimate this rate being at least
7% versus 4-5% WACC for operational assets.
We have built up a four-step approach in valuing renewable pipelines.
1) Operational/under construction renewable assets only.
Barclays | European Utilities
12 May 2021 12
2) Valuing secured pipeline- i.e. assets under development with land rights, but not yet
permitted and with offtake contract (pre-Final Investment Decision, FID) – ‘black-sky’,
i.e. giving a value of zero for all aspirational pipelines and therefore a floor valuation and
downside risk.
3) Base case: aspirational pipeline, normalising company targets between companies, with
a view of assets that will be developed out to 2030, beyond those projects already
secured.
4) Blue-sky best case scenario. Assuming market shares remain constant and the high
scenario of installations materialises. Our ‘blue-sky’ scenario uses a 2050 capacity
estimate.
1) Operating assets
The following table summarises the valuation of operating assets within our utilities. Overall
we value existing assets at an average 11.0x EBITDA with a range of up to 82% of our EV (for
Drax) down to relatively small proportions for the larger vertically integrated utilities.
FIGURE 15
We value operating renewables at an average 11.0x EBITDA, and accounts for 46% of EV (at our PT) on average
(EUR / GBPmn /
DKKmn) * MW EV EV/ MW
EV / EBITDA
2021E (x)
Renewables/
EV
Drax ** 3,086 2,210 0.7 5.4 82%
Encavis 1,810 3,247 1.8 13.3 77%
Neoen 4,100 4,505 1.1 73%
EDPR 13,800 16,260 1.2 9.8 66%
EDP 20,926 25,287 1.2 12.1 64%
Acciona 9,231 7,966 0.9 9.4 63%
Orsted * 10,328 222,488 21.5 10.0 58%
RWE 11,245 16,560 1.5 9.3 50%
Solaria 2,150 1,379 0.6 19.0 45%
SSE ** 6,628 11,631 1.8 13.4 38%
Engie 28,301 23,490 0.8 9.2 28%
Iberdrola 40,318 39,649 1.0 13.4 27%
EDF 31,542 36,760 1.2 8.6 26%
Endesa 8,481 10,083 1.2 11.2 26%
Enel 49,023 41,212 0.8 9.5 24%
Grenergy 198 356 1.8 24%
Naturgy 5,159 4,305 0.8 11%
Total 246,326 268,255 1.1 11.0 33%
Source: Barclays estimates * DKK ** GBP
2) The following chart summarises ‘secured’ pipelines within the renewable
stocks – our ‘black-sky’ scenario – limited down-side risk for vertically
integrated names
Secured pipelines are projects that have been announced and secured land rights, or which
are in development. They are pre-FID and not yet under construction.
Barclays | European Utilities
12 May 2021 13
FIGURE 16
Enel and Iberdrola have a secured pipeline with a net capacity of over 50,000MW
Source: Company data, Barclays estimates
Comparing the ‘Black-sky’ scenarios to our PTs shows where the potential downside if there
were to be zero value for any aspirational pipelines, as detailed in the table below. Note this is
different to the ‘downside case’ for our stock valuations as these scenarios just impact the
renewable component of the companies and not in other divisions – our downside valuations,
including non-renewable assets, are summarised later in this section. Some stocks, most
notably the pure play renewables, have significant downside if the renewable valuations were
to include only commissioned/under construction/secured projects. In general we see
limited impact on where our valuation would be versus current share price for the vertically
integrated names.
FIGURE 17
Even with a ‘black-sky’ scenario we see upside in vertically integrated utilities, but pure-
plays are more exposed
Source: Barclays estimates * pricing date close 10 May 2021
3) Base case: Aspirational pipelines make valuations more consistent between
companies with a 10-year baseline estimate
Every company quotes a different renewables target and ambition. We have normalised
renewable pipelines to assume all companies have a pipeline out to end of 2030. We have
-
10,000
20,000
30,000
40,000
50,000
60,000
Pip
elin
e se
cure
d M
W
Onshore wind Offshore wind Solar Hydro Other
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
% change in PT % upside valuation vs black sky
Barclays | European Utilities
12 May 2021 14
then removed the secured pipeline to determine the level of aspiration projects that are yet
to be sourced.
Only Orsted and Naturgy have aspirational pipelines more than half of our total baseline
expectations, and the larger vertically integrated names have good quality pipelines already
in place.
FIGURE 18
Our normalized pipeline includes both secured and expected aspirational out to 2030
Source: Barclays estimates
Our overall base case on % EV is shown below. There are 9 stocks that are nearly fully
renewables, with a further 6 with material renewable exposure. In general, stocks with a
higher proportion of secured pipeline are higher quality than those that are still seeking to
source renewable projects.
FIGURE 19
Our price targets are derived from an expected 10-year build out with commissioned, secured and aspirational pipelines
Source: Barclays estimates
0%
10%
20%
30%
40%
50%
60%
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Dra
x
Eng
ie
EDF
Enca
vis
Enel
RW
E
Iber
dro
la
EDP
End
esa
EDP
R
SSE
Acc
ion
a
Gre
ner
gy
So
lari
a
Nat
urg
y
Ors
ted
Neo
en % a
spir
atio
nal
/ b
ase
cap
acit
y
MW
by
stat
us
Commissioined/under construction Pipeline secured
Pipeline aspirational % aspiration/total
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% o
f EV
Operating Secured Aspirational
Barclays | European Utilities
12 May 2021 15
FIGURE 20
Our overall valuation for renewables uses a consistent methodology is a 13.2x, with a range of 5.5x for Drax up to 19.1x for SSE
(EUR / GBPmn /
DKKmn) *
PT (EUR / GBP /
DKKmn) 2030 MW EV EV/ MW
EV / EBITDA
2021E (x)
Renewables/
EV
Acciona 153.0 29,831 11,222 0.38 11.8 89%
Drax ** 550 3,086 2,260 0.73 5.5 84%
EDF 16.0 54,042 40,760 0.75 9.5 29%
EDP 5.2 42,188 33,579 0.80 12.9 86%
EDPR 20.1 35,062 24,552 0.70 14.8 100%
Encavis 18.0 5,090 4,231 0.83 17.3 100%
Endesa 27.4 19,300 14,346 0.74 13.2 37%
Enel 10.1 120,435 63,960 0.53 10.8 38%
Engie 16.0 46,301 27,990 0.60 10.4 34%
Grenergy 45.2 6,234 1,473 0.24 10.9 100%
Iberdrola 15.0 105,000 70,078 0.67 15.8 48%
Naturgy 26.5 10,777 5,581 0.52 14%
Neoen 40.0 12,076 6,189 0.51 100%
Orsted * 800 47,906 375,838 7.85 17.0 97%
RWE 42.0 25,336 26,224 1.04 14.6 78%
Solaria 16.7 11,755 3,096 0.26 14.6 100%
SSE ** 1770 17,178 16,622 0.97 19.1 54%
Total 591,597 399,812 0.68 13.2 49%
Source: Barclays estimates * DKK, ** GBP
4) Blue sky valuation – valuing a 2050 pipeline
FIGURE 21
We estimate European utilities would develop a total of 592GW by 2030 in our base case, 444GW in our ‘black-sky’ and
1,449GW in the ‘blue-sky scenario…
PT Blue sky Black sky
Downisde case
incl other assets
Base
case
Base
case Blue sky
EV
Blue sky Black sky
EV
Black sky
(EUR /
GBPmn) *
(EUR /
GBP)
(EUR /
GBP)
(EUR /
GBP)
(EUR /
GBP) MW EV MW EV MW EV
Acciona 153.0 285.8 131.4 90.0 29,831 11,222 45,066 18,511 17,831 10,038
Drax ** 550.0 1,414 538 125 3,086 2,260 15,066 5,735 3,086 2,210
EDF 16.0 26.3 15.7 9.0 54,042 40,760 153,988 72,793 48,417 39,760
EDP 5.2 9.1 4.0 4.1 42,188 33,579 102,161 49,193 30,400 28,982
EDPR 20.1 28.7 14.8 14.8 35,062 24,552 67,372 32,025 23,274 19,955
Encavis 18.0 29.7 17.6 17.6 5,090 4,231 20,000 5,853 4,310 4,175
Endesa 27.4 32.5 25.7 20.0 19,300 14,346 41,404 19,772 13,665 12,543
Enel 10.1 13.4 9.5 7.9 120,435 63,960 239,331 97,215 101,934 58,067
Engie 16.0 27.5 15.5 10.5 46,301 27,990 138,166 55,821 41,801 26,865
Grenergy 45.2 80.6 28.7 28.7 6,234 1,473 9,000 2,462 3,687 1,013
Iberdrola 15.0 17.5 13.6 7.9 105,000 70,078 196,833 85,708 85,790 61,041
Naturgy 26.5 31.3 25.2 21.0 10,777 5,581 25,186 10,199 5,159 4,305
Neoen 40.0 53.0 30.0 30.0 12,076 6,189 20,016 9,189 5,202 5,089
Orsted * 800 1,265 569 569 47,906 375,838 190,000 571,138 21,306 278,801
RWE 42.0 67.5 37.9 29.0 25,336 26,224 114,900 43,447 21,336 23,481
Solaria 16.7 22.6 9.6 9.6 11,755 3,096 10,496 3,835 6,230 2,206
SSE ** 1,770 2,585 1,532 1,100 17,178 16,622 60,000 25,304 11,279 14,089
Total (Eu) 591,597 399,812 1,448,987 594,837 444,707 348,766
Source: Barclays estimates * DKK ** GBP
Barclays | European Utilities
12 May 2021 16
FIGURE 22
…with Blue-sky valuations there would be significant increases in valuations, leading to
upside from current share prices of >100% for a number of utilities
Source: Barclays estimates * pricing date close 10 May 2021
What’s implied in the current share price?
We have looked at the implied valuation using current share prices within European utilities.
We have then compared this valuation to the 10-year pipeline length in order to determine
the implied pipeline length implied in the current valuations.
Clearly, the shorter the implied pipeline length the better the value of the renewable portfolio.
FIGURE 23
We estimate the current share prices are implying a 12 year pipeline in Orsted versus 4 years secured, 9 in EDPR versus 4.5
secured and 2-4 years in Enel, RWE, Iberdrola and SSE where a secured pipeline is greater than implied pipeline value
Source: Barclays Research estimates
We have used different yearly installation rates per utility over 2022-2030E in order to
estimate the pipeline valuation. We estimate the sector will be installing ~39GW / year over
the next nine years.
0%
50%
100%
150%
200%
250%
300%
% change in PT % upside vs blue sky value
11.8
8.8 8.57.6 7.1
5.4 4.9 4.73.8
2.8 2.72.0
0.0 0.0 0.0 0.0 0.0
3.74.8 4.5
6.4
4.53.5
8.4
5.94.9
7.0 7.2 7.4
0.0
7.5
5.8
7.5
0.00
2
4
6
8
10
12
14
~ years
Implied pipeline Secured pipeline
OWEWUW
Barclays | European Utilities
12 May 2021 17
FIGURE 24
Forecasted average installation rate for the period 2022-2030
Installation rate / yr
Acciona 2,289
Drax 280
EDF 2,500
EDP 2,362
EDPR 2,362
Encavis 364
Endesa 1,202
Enel 7,935
Engie 2,000
Grenergy 671
Iberdrola 7,187
Naturgy 624
Neoen 886
Orsted 4,175
RWE 1,566
Solaria 1,067
SSE 1,172
Total 38,644
Average 2,273
Source: Barclays Research estimates
Barclays | European Utilities
12 May 2021 18
FIGURE 25
Barclays European utilities comp sheet priced as at 10 May
Market Share Target Up / (dn) Company P/E (adj) (x) EV/EBITDA (adj) (x) Dividend yield (%)
Cap Price Price Currency side (%) Rating 2020 2021 2022 2023 2020 2021 2022 2023 2020 2021 2022 2023
Integrated
Centrica 3,076 56.72 76 GBp 34% OW 8.4 21.6 9.3 9.5 4.7 3.5 3.3 3.1 0.0 3.7 5.5 5.5
Electricite de
France
34,718 11.69 16.00 EUR 37% OW 24.3 17.4 14.4 12.3 7.5 7.1 6.4 6.2 1.8 2.6 3.1 3.7
Enel 81,984 8.27 10.10 EUR 22% OW 15.8 15.1 14.0 13.0 7.9 7.8 7.6 7.3 4.4 4.7 5.0 5.3
Engie 29,214 12.65 16.00 EUR 26% OW 19.4 12.5 11.4 10.7 7.9 7.3 7.0 6.9 4.3 5.8 6.4 6.8
EVN 3,434 19.60 20.00 EUR 2% EW 16.6 14.9 14.4 13.8 4.2 3.9 3.7 3.6 2.6 2.8 3.1 3.3
Iberdrola 71,192 11.47 15.00 EUR 31% OW 19.7 19.0 17.4 16.5 12.4 12.0 11.4 10.7 3.8 4.0 4.2 4.3
Endesa 23,241 22.39 27.40 EUR 22% OW 13.8 13.6 12.6 11.9 8.4 8.8 8.6 8.3 9.2 5.9 5.5 5.9
SSE 14,675 1,479 1,770 GBp 20% OW 17.7 16.8 14.1 14.6 13.1 13.5 12.0 12.5 5.4 5.5 5.6 5.7
Average 18.3 16.2 14.5 13.5 9.1 8.8 8.4 8.1 4.2 4.4 4.7 5.0
Renewables
Acciona 7,362 138.80 153.00 EUR 10% EW 40.0 23.6 18.5 15.6 11.1 10.3 9.4 9.0 2.9 3.2 3.5 3.9
EDP 16,017 4.56 5.20 EUR 14% EW 20.9 18.8 17.6 17.5 8.6 9.3 9.0 9.0 4.4 4.5 4.7 4.9
EDPR 15,658 18.65 20.1 EUR 8% EW 28.2 28.9 26.2 25.0 13.4 13.2 12.5 12.1 0.5 0.5 0.6 0.7
Encavis 2,046 14.40 18.0 EUR 25% EW 33.3 31.9 28.5 25.6 16.8 16.0 15.0 14.2 1.9 2.1 2.2 2.3
Grenergy 681 23.90 45.2 EUR 89% OW 42.1 45.0 24.6 14.1 37.1 26.7 18.8 13.8 0.0 0.0 0.0 0.0
Neoen 3,530 34.16 40.00 EUR 17% EW 891.9 308.4 135.2 135.2 20.2 17.9 16.7 15.6 0.0 0.0 0.2 0.2
Orsted 352,952 864.00 800.00 DKK -7% UW 23.3 31.3 44.9 35.8 22.9 25.6 19.1 16.4 1.4 1.4 1.5 1.6
RWE 18,934 31.60 42.00 EUR 33% OW 16.0 21.7 17.2 19.7 7.4 8.4 7.5 7.8 2.8 2.9 3.1 3.2
Solaria 1,936 15.00 16.7 EUR 24% EW 72.9 N/A 36.1 19.8 52.3 45.2 23.4 15.4 0.0 0.0 0.0 0.0
Average 31.0 32.4 42.0 34.3 19.8 14.0 15.5 13.8 1.6 1.6 1.7 1.8
Note: Priced as at market close on 10 May 2021
Source: Barclays Research estimates
Barclays | European Utilities
12 May 2021 19
Catalyst calendar for European renewable stocks
FIGURE 26
Key upcoming climate policy dates
Date Country/
Region Event Impact
Latest June
2021 EU
European Commission presents draft
legislation to increase 2030 target: "Fit
for 55 Package"
Pieces of legislation the Commission will review: the EU Emissions
Trading System; the Effort Sharing Regulation; the Land Use, Land Use
Change and Forestry Regulation; the Energy Efficiency Directive;
the Renewable Energy Directive; and the CO2 Emissions Performance
Standards for Cars and Vans Regulation, as well as the planned carbon
border adjustment mechanism.
Summer 2021 UK UK Greenhouse gas removals UK Government to publish call for evidence on support options for
BECCS and other negative emissions technologies
Q1 and Q2
2021 EU EU Biodiversity Policy
European Commission presents policy plans and legislation drafts on
biodiversity.
Q2 2021 EU EU Sustainable Finance Legislation European Commission aims to establish a green bond standard.
Late 2021 UK UK Offshore CfD Round 4 The PPA process to ensure offshore wind projects are built
Nov-21 Global COP-26 The UK hosts COP-26 which will set emission trajectories and new
initiatives
Q3 and Q4
2021 EU EU Sustainable and Smart Mobility
European Commission aims to present a proposal to revise the Directive
on Intelligent Transport Systems.
Q4 2021 EU EU Circular Economy European Commission presents legislation on circular economy.
2021 UK UK Industrial Decarbonisation Strategy The UK government will consider what demand-side policies can drive
emissions reductions in industry
2021 UK UK Revenue Mechanisms
The government will outline further details in 2021 on a revenue
mechanism to bring through private sector investment into transport
and storage, power and industry CCS and hydrogen projects via new
business models to support these projects
2021 UK UK Economic Regulation
The government will produce an overarching policy paper on economic
regulation in 2021, which will consider regulator duties, injecting more
competition into strategic investments, and the benefits of a cross-
sectoral Strategic Policy statement
2021 UK UK Heat and Building Strategy The government will announce regulation and targeted spending for
energy efficiency in heating and buildings
2021 UK UK New Energy Act New legal framework for the future networks
2021 UK UK CCS UK Govt will invest £1bn to facilitate the deployment of CCUS in two
industrial clusters
Source: Barclays Research, BEIS, Ofgem, Ofwat
Barclays | European Utilities
12 May 2021 20
Renewables investment summary
The degree of the scale of the GW to be built is enormous: 4-9x more
capacity in 2050 versus today and >3x pickup in installation rates
Unequivocally, capacity additions to 2050 are going to be very large.
Barclays oil team published a cross-asset research piece ‘Opportunities in decarbonisation’ 9
March 2021, in which they estimated total renewable capacity rising from current global
levels of 800GW to upwards to a range between 10,000 and 24,000GW by 2050 with
scenarios based on degree of carbon reductions, electricity as a % of final energy mix and %
of hydrogen coming from green hydrogen. Globally at the end of 2019, there was 2,710GW
of installed wind, solar, hydro and biomass, of which 1,450GW was wind, solar and biomass
and 1,260GW is hydro. This is an increase of 4-9x from existing renewable installed capacity
and an increase in up to 3.4x current renewable installation rates.
FIGURE 27
To reach net zero targets would see annual installations go up by >3x from current levels
2020 2050 low scenario 2050 high scenario
Global GW renewables 2,710 10,000 24,000
increase GW 7,290 21,290
annual installations GW/year 211 243 710
x increase in installation 1.2 3.4
OECD GW renewables 1,129 4,000 9,000
increase GW 4,000 9,000
annual installations GW/year 101 133 300
x increase in installation 1.3 3.0
Europe GW renewables 573 1,500 4,000
increase GW 927 3,427
annual installations GW/year 25 31 114
x increase in installation 1.2 4.6
Source: BNEF, BP, IEA, Barclays estimates
FIGURE 28
Global capacity
FIGURE 29
OECD capacity renewable capacity demand could reach as
high as 9,000GW
Source: IEA, Barclays estimates Source: IEA, Barclays estimates
0
5,000
10,000
15,000
20,000
25,000
2017 2022 2027 2032 2037 2042 2047
GW Development Dynamism
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2017 2022 2027 2032 2037 2042 2047
GW Development Dynamism
Barclays | European Utilities
12 May 2021 21
We expect to see returns come down as risks reduce – but a ROIC-WACC
spread should be achievable for visible pipeline
We see company hurdle rates and current forecasts at >200bps higher than WACC for the
current build cycle – with significant differences in return expectations depending on
technology type and geography. Further analysis and sensitivities are detailed later in this
note.
This ROIC should justify a meaningful ROIC-WACC spread for renewable developers, and the
achieved ROIC is in line with the risk of the WACC. We estimate this NPV at a c.30% premium
to invested capital.
These are our preferences by technologies:
We prefer solar PV projects in highly developed PPA markets, like Spain, where the
unlevered IRR (8% on average) is boosted by the inclusion of the retail margin within the
PPA contract. By stocks, we prefer Grenergy (OW) and Endesa (OW), as two big solar PV
developers in Spain.
In onshore wind, we prefer high unlevered IRRs (7% on average), mainly in the US market.
By stocks, we prefer Iberdrola (OW), RWE (OW) and Enel (OW), as the utilities with the
highest exposure to the US market.
In offshore wind, we also prefer high unlevered IRRs (8% on average), mainly in the US
market. By stocks, we prefer RWE (OW), Iberdrola (OW), as the utilities with the highest
exposure to the US market.
FIGURE 30
We estimate returns are best for Southern Europe solar, North American offshore wind
IRR post-tax
EV
Capex/MW
(LOC/MW)
NPV/capex
x
Region Solar
Onshore
wind
Offshore
wind Solar
Onshore
wind
Offshore
wind Solar
Onshore
wind
Offshore
wind
UK (£) 6.5% 6.5% 6.5% 0.6 0.9 1.8 0.3 0.3 0.3
Southern Europe (Eu) 8.0% 5.5% 7.0% 0.6 0.9 2.0 0.3 0.3 0.3
Central Europe (Eu) 7.0% 6.0% 7.0% 0.6 1.0 2.0 0.3 0.3 0.3
USA ($) 7.0% 7.0% 8.0% 1.2 1.2 3.0 0.3 0.3 0.3
Latin America ($) 9.0% 8.0% nm 0.6 1.0 nm 0.15 0.15 0.15
Source: Barclays Research estimates
Barclays | European Utilities
12 May 2021 22
FIGURE 31
We estimate an average €0.3mn/MW NPV for total pipeline value
NPV / MW (LOC/MW)
Acciona 0.16
Drax ** 0.02
EDF 0.18
EDP 0.39
EDPR 0.39
Encavis 0.30
Endesa 0.39
Enel 0.32
Engie 0.25
Grenergy 0.19
Iberdrola 0.47
Naturgy 0.23
Neoen 0.21
Orsted * 4.08
RWE 0.69
Solaria 0.18
SSE ** 0.47
Average 0.31
Source: Barclays estimates * DKK, ** GBP
The below highlights the unlevered return expectations of onshore wind projects, based on a
survey over the past 6 years by Bloomberg New Energy Finance. Using onshore wind as a
proxy, we can see that since 2015 return expectations (regardless of subsidy) across Europe
have been consistently falling.
Barclays | European Utilities
12 May 2021 23
FIGURE 32
Unlevered return expectations for onshore wind projects over time
Source: BNEF
1) Enormous global renewable capacity requirements
We estimate global capacity requirements could be 10-25,000GW
Barclays’ oil team published a cross-asset research piece ‘Opportunities in decarbonisation’ 9
March 2021, in which they estimated total renewable capacity rising from current global
levels of 800GW to upwards to a range between 10,000 and 24,000GW by 2050, with
scenarios based on degree of carbon reductions, electricity as a % of final energy mix and %
of hydrogen coming from green hydrogen.
Within the 28 country members of the OECD, total renewable demand could be up to
9,000GW by 2050.
8.2% 8.2% 8.5%8.0%
8.5%
5.0%
7.0%6.50% 6.5%
5.5%
10%
6.5%
5.0%5.50%
4.0%3.5%
4%
3.0% 2.9%
9.0% 9.0%9.5% 9.5% 9.5%
6.0%
8.0%
7.0% 7.0%
6.0%
12.0%
7.5%
5.5%
6.5%
5.0% 5.0% 4.8%
4.0% 4.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
Un
leve
red
On
sho
re W
ind
IR
R E
xpe
cta
tio
ns
Barclays | European Utilities
12 May 2021 24
FIGURE 33
Renewables are expected to reach up to 24,000GW by 2050
globally
FIGURE 34
And 9,000GW in OECD countries
Source: IEA, Barclays estimates Source: IEA, Barclays estimates
With Europe at 1,500-5,000GW
FIGURE 35
We see underlying renewable requirements at 1,500-
2,000GW pre green hydrogen
FIGURE 36
Renewable capacity may rise to 1,500-5,000GW with the
introduction of green hydrogen
Source: BNEF, Barclays estimates Source: BNEF, Barclays estimates
This leads to a 7.5% CAGR in installed capacity and a potentially near quadrupling in installed
capacity per annum.
FIGURE 37
To reach net zero targets would see annual installations go up by >3x from current levels
2020
2050 low
scenario
2050 high
scenario
Global GW renewables and hydro 2,710 10,000 24,000
increase GW 7,290 21,290
annual installations GW/year 211 243 710
x increase in installation 1.2 3.4
0
5,000
10,000
15,000
20,000
25,000
2017 2022 2027 2032 2037 2042 2047
GW Development Dynamism
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2017 2022 2027 2032 2037 2042 2047
GW Development Dynamism
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2010 2020 2030 2040 2050 2060
inst
alle
d c
ap
aci
ty (
GW
)
High electrification Medium electrification
Low electrification
0
1,000
2,000
3,000
4,000
5,000
6,000
2010 2020 2030 2040 2050 2060
inst
alle
d c
ap
aci
ty (
GW
)
High electrification Medium electrification
Low electrification
Barclays | European Utilities
12 May 2021 25
OECD GW renewables and hydro 1,229 4,000 9,000
increase GW 4,000 9,000
annual installations GW/year 101 133 300
x increase in installation 1.3 3.0
Europe GW renewables and hydro 573 1,500 4,000
increase GW 927 3,427
annual installations GW/year 25 31 114
x increase in installation 1.2 4.6
Source: BNEF, BP Barclays estimates
Overall, we see EU (and UK) stimulus packages heading towards a higher electrification, higher hydrogen
strategy, with €3.7trn investment needed by 2050
FIGURE 17
We see stimulus package heading towards a higher electrification/hydrogen solution with c.€3.7trn investment needed
Source: Barclays Research estimates
Barclays | European Utilities
12 May 2021 26
Offshore wind Global Technical Capacity Potential is >1,000GW
FIGURE 38
Worldwide offshore wind capacity potential
Source: Iberdrola. Barclays Research
Europe targeting ~100GW by 2030 and ~200GW of offshore by 2050
2019 was also a defining year for members of the EU to submit their National Energy and
Climate Plans (NECPs) and set Renewable Energy targets out to 2030. Early plans added up
to c.75GW of offshore wind target capacity by 2030, however these have since been revised
and, in line with growing focus across Europe to electrify and decarbonize the economy, have
increased to a potential 100GW. Within this, the UK and Germany are setting some of the
highest targets, with 40GW and 20GW, respectively, compared to current installed capacities
of 9.9GW and 7.3GW.
Europe targeting 105.8 GW of offshore wind by 2030, up from 22GW installed currently
Country Policy Capacity Target (GW) Year
United Kingdom UK Offshore Sector Deal 40 2030
Scotland 11 2030
Germany Draft National Energy
and Climate Plan 20 2030
Netherlands Dutch Climate
Agreement 11.5 2030
Denmark Energy Agreement 5.3 2030
Poland Draft National Energy
and Climate Plan 9.6 2030
France Multi-Annual Energy
Plan 11 2028
Belgium Draft National Energy
and Climate Plan 4 2030
Ireland Climate Action Plan 2019 3.5 2030
Italy Draft National Energy
and Climate Plan 0.9 2030
Source: EU Commission, Barclays Research
Barclays | European Utilities
12 May 2021 27
The North Seas Energy Cooperation (Belgium, the Netherlands, Luxembourg, France,
Germany, UK, Ireland, Norway, Sweden and Denmark with support from the European
Commission) acts as a platform for cooperation on potential joint wind offshore projects and
seeks to coordinate electricity infrastructure. At the Ministerial meeting in Esbjerg on the 20th
of June 2019, North Seas countries agreed to work together to achieve an indicative
aggregated installed offshore wind capacity of Member States of the NSEC of at least 70 GW
by 2030.
The EU released its offshore renewable energy strategy, targeting 300GW of offshore wind
by 2050, with an interim target of 60GW by 2030. BNEF expects the EU to hit its 2030 target,
while the 300GW goal presents more of a challenge. On an annual basis, the plan looks
achievable – equating to 12GW a year post-2030. This requires only a small step-up from the
current build rate. The bloc’s installations have increased from a peak of 2.8GW in the 2010s,
to 10.1GWs in the 2020s.
UK should have enough capacity to meet 2030 targets – but 2050 is going to need
significantly more
Excluding the 10GW up for grabs in the upcoming ScotWind leasing round, the UK was just
shy of 50GW combined of offshore wind capacity commissioned and in the pipeline. The
tender for seabed leases in Scottish waters will close for applications in March 2021, and
should award leases in September 2021.
The ScotWind leasing round is expected to see bids submitted end of March, with auction
results August/September. This process is materially different to the England and Wales
process in that the upfront costs are capped at £10,000/km2, this is around £10,000/MW
(there is a low estimate for MW/km2. The rule of thumb is 100km2 = c1.5TWh).
FIGURE 39
The UK’s Offshore Wind pipeline is already on track to exceed the 40GW by 2030 target
Source: BNEF, Barclays Research
10.4 7.213.1
18.510.0
59.3
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Co
mis
sio
ne
d
Fin
an
cin
g
Se
cu
red
/U
nd
er
Co
nst
ructi
on
An
no
un
ce
d/
Pla
nn
i
ng
Be
gu
n
Pe
rmit
ted
Sco
tWin
d
To
tal
UK
Off
sho
re W
ind
Ca
pa
cit
y (
MW
)
Barclays | European Utilities
12 May 2021 28
FIGURE 40
Owners’ shares of total cumulative installed capacity at end of 2019 (MW) in Europe
Source: WindEurope
United States – Developers’ wheels are spinning
We estimate the US market could reach a cumulative capacity of 20.7 GW by 2030, with
average annual installations of 2.3 GW/year from 2023 to 2030. A 2016 DOE report forecasts
86 GW of US offshore wind by 2050. The current US development pipeline, including projects
with commercial operation dates (COD) beyond 2030, contains over 34.5 GW of capacity.
BNEF 2030 US market forecasts (18.9 GW as of 2H19) have increased 23% over the past six
months.
FIGURE 41
Offshore Wind Pipeline Forecast by State
Source: U.S. Department of Energy, Bureau of Ocean Energy Management, Company Reports, Barclays Research
Upside clearly exists in our forecast as states continue to lift targets, lawmakers draft industry-
supportive legislation, manufacturers build out the US supply chain, and costs come down.
Others, 30%
Orsted, 16%
RWE, 12%Vattenfall, 7%
Macquarie Capital,
4%
Global
Infrastructure
Partners, 4%
Northland Power,
3%
SSE, 3%
Stadwerke
Munchen, 2%
Iberdrola, 2%
Siemens, 2%Equinor, 2%
EnBW, 2% PKA, 2%
Copenhagen
Infrastructure
Partners, 1%
Eneco, 1% Masdar, 1%
0
4,000
8,000
12,000
16,000
20,000
24,000
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Cu
mu
lati
ve C
ap
aci
ty (M
W)
An
nu
al A
dd
itio
ns
(MW
)
ME MA RI CTNY NJ MD VAOH CA NC Cumulative
Barclays | European Utilities
12 May 2021 29
The large-scale development of cost-competitive floating technology before 2030 would
provide significant upside in CA, HI, and ME. However, further delay of the Cumulative EIS for
Vineyard Wind may pose a risk to our 2030 forecast, as this permit is shaping up to be the
“starting gun” for the offshore wind industry in the US, and developers are hesitant to build
several projects concurrently should construction timelines begin to overlap.
Key risks: local fisheries tend to delay permitting process, early demonstration projects have
taken 9 to 15 years to commission. Generally prefer projects with high local content although
no explicit rule on supply chain. Bathymetry, wind resources and policies provide strong
opportunity to floating technology in the long-run.
In the US, states set their own Renewable Energy Mandates. Whilst there is no
unified national OFW target, some states have already set targets in place.
FIGURE 42
Some US states are targeting a total 26.8GW of capacity by 2035, from a base of only
30MW currently
State Capacity Target (GW) Year
New York 9 2035
New Jersey 7.5 2035
Massachusetts 3.2 2030
Virginia 2.5 2026
Connecticut 2 2030
Maryland 1.6 2030
Rhode Island 1 2020
Source: Barclays Research
Asia to become a major offshore wind market
In Asia, India, Korea, Japan and Taiwan have likewise outlined offshore wind ambitions. It is
worth mentioning that whilst the country has no explicit national target, China has a clear
mandate in aggressively adding to its offshore wind portfolio – a record 2.4GW of capacity
came online last year alone, boosting total capacity to 6.8GW. Considering the current
pipeline, China is expected to be home to 52GW of OFW by 2030.
FIGURE 43
Excluding China, capacity targets in Asia amount to 67GW
Country Capacity Target (GW) Year
India 30 2030
Korea 12 2030
Japan 10 2030
Taiwan 15 2030
Source: Barclays Research
Collectively, this is a target of c.200GW by around 2030 – a huge bump up from the current
installed capacity of 29.1GW.
Upcoming renewable auctions
In total, across Europe renewable auction capacity has been announced for 20GW of offshore
wind, 1.8GW of onshore wind, 4.6GW of solar and 45.8GW for technology-agnostic auctions.
Barclays | European Utilities
12 May 2021 30
FIGURE 44
Upcoming renewable auction calendar - Europe
Country Auction program Sector
Target
min
(MW)
Target
max
(MW)
Energy
sold
(GWh)
Deadline date Results date
Denmark
Borholm Energy Island Offshore Wind Tender Offshore Wind 2000
North Sea Energy Islands Offshore Wind
Tender Offshore Wind 2000
Hesselo Offshore Wind Tender Offshore Wind 800 1200 TBA (2021) Dec, 2022
Thor Offshore Wind Tender Offshore Wind 800 1000 Dec, 2020 Dec, 2021
Denmark Round 3 Technology-Neutral
Auction Onshore wind, solar 300 To be confirmed To be confirmed
Denmark Round 4 Technology-Neutral Onshore wind, solar 300 Sept., 2021 December, 2021
Denmark Round 5 Technology-Neutral Onshore wind, solar 300 Sept., 2022 December, 2022
Denmark Round 6 Technology-Neutral Onshore wind, solar 300 Sept., 2023 December, 2023
Denmark Round 7 Technology-Neutral Onshore wind, solar 300 Sept., 2024 December, 2024
France
France Offshore Wind Tender Round 10 Offshore Wind 1000 June, 2024
France Offshore Wind Tender Round 8 Offshore Wind 500 1000 June, 2022
France Offshore Wind Tender Round 7 Offshore Wind 250 June, 2022
France Onshore Wind Auction Round 8 Onshore Wind 700 April 16, 2021
Cotentin Manche Normandy Offshore Wind Offshore Wind 900 1050 March 12, 2021 TBA (2022)
France Offshore Wind Tender Round 5 Offshore Wind 250 June, 2021
France Offshore Wind Tender Round 6 Offshore Wind 250 June, 2022
France Offshore Wind Tender Round 9 Offshore Wind 1000 June, 2023
Germany
German Federal Network Agency Solar
Tenders 2021 Solar 350
German Federal Network Agency Solar
Tenders 2020 Solar 300
Germany 2019 Solar Special Tender Solar 500 Dec.1, 2019
Germany 2021 Wind Special Tenders Onshore Wind 1500 Feb. 1, 2021
Germany 2020 Solar Special Tenders Solar 1100 March 1, 2020
Germany 2021 Solar Special Tenders Solar 1600 March 1, 2021
Germany Offshore Wind Auction Offshore Wind 958 Sept., 2021
Ireland
Ireland RESS Auction Round 5 2025 Renewables 2500
Ireland RESS Auction Round 4 2023 Renewables 4000
Ireland RESS Auction Round 3 2021 Renewables 3000
Ireland RESS Auction Round 2 Renewables 3000
Italy
Italy Large-Scale Round 5 Renewables 700
Italy Large-Scale Round 6 Renewables 800
Italy Large-Scale Round 7 Renewables 800
Netherlands
Netherlands Offshore Wind (Noorden van de
Waddeneilanden) Offshore Wind 700 Dec, 2022
Netherlands Offshore Wind (Zone Hollandse
Kust (west)) Offshore Wind 1400 Dec, 2021
Poland Poland Offshore Wind Allocation Offshore Wind 5900 March, 2021 June, 2021
Spain
Spain Renewable Energy Auctions - Round 2 Renewables 3500 TBA TBA
Spain Renewable Energy Auctions - Round 3 Renewables 3500 TBA TBA
Spain Renewable Energy Auctions - Round 4 Renewables 3500 TBA TBA
Spain Renewable Energy Auctions - Round 5 Renewables 3500 TBA TBA
Spain Renewable Energy Auctions - Round 6 Renewables 3500 TBA TBA
UK U.K. CfD Allocation Round 4 Renewables 12000
Scotland ScotWind Offshore Wind Tender Offshore Wind 10000 Mid July 2021 End of 2021
Source: BNEF, TBA = to be announced
Barclays | European Utilities
12 May 2021 31
FIGURE 45
Global announced renewable energy auction capacity by country (as of end-2020)
Source: BNEF
The UK announced at the end of 2020 in the PM’s 10-point Plan that the next Contracts for
Difference auction will take place in late 2021 (link here). The Leasing Round 4 projects will
not be developed enough to bid in this round. The auction targets a doubling of Renewables
capacity – 12GW of capacity will be procured up from 5.8GW in the last auction in 2019 where
CfD strike prices were around c.£40/MWh in 2012 prices. Offshore wind will be included in a
category of its own for the first time, meaning projects will not have to compete for contracts
against other technologies. In another first, floating offshore wind projects will also be eligible
to bid in a ‘less-established technologies’ category.
FIGURE 46
Renewable auction capacity in Europe by technology (end-2020)
Source: BNEF
34.4
17.5
12.0
7.7 7.3 6.3 5.9 5.8 5.0 3.6 2.3 2.1 2.0 1.0 0.6
0
5
10
15
20
25
30
35
40
An
no
un
ce
d R
en
ew
ab
le A
uc
tio
n
Ga
pa
city
(G
W)
1500
12500
2300
17500
12000
700
3850300
1500
62004800
958
2100
5900
02,0004,0006,0008,000
10,00012,00014,00016,00018,00020,000
An
no
un
ce
d R
en
ew
ab
le A
uc
tio
n
Ca
pa
city
(M
W)
Renewables Solar Onshore Wind Offshore Wind
Barclays | European Utilities
12 May 2021 32
Market shares or renewables and main players
FIGURE 47
European utilities will have 250GW of installed capacity at the end of 2021e
Source: Company data, Barclays estimates
FIGURE 48
Listed European utilities have a 20% market share of OECD installed capacity as at end
2020
Source: BNEF, Barclays estimates, BP, Company data, BNEF
2) But what returns will these assets make?
Developers of renewable assets have made good returns on projects historically and still all
hold hurdle rates significantly higher than their WACC – the following table summarises the
view of hurdle rate from developers.
We estimate, as we explain later in this section, that there remain significant risks over the
returns that can be achieved by renewable assets, and the WACC we use to value assets is 4-
4.5% unlevered post-tax – higher than regulated utilities, but significantly lower than
conventional generation.
If developers were to achieve the returns they are seeking, investments would be significantly
NPV positive and potential pipelines could be highly valuable.
We have analysed company reports and transcripts dating back to 2011 in order to gauge
how company commentary on returns has evolved over time. We note that returns have
come down from the double digit and WACC +200-300bps range towards mid-single digit
and WACC+150-200bps range across all technologies. This is consistent with the findings of
the BNEF survey.
-
10,000
20,000
30,000
40,000
50,000
60,000
Inst
alle
d M
W
Onshore wind Offshore wind Solar Hydro Other
Other, 80.3%Enel , 4.0%
Iberdrola, 3.3%
EDF, 2.6%
Engie, 2.3%EDP, 1.7%
EDPR, 1.1%RWE, 0.9%Orsted, 0.8%
Acciona, 0.8%
Endesa, 0.7%SSE, 0.5%Naturgy,
0.4%Neoen, 0.3%
Drax, 0.3%
Solaria, 0.2%
Barclays | European Utilities
12 May 2021 33
FIGURE 49
Renewable hurdle rates according to European Utilities have come down over the past decade
2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011
EDF
Onshore Wind
200-300bps
WACC spread
US and Canada 9-
11%, UK/Italy >12%
Solar
200-300bps
WACC spread
Euro Zone >9%, US
and Canada 9-11%
RWE
Onshore Wind
Europe 4.5-8%, US 5.5-8%, New
markets 6.5-9.5%
Offshore Wind
New markets 5.5-8.5%, New
markets 7-10%
Mature markets
5.5-8.5%
Solar
Europe 4.5-8%, US 5.5-8%, New
markets 6.5-9.5%
Iberdrola Onshore Wind WACC +200bps WACC + 200-300bps 15.6%
Offshore Wind UK >6% Solar WACC +200bps WACC + 200-300bps 15.6%
EDPR Onshore Wind WACC+ 250bps >10%
Offshore Wind WACC+ 250bps UK >10% US >10% US >10% >10% Solar WACC+ 250bps >10%
Enel
Onshore Wind
WACC + 150-
200bps WACC +200bps WACC +200bps
Equity IRR Spain
10-12%, Chile
12-15%
Equity IRR USA
10-12%
WACC +200bps,
c.10-11%
US 9%, Peru 13-15%
equity IRR 11%
Solar
WACC + 150-
200bps WACC +200bps WACC +200bps
Equity IRR Spain
10-12
WACC +200bps,
c.10-11%
WACC +200bps,
c.10-11%
US 9%, Mexico 12-
14% equity IRR, Peru
13-15% equity IRR 11%
Endesa Onshore Wind WACC +200bps Solar WACC +200bps
Acciona
Onshore Wind
WACC +200-
300bps
Solar WACC +200-
300bps
Engie Onshore Wind WACC +200bps
Solar WACC +200bps
Orsted
Offshore Wind
Taiwan, US,
Europe 7-8%
Taiwan, US, Europe
7.5-8.5%
Race Bank, double
digit IRR
SSE
Onshore Wind
Mid-single digit
equity returns
Offshore Wind
Low double-
digit equity
returns
Walney 8-
10%
Source: Company Reports
Barclays | European Utilities
12 May 2021 34
We estimate a WACC of 4.5-5% for contracted renewable generation
We see a number of risks to these returns:
Downside risks include:
1) Technology shifts into alternative solutions (floating wind, next generation solar,
nuclear)
2) Competition driving down returns
3) Over-estimating achieved power prices with renewables increasingly setting power
prices with zero marginal costs
4) Long-run power prices set by deflationary capital costs of renewables
5) Change in regulation – in particular burdening renewables with increasing societal costs
We also see a number of upside risks to these returns:
1) Lack of capital for the up to €700bn per annum capital requirement
2) Re-regulation of the power markets removing marginal cost dynamics
3) Green hydrogen power demand putting floor on power prices
4) Capital cost deflation on secured projects
5) Long-run power prices set by inflationary capital costs of renewables
These are not risk-free assets, and we see WACC at 4-4.5% for contracted assets – higher
than regulated utilities, but less than conventional/merchant power (7-8%)v
FIGURE 50
We estimate the WACC of renewables at 4.5-5.0%
Asset beta Post tax WACC Cost of equity
(20% gearing)
Cost of equity
(40% gearing)
Cost of equity
(60% gearing)
Water 0.34 3.6% 4.0% 4.6% 6.0%
Regulated power and gas 0.39 3.9% 4.4% 5.3% 6.9%
Renewables contracted 0.46 4.5% 5.1% 6.1% 8.2%
Utility infrastrucutre 0.47 4.5% 5.2% 6.3% 8.4%
Renewables semi-contracted (ROs) 0.53 5.0% 5.7% 7.0% 9.5%
Waste 0.56 5.2% 6.0% 7.4% 10.1%
Merchant power 0.86 7.5% 8.8% 11.1% 15.7%
Source: Barclays estimates
Unlevered returns around the world base case.
FIGURE 51
We estimate returns (unlevered, post tax) are best for Southern Europe solar, North American offshore wind
IRR post-
tax EV
Capex/MW
(LOC/MW)
NPV/capex
x
Region Solar
Onshore
wind
Offshore
wind Solar
Onshore
wind
Offshore
wind Solar
Onshore
wind
Offshore
wind
UK (£) 6.5% 6.5% 6.5% 0.6 0.9 2.8 0.3 0.3 0.3
Southern Europe (Eu) 8.0% 5.5% 7.0% 0.6 0.9 3.0 0.3 0.3 0.3
Central Europe (Eu) 7.0% 6.0% 7.0% 0.6 1.0 3.0 0.3 0.3 0.3
USA ($) 7.0% 7.0% 7.0% 0.5 0.8 3.5 0.3 0.3 0.3
Latin America ($) 9.0% 8.0% nm 0.6 1.0 nm 0.15 0.15 0.15
Barclays | European Utilities
12 May 2021 35
Source: Barclays research estimates
Onshore wind IRRs could be between 6-8%
1) Our estimate for unlevered IRR
FIGURE 52
Our base case onshore wind project DCF and assumptions
Source: Barclays Research estimates
2) Sensitivities
Barclays | European Utilities
12 May 2021 36
FIGURE 53
Onshore Wind NPV sensitivity to merchant power price post-subsidy/PPA and WACC
€27 €28 €29 €30 €31 €32 €33 €34 €35 €36 €37 €38 €39 €40
5.5% 11.9 12.6 13.3 14.1 14.8 15.5 16.2 17.0 17.7 18.4 19.1 19.8 20.6 21.3
5.6% 11.4 12.1 12.8 13.5 14.2 15.0 15.7 16.4 17.1 17.8 18.5 19.2 19.9 20.6
5.7% 10.9 11.6 12.3 13.0 13.7 14.4 15.1 15.8 16.5 17.2 17.9 18.6 19.3 19.9
5.8% 10.5 11.1 11.8 12.5 13.2 13.9 14.5 15.2 15.9 16.6 17.3 17.9 18.6 19.3
5.9% 10.0 10.7 11.3 12.0 12.7 13.3 14.0 14.7 15.3 16.0 16.7 17.3 18.0 18.7
6.0% 9.5 10.2 10.9 11.5 12.2 12.8 13.5 14.1 14.8 15.4 16.1 16.7 17.4 18.0
6.1% 9.1 9.7 10.4 11.0 11.7 12.3 12.9 13.6 14.2 14.9 15.5 16.1 16.8 17.4
6.2% 8.7 9.3 9.9 10.5 11.2 11.8 12.4 13.0 13.7 14.3 14.9 15.5 16.2 16.8
6.3% 8.2 8.8 9.5 10.1 10.7 11.3 11.9 12.5 13.1 13.8 14.4 15.0 15.6 16.2
6.4% 7.8 8.4 9.0 9.6 10.2 10.8 11.4 12.0 12.6 13.2 13.8 14.4 15.0 15.6
6.5% 7.4 8.0 8.6 9.1 9.7 10.3 10.9 11.5 12.1 12.7 13.3 13.9 14.5 15.0
Source: Barclays Research
We see major disparities in unlevered IRRs between PPA contracts and CfD/ auction
contracts. The difference is that PPA contracts include retail margins and CfD/ auction
contracts do not. If we take the last auction price in Spain (it did not include retail margin),
and we calculate the unlevered IRR, this is more than 300bps below PPA IRR and below the
unlevered IRR for offshore wind CfD.
FIGURE 54
Estimated unlevered IRR post tax in different scenarios and prospects of LCOE future evolution
Spain
Unlevered IRR post
tax
Includes retail
margin?
Estimated retail
margin
LCOE future
evolution
Onshore wind @PPA EUR40/MWh 6.80% Yes EUR9/MWh Neutral. Flat by 2030
Onshore wind @auction price EUR25.3/MWh 3.60% No - Neutral. Flat by 2030
Source: Barclays Research estimates
Barclays | European Utilities
12 May 2021 37
Solar is our preferred asset class
1) Our estimate for unlevered IRR
FIGURE 55
Our base case solar PV project DCF and assumptions
Source: Barclays Research estimates
2) Sensitivities
Barclays | European Utilities
12 May 2021 38
FIGURE 56
Solar NPV sensitivity to merchant power price post-subsidy/PPA and WACC
€27 €28 €29 €30 €31 €32 €33 €34 €35 €36 €37 €38 €39 €40
5.5% 19.7 20.3 20.8 21.4 21.9 22.5 23.1 23.6 24.2 24.7 25.3 25.8 26.4 26.9
5.6% 19.4 19.9 20.5 21.0 21.5 22.1 22.6 23.2 23.7 24.3 24.8 25.3 25.9 26.4
5.7% 19.0 19.6 20.1 20.6 21.2 21.7 22.2 22.8 23.3 23.8 24.3 24.9 25.4 25.9
5.8% 18.7 19.2 19.7 20.3 20.8 21.3 21.8 22.3 22.9 23.4 23.9 24.4 24.9 25.5
5.9% 18.4 18.9 19.4 19.9 20.4 20.9 21.4 21.9 22.4 22.9 23.5 24.0 24.5 25.0
6.0% 18.0 18.5 19.0 19.5 20.0 20.5 21.0 21.5 22.0 22.5 23.0 23.5 24.0 24.5
6.1% 17.7 18.2 18.7 19.2 19.7 20.1 20.6 21.1 21.6 22.1 22.6 23.1 23.6 24.1
6.2% 17.4 17.9 18.3 18.8 19.3 19.8 20.3 20.7 21.2 21.7 22.2 22.7 23.1 23.6
6.3% 17.1 17.5 18.0 18.5 18.9 19.4 19.9 20.4 20.8 21.3 21.8 22.2 22.7 23.2
6.4% 16.7 17.2 17.7 18.1 18.6 19.0 19.5 20.0 20.4 20.9 21.4 21.8 22.3 22.7
6.5% 16.4 16.9 17.3 17.8 18.2 18.7 19.1 19.6 20.1 20.5 21.0 21.4 21.9 22.3
Source: Barclays Research
FIGURE 57
Impact on NPV from flex in key assumptions
Flex Onshore Wind Solar Offshore Wind
Load Factor +/- 1% 21% 12% 5%
WACC +/- 0.5% 19% 9% 10%
Merchant Power Price
+/- 1%
2% 1% 1%
Source: Barclays Research
We see major disparities in unlevered IRRs between PPA contracts and CfD/ auction
contracts. The difference is that PPA contracts include retail margins and CfD/ auction
contracts do not. If we take the last auction price in Spain (it did not include retail margin),
and we calculate the unlevered IRR, this is more than 200bps below PPA IRR and closer to
offshore wind CfD.
FIGURE 58
Estimated unlevered IRR post tax in different scenarios and prospects of LCOE future evolution
Spain
Unlevered IRR
post tax
Includes retail
margin?
Estimated retail
margin
LCOE future
evolution
Solar PV @PPA EUR33/MWh 9.40% Yes EUR9/MWh Positive. Down 40% by 2030
Solar PV @auction price EUR24.5/MWh 7.30% No - Positive. Down 40% by 2030
Source: Barclays Research estimates
3) Estimated future evolution of LCOE
Surplus cell and module supplies could trigger price war in 2021. We are assuming in our
forecasts an increase in solar panels in H1 2021, followed by a stabilisation of prices at
$0.23/W in H2 2021. For the end of 2021 and 2022, we forecast a decline in solar module
prices. This decline in prices will allow unlevered IRRs to improve again in 2022E.
Barclays | European Utilities
12 May 2021 39
FIGURE 59
Solar module price movement in 2020 and 1Q2021
Source: PV Infolink, BNEF
Tier-1 solar module manufacturers have been ramping up capacity over the past year amidst
an industry trend of expansion and increasing market presence, and are expected to continue
to do so throughout 2021. Total solar cell and module supply is forecast to reach 366GW and
377GW, respectively, by the end of 2021, over double the forecast demand of 143.7GW
(https://www.infolink-group.com/en/solar/analysis-trends/Supply-surplus-to-trigger-
price-competition-in-2021). We believe this overcapacity in the market will help drive down
module prices in 2022E.
A longer-term view on the technology suggests that the LCEO of solar PV will continue to
decline. According to BNEF data, LCEO is forecast to decline by 32-39% by 2030 compared
to 2020 levels and 50-54% accumulated decline in LCEO by 2040.
FIGURE 60
Estimated LCEO evolution for solar PV in Spain by 2040
Source: BNEF, Barclays Research
0
5
10
15
20
25
30
35
40
LCOE $/MWh
LCOE $/MWh (low) LCOE $/MWh (high)
Barclays | European Utilities
12 May 2021 40
Offshore wind: we see falling returns but an NPV positive pipeline
1) Our estimate for unlevered IRR
FIGURE 61
Our base case Offshore Wind project DCF and assumptions
Source: Barclays Research estimates
2) Sensitivities
FIGURE 62
With no change in CfD prices, projects would see IRRs between 3.6-4.9% and CfDs would need to rise to £50-£59/MWh in
order to maintain current IRRs of 7-8%
Scenario 3: No Change in CfD Prices Scenario 1: CfD Increase
Base Case RWE - Dogger BP - Dogger RWE - Dogger BP - Dogger
Upfront Costs
£/MW/Annum 0 88900 154000 88900 154000
CfD Strike price£/MWh 39.65 39.65 39.65 50.7 59
Unlevered Post-Tax IRR 7.5% 4.9% 3.6% 7.50% 7.50%
Source: Barclays Research estimates
FIGURE 63
We estimate that a 10% increase in upfront costs would reduce IRR by c0.2%, and every
year the option fee is paid is up to a 0.8% reduction in IRR
IRR Impact
+/- 10% on Total Capital Cost 1%
+/- £1 on CfD 0.3%
+/- 1 Year of Option Fee Payment 0.6-0.8%
Source: Barclays Research estimates
Barclays | European Utilities
12 May 2021 41
With a clear trend emerging of higher upfront costs to just obtain the right to explore a
development opportunity (remember that a seabed lease does not guarantee reaching FID of
a project), we see as a result a combination of either increased CfDs or reduced returns.
Increased CfD costs would lead to a conflict of interest. Under this situation, a scenario
would occur in which the more a developer pays, the higher the NPV of a project and the
higher the benefit to the government. In terms of maintaining a sustainable offshore wind
market, this would be an absurd situation.
FIGURE 64
UK Offshore Wind Auction prices have fallen significantly as competition has ramped up
Source: BNEF, Barclays Research
Falling returns the most sensible outcome. A fall in project returns sounds eminently
sensible for companies that do not see themselves as developers, but rather owners. BP
highlight that they are seeking a return of 8-10%. We believe they can achieve this, but that
is essentially a ROIC of 4-5%, the required return of a project owner, but significantly lower
than the required return of a developer.
Developers have already hinted that they see signs of pressure on returns. In October 2019,
Orsted reduced their long term unlevered IRR target to 7-8% from 7.5-8.5% a year earlier. At
their CMD in March 2020, RWE highlighted IRR requirements for offshore wind as 5.5-8.5%
for mature markets and 7-10% for new markets.
Developers that operate on farm-down models will struggle the most in this environment.
In our view, developers and developer-owners that need to sell down stakes in projects in
order to finance their growth (e.g. Orsted, SSE) will struggle in this environment. If larger
utilities and oil and gas companies can aggressively bid at these rising levels without an
increase in cost being borne by consumers, we see this significantly reducing the value of
pipelines. The historical rule of thumb has been that every £1 invested at 70% gearing equates
to £1.40. Developers can sell down half of their stake and self-finance without the need for
equity. Now, we see that every £1 invested is still worth £1.40 pre-government economic
rent, but the government takes 30p of it. Consequently, this is damaging to pipeline valuations
which prop up a lot of the value investors place on renewable companies.
Using our sample base case DCF in Figure 16, we highlight the effects and sensitivities of the
upfront costs from Leasing Round 4 for RWE and BP.
3) Estimated future evolution of LCOE
Upfront capex: -40% between 2020 and 2030. Since 2010, offshore wind capex has fallen
by more than half in some markets. Certain countries, such as the UK, are at a premium to
0
20
40
60
80
100
120
140
2014 2015 2016 2017 2018 2019 2020
Ave
rag
e p
rice
£/M
Wh
Auction Year
Barclays | European Utilities
12 May 2021 42
the rest of the market due to the inclusion of transmission capex. It is expected that increasing
capacities of offshore wind turbines in the future will lead to a reduction in the number of
foundations needed, less array cabling and consequently cheaper installation rates. Whilst
the cost of transmission will prove to be stubborn, and less sensitive to turbine increases, we
expect potential increases in voltage of cables to help drive down costs.
FIGURE 65
New-build offshore wind project capital expenditure, including transmission where
applicable
Source: BNEF
In some markets (UK and US, and Belgium and Denmark in some cases), developers are
responsible for bringing power to shore and hooking up to the grid. In the UK, the transmission
assets are then transferred at fair value to an offshore transmission operator. In others, such as
the Netherlands, France, and Germany, a transmission system operator builds the transmission
grid out to sea, leaving the developer only responsible for the generation asset.
FIGURE 66
LCOE of offshore wind transmission systems
Source: Tennet, Barclays Research
0.00
2.00
4.00
6.00
8.00
1995 2000 2005 2010 2015 2020
Ne
w B
uild
CA
PE
XU
SD
m/
MW
Belgium China Denmark France
Germany Japan South Korea The Netherlands
Norway Portugal Spain Sweden
Taiwan UK US Vietnam
10.512.5 12.5
14
27
16.514.5
1820
1819.5
22 22.521
1820.1
18
25 25
6.5 7
14.5
0
5
10
15
20
25
30
LCO
E (E
UR
/MW
h)
Sub Stations Cables
Barclays | European Utilities
12 May 2021 43
The cost of wind turbines makes up 40% of total offshore wind capex and the cost of
foundations, cables and installation are all proportional to the number of turbines. To forecast
future costs, we assume European projects use the most powerful turbines available. By 2030
we expect projects could install 20MW turbines, up from around 14MW today, at an upfront
capex of £2.1mn/MW.
By 2050, wind turbines could potentially triple in size, leading to savings not only in the
number of turbines required, but across capex components. fewer turbines will mean less
array cables, foundations and faster installation time. BNEF calculates a learning rate of 10.7%
for onshore wind – a 10.7% fall in price for every doubling of capacity. We assume, given the
similarity in the onshore/offshore turbine technology that this rate can apply for offshore
turbines.
According to National Renewable Energy Laboratory of the US Department of Energy, LCOE
of offshore wind should drop from an average of USD 0.13/kWh in 2018 to an average
USD 0.04/kWh by 2030 and USD 0.03/kWh by 2050.
FIGURE 67
Expected evolution of offshore wind LCOE
Source: Iberdrola. Barclays Research
Barclays | European Utilities
12 May 2021 44
COUNTRY SUMMARIES France
Germany
Italy
Spain
UK
Barclays | European Utilities
12 May 2021 45
France – Major renewables push should benefit EDF & Engie
Market shares
Both EDF and Engie remain the biggest renewables players with current market shares in
French renewables of ~15% and ~12%, respectively. Going forward we forecast that both
companies will remain the biggest players in this market.
FIGURE 68
Market share in renewables – solar / wind / biomass (29GW in 2019)
Source: BNEF, Barclays Research
Renewables plans until 2030
We believe that the market is still ignoring France’s significant renewables growth strategy,
which is based on the 2019-2028 medium-term energy policy (PPE). The PPE, which was
presented on 27 November 2018, presents the trajectory to be followed over the next ten
years in order for France to achieve its ultimate goal of full carbon neutrality by 2050.
We see both EDF and Engie as key beneficiaries of the French government’s plans to
significantly increase the installed capacity of solar and wind by 2028. Assuming the French
government reaches its top-end target for installed solar capacity of 44.5 GW in 2028, this
would imply additional solar capacity of almost 37 GW over 2019-28. For offshore wind this
would be over 5 GW, based on the top-end 5.2 GW target, and for onshore wind over 32 GW.
This would represent a total renewables addition of 64 GW.
In April 2021, the French government shortlisted six bidders in a 1GW offshore wind tender.
The winner of the pre-qualified bidders – EDF/Maple Power JV, Ibedrola, Ocean Winds, Shell,
Total-RWE consortium, and Vattenfall-Wpd-Banque des Territoires consortium – will be
announced in 2022 with the wind farm set to become operational in 2028.
EDF
15%
Engie
12%
Borealis
4%
Total
3%Allianz
2%
Other
64%
Barclays | European Utilities
12 May 2021 46
FIGURE 69
French government targets imply a more than fivefold increase of installed solar and a
near tripling of onshore wind capacity by 2028
Source: French government. For 2028, we have assumed mid-point for offshore target range & top end of solar range.
Our view on 2050 electrification scenarios for France
One of the key conclusions of this report is the significant multi-decade growth we expect for
European countries coming from an increased electrification of the economy. Based on our
analysis we see total French power consumption reaching ~924 TWh under a medium
electrification case, rising to ~1,243 TWh under a high electrification scenario. At the low end
this is an annual 1.1% rise in consumption, reaching 3.1% per annum growth in the high
scenario. These are significant levels of future growth. With these three scenarios of
electrification, we estimate that wind/solar could generate 70% of the total consumption. We
believe that France is in a favourable position to achieve this high level of renewable capacity
additions. This is because of the untapped offshore wind potential and more importantly the
favourable solar conditions, particularly in Southern France.
Our analysis points to the requirement of 395 – 742 GW of renewables in France relating to
the low-, medium- and high electrification scenarios. This indicates a significant level of
growth, which is a key factor behind our positive view on EDF.
FIGURE 70
With a range of electrification scenarios for the French economy, we could see the need
for between 395 – 742 GW of renewables
Scenario 2050
Current
2018
Low
electrification
Medium
electrification
High
electrification
Total energy consumed mn TOE 140 174 169 164
Electricity consumed mn TOE 41 57 79 107
Residual fuel mn TOE 99 117 90 57
Electricity consumed TWh 473 662 924 1,243
% growth pa – 1.1% 2.1% 3.1%
70% wind/solar/hydro
Wind/solar/hydro TWh 36 267 373 501
Wind/solar GW 25 182 255 343
GW delta per
annum – 4.9 7.2 9.9
TWh pa growth – 6.4% 7.5% 8.6%
Other electricity TWh 437 395 552 742
Source: Eurostat, Barclays Research estimates
0
10
20
30
40
50
2018 2023 2028
GW
Offshore wind Solar Onshore wind
Barclays | European Utilities
12 May 2021 47
Germany – E.ON and RWE future growth capex not reflected
Market shares
From current 117.6GW of renewables installed capacity, RWE and other big players do not
surpass the 1% market share threshold, in a highly fragmented market with residential PV
representing 33% of total renewables capacity.
FIGURE 71
Market share in renewables – solar / wind / biomass (117.6 GW in 2019)
Source: BNEF, Barclays Research
In the case of offshore wind, the German government is now targeting 20 GW of capacity by
2030 compared to the ~7 GW today. We believe RWE will be able to capitalise on this
opportunity based on its #1 market position in Germany (~13% market share). Assuming
that RWE will be able to maintain this market share, it would be able to secure ~1.7 GW of
offshore wind by 2030, tripling its installed capacity.
FIGURE 72
Market share in German offshore wind (7GW in 2019)
Source: Company data
Offshore wind market fragmented: The offshore wind industry in Germany is fragmented,
with RWE taking up the largest share of 11%, followed by Orsted with 9%. There are over 50
owners in the mix of Germany’s 7.5GW of installed capacity.
RWE
1%EnB
W…
WPD
1%UE GmbH
1%
Enerpac
1% PNE
1%
Encavis
1%
Other
93%
RWE13%
Orsted10%
Iberdrola5%
EnBW5%
Vattenfall4%
Trianel3%
Other60%
Barclays | European Utilities
12 May 2021 48
FIGURE 73
Germany Offshore Wind commissioned farm ownership share (as of end-2020)
Source: Barclays Research estimates, BNEF, 4C Offshore
Germany has expansion targets of 20GW by 2030 and 40GW by 2040 from 7.5GW currently,
with a target of reaching a renewables share in power consumption of 65% within the next
decade. These ambitious targets are reflective of waning support towards onshore wind in
the country. The number of permits issued for onshore turbines has fallen over 70% from
1228 licenses in 2016 to less than 400 in 2019. Alongside this, many projects have been put
on hold due to conflicts with aviation authorities and opposition from social and
environmental groups despite an already mandatory 1000m between proposed sites and
residential areas. For a country already lacking space, offshore wind is clearly rising as a viable
solution to these issues.
In order to support the realisation of these targets, Germany has made amendments to their
original Offshore Wind Act. Firstly, areas allocated for OFW farms will be pre-developed so
that in each yearly auction starting from 1 September 2021, areas can be auctioned with a
capacity of 1GW/year from 2021 to 2023, c.3GW in 2024 and 4GW in 2025. Under the new
regime, price ceilings are introduced of 7.3 ct./kWh in 2021, 6.4 ct./kWh for 2022 and 6.2
ct./kWh for auctions from 2023 onwards. If zero bids are handed in for an area by several
bidders, a subsequent auction will take place wherein bidders can offer a price they are willing
to pay – the offered price is then used as an ‘offshore grid connection contribution payment’
payable by the wind farm operator.
Our view on 2050 electrification scenarios for Germany
One of the key conclusions of this report is the significant multi-decade growth we see
possible for European countries coming from an increased electrification of the economy.
Based on our analysis we see total German power consumption reach ~1,359TWh under a
medium electrification case, rising to ~1,795TWh under a high electrification scenario. This is
an annual 3.1% rise in consumption at the low end scenario and reaching 5.0% per annum
growth in the high end scenario. These are significant levels of potential growth. With these
three scenarios of electrification, we estimate that wind/solar could generate 70% of the total
consumption. Although this could prove to be more difficult for Germany to achieve based
on perceived land constraints, we do not see it as impossible. This is because of the
opportunity of further developing offshore wind capacity in the North Sea using floating wind
technology and the ample empty space in Eastern Germany that could be used for significant
onshore wind and solar capacity additions.
Others
28%
RWE Renewables
11%
Orsted
9%
Northland Power
7%
EnBW
6%
Ocean Breeze Energy
5%
Stadtwerke Munchen
5%
Iberdrola
5%
Vattenfall Europe
Windkraft
4%
APG
3%
Gulf Energy
Development
3%
Trianel
3%
Rnewables
Infrastructure Group
(TRIG)
2%
China Three Gorges
2%
Enbridge
2%
Canada Pension Plan
Investment Board
2%
Barclays | European Utilities
12 May 2021 49
Our analysis points to the requirement of 275 – 495 GW of renewables in Germany relating
to the low-, medium- and high electrification scenarios. This indicates a significant level of
growth, which is a key factor behind our positive views on E.ON and RWE.
FIGURE 74
With a range of electrification of the German economy, we could see the need for
between 375 – 495 GW of renewables
Scenario 2050
Current
2018
Low
electrification
Medium
electrification
High
electrification
Total energy
consumed mn TOE 205 251 246 241
Electricity consumed mn TOE 46 86 117 154
Residual fuel mn TOE 159 165 129 86
Electricity consumed TWh 536 999 1,359 1,795
% growth pa – 2.0% 3.0% 3.8%
70% wind/solar/hydro
Wind/solar/hydro TWh 156 410 558 736
Wind/solar GW 105 275 375 495
GW delta per
annum – 5.3 8.4 12.2
TWh pa growth – 3.1% 4.1% 5.0%
Other electricity TWh 380 589 802 1,058
Source: Eurostat, Barclays Research estimates
Barclays | European Utilities
12 May 2021 50
Italy – Enel best positioned for renewables growth
Market shares
Enel currently hold number one position with a 16% market share in Italian renewables in a
highly fragmented market. Among foreign competitors, only EDF is in a position to compete
with Enel in terms of critical mass in installed capacity.
FIGURE 75
Market share in Italian renewables (32GW in 2019)
Source: BNEF, Barclays Research
Italy’s renewable targets by 2030
Italy presented its National Energy and Climate plan (NECP), with specific targets on
renewable energies percentages over total production, in order to deliver the previously
mentioned reductions in greenhouse gas emissions. Nevertheless, the plan is not very specific
on thermal capacity closure. The National Plan includes plans for Italy to close down all its
thermal coal plants by 2025.
FIGURE 76
Renewables projections submitted by Italy 2030E
(GW) 2016 2017 2025E 2030E
Hydropower 18.6 18.9 19.1 19.2
Geothermal 0.8 0.8 0.9 0.95
Wind 9.4 9.8 15.7 18.4
Bioenergy 4.1 4.1 3.6 3.8
Solar 19.3 19.7 26.8 50.9
Total 52.3 53.3 66.2 93.2
Source: European Commission
According to the plan, Italy will add 12.9GW of new capacity between now and 2025E and
27GW between 2025 and 2030E. Of that capacity 55% of the total capacity additions will be
solar in the first period and the share of solar will increase to 89% of total new capacity
additions in the period 2025 to 2030E (24GW).
Enel
17% San Quirico
4%
EDF
4%FRI Green Power
3%F2I
2% RWE
2%
Finmeria
1%A2A
1%
Other
66%
Barclays | European Utilities
12 May 2021 51
Our view on 2050 electrification scenarios for Italy
We see total Italian power consumption reaching ~710TWh under a medium-electrification
case, rising to ~940TWh under a high electrification scenario. This is an annual 2.0% rise in
consumption at the low end, reaching 3.8% per annum growth in the high scenario. With
these three scenarios of electrification, we estimate that wind/solar could generate 70% of
the total consumption.
Overall, with electrification of the Italian economy we see the potential for >200GW of wind
and solar, with a low case of 146GW and a high of 260GW (70% renewable future in a high
electrification scenario). The middle case would be 197GW.
FIGURE 77
With a range of electrification of the Italian economy, we could see the need for between
146GW and 261GW
Scenario 2050
Current
2018
Low
electrification
Medium
electrification
High
electrification
Total energy consumed mn TOE 114 141 136 131
Electricity consumed mn TOE 24 46 61 81
Residual fuel mn TOE 90 96 75 50
Electricity consumed TWh 283 530 715 946
% growth pa 2.0% 2.9% 3.8%
70% wind/solar/hydro
Wind/solar/hydro TWh 51 256 345 456
Wind/solar GW 29 146 197 261
GW delta per annum 3.7 5.3 7.2
TWh pa growth 5.2% 6.2% 7.1%
Other electricity TWh 232 274 370 489
Source: Eurostat, Barclays Research estimates
Barclays | European Utilities
12 May 2021 52
Iberia – Iberdrola and Endesa our growth stock picks
Market shares
Iberdrola holds a 19% market share in the Spanish renewables market, followed by Acciona
with 11% and Endesa with similar market share. The majority of the market is owned by local
utilities, including Portuguese utility EDP. In Portugal, EDP is the biggest player with 16%
market share, followed by EDF with 8% market share.
FIGURE 78
Market share in Spanish renewables (34GW in 2019)
FIGURE 79
Market share in Portuguese renewables (6GW in 2019)
Source: BNEF, Barclays Research Source: BNEF, Barclays Research
Growth potential of the Spanish renewables market
The regulatory environment for renewables in Spain has been shaped by the EU’s climate and
energy goals and materialised in the Integrated National Plan on Energy and Climate for 2021-
30 (Plan Integrado Nacional de Energía y Clima 2021-30, the ‘PNIEC’). Nevertheless, these
targets are mere guidance. We believe Spain will deliver the 57.4GW additional capacity
before 2030 and, consequently surpass the target of 97GW of wind and solar installed
capacity. Assuming that capacity is reached two years in advance at a rate of 6.5GW/ per
annum, the growth for onshore wind is 9% CAGR and 18% CAGR for solar.
Spain submitted the plan to the EU in early 2019 and it was approved in early 2020. It sets the
following targets by 2030: a) a 42% share of renewables in the final energy used and a 74%
share in the case of electricity, b) energy dependence from abroad must be reduced from the
current 74% to 61%, c) energy efficiency must be increased to 39.5%, and d) greenhouse
effect emissions must be reduced by 23% compared with the 1990 level.
The plan will mobilise €241bn in investments between 2021 and 2030. The plan assumes
that 80% of the funds will come from the private sector and only 20% from public institutions,
including EU funds.
In order to deliver these targets, the plan included a specific generation mix to be achieved by
2030: of an estimated 161GW total electricity generation capacity, 50GW must be wind,
39GW PV and 5GW CSP power.
IBE
19%
ANA
11%
ELE
11%EDP
6%NTGY
5%Brookfield
2%
ACS
2%
Other
44%
EDP
16%
EDF
8%
Vetient E.
8%Other
68%
Barclays | European Utilities
12 May 2021 53
FIGURE 80
Expected evolution of installed capacity in Spain by 2030
(MW) 2020 2025E 2030E 2021-30E
Onshore / offshore wind 28,033 40,633 50,333 22,300
Solar PV 9,071 21,713 39,181 30,110
Solar thermal 2,303 4,803 7,303 5,000
Hydro 14,109 14,359 14,609 500
Hybrid pump storage 2,687 2,687 2,687 0
Pump storage 3,337 4,212 6,837 3,500
Biogas 211 241 241 30
Other renewables 0 40 80 80
Biomass 613 815 1,408 795
Storage 0 500 2500 2,500
Source: Plan Integrado de Energía y Clima, Ministerio de Transición Ecológica; CNMC
Portugal has also set ambitious targets for 2030 under its Integrated National Plan on Energy
and Climate for 2021-30 submitted to the EU. In fact, Portugal’s targets go above and beyond
Spain’s. Portugal is targeting 47% of renewables in final energy consumption and 90% of
renewables in power generation capacity by 2030 and is aiming for €407-431bn in
investments up to 2030. As an emerging market for Capital Energy, accounting for some 12%
of the company’s 2025E installed capacity, we believe Portugal’s framework sets a promising
tone for renewables development in the country.
Our view on 2050 electrification scenarios for Iberia
We see total Iberian power consumption reaching ~880TWh under a medium electrification
case, rising to ~1,200TWh under a high electrification scenario. This an annual 3.2% rise in
consumption at the low end and reaching 5.6% per annum growth in the high end scenario.
With these three scenarios of electrification, we estimate that wind/solar could generate 70%
of the total consumption.
Overall, with electrification of the Iberian economies we see the potential for >200GW of wind
and solar, with a low case of 165GW and a high of 344GW (70% renewable future in a high
electrification scenario). The middle case would be 243GW.
FIGURE 81
With a range of electrification of the economy, we could see the need for between
243GW to 344GW in Iberia
Scenario 2050
Current
2018
Low
electrification
Medium
electrification
High
electrification
Total energy consumed mn TOE 97 213 208 203
Electricity consumed mn TOE 19 51 76 107
Residual fuel mn TOE 78 161 132 95
Electricity consumed TWh 220 597 881 1,248
% growth pa 3.2% 4.4% 5.6%
70% wind/solar/hydro
Wind/solar/hydro TWh 63 288 425 602
Wind/solar GW 36 165 243 344
GW delta per annum 4.0 6.5 9.6
TWh pa growth 4.9% 6.1% 7.3%
Other electricity TWh 157 309 456 645
Source: Eurostat, Barclays Research estimates
Barclays | European Utilities
12 May 2021 54
UK – best positioned on energy transition theme
2020 was a critical year for the UK in terms of defining the nation’s decarbonisation strategy.
The government announced a 10-Point Plan for reaching carbon neutrality followed by a
National Infrastructure Strategy and Energy White Paper. Together these documents
proposed a plethora of consultations from the future of the system operator, carbon pricing,
retail tariffs and frameworks to meet a net-zero target. In total, the UK has committed £12bn
towards its net-zero goal so far and announced 12GW of capacity for the next CfD auction in
late 2021.
We believe 2021 is set to be another important year in terms of the UK’s climate agenda,
considering it is hosting COP26 in November.
FIGURE 82
10-Point Plan, National Infrastructure Strategy and Energy White Paper summarised
Area Already Announced in 2020 Total £ Pledged Upcoming
Offshore Wind Produce enough offshore wind to power every
home in the UK
40GW by 2030, supporting up to 60,000 jobs
12GW of renewable capacity available in next
CfD auction, including a separate category for
OFW for the first time
60% of project capex to be spent locally by 2030
o £160mn to upgrade ports and
manufacturing facilities
UK Offshore CfD Round 4 in
late 2021
Hydrogen 5GW of ‘low carbon’ hydrogen production
capacity by 2030 (incl. green and blue)
Develop first town heated by hydrogen by the
end of the decade
Aim to enable up to 20% hydrogen blending on
the network by 2023
£240mn Net Zero Hydrogen
Fund
UK hydrogen strategy to be
released in the first quarter of
2021
Nuclear Provision for large nuclear plant and advanced
small nuclear reactors, supporting 10,000 jobs
R&D for new advanced modular reactors
Govt. confirmed it will enter negotiations with
EDF on Sizewell C project
Aim to build commercially viable fusion power
plant by 2040
£525mn including £385mn for
small modular reactors
£220mn for nuclear fusion
Electric Vehicles Phasing out of new petrol and diesel cars/vans
by 2030
Funding to accelerate rollout of chargepoints
£1.3bn
Jet Zero/Green
Maritime
Supporting research projects for zero-emission
planes and ships
£21mn to support sustainable
aviation fuels and zero
emission flight infrastructure
£20mn to support alternative
marine fuels and green
shipbuilding
Heat
Pumps/Building
Efficiency
Install 600,000 heat pumps every year by 2028
Establishing Future Homes Standard that all new
build homes are zero carbon ready
Requiring that all rented non-domestic buildings
will be EPC Band B by 2030 homes are zero
carbon ready
£1bn into home/building
efficiency
Green Homes Grant voucher
scheme extended one year
The government will
announce regulation and
targeting spending for energy
efficiency in heating and
buildings in 2021.
New smart meter obligation
on suppliers, which will start in
July 2021.
Carbon, Capture
and Storage
Target to remove 10mn tonnes of CO2 by 2030
Create two CCS clusters by the mid-2020, and
two more by 2030
£1bn for CCS infrastructure
fund
Revenue mechanism to bring
through private sector
investment via new business
models to support these
projects, 2021
Barclays | European Utilities
12 May 2021 55
Area Already Announced in 2020 Total £ Pledged Upcoming
BECCS/Negative
Emission
Technology
Government aim to establish role of BECCS
within the economy by 2022
£100mn for DACs at Summer
Economic Update
Greenhouse Gas Removal
Technologies study due in
Summer 2021
UK Infrastructure
Bank
To co-invest alongside the private sector in
infrastructure projects
Lend to local and mayoral authorities
Operational from Spring 2021
At Budget 2021, the
Chancellor will set out
comprehensive details
regarding the operations,
mandate and scale of the
bank.
Decarbonising
Industry
Industrial Energy Transformation Fund will
support early adoption of energy efficiency and
deep decarbonisation projects in energy
intensive industries
£315mn Industrial Decarbonisation
Strategy to be published in
Spring 2021
Emissions
Trading Scheme
This will replace the EU ETS from Jan 1st 2021
5% reduction in carbon emissions
Government has highlighted it could link the UK
ETS internationally (i.e. with the EU)
Retail Market UK will offer a simple method of switching to a
cheaper energy tariff, and will test automatic
switching
Suppliers to include transparent and accurate
information on carbon content
£6.7bn package in EWP to
support lowest paid with their
bills
Framework to introduce opt-in
switching with consultation
due by March 2021.
Consult by spring 2021 on
regulating third parties such as
energy brokers and price
comparison websites.
Networks Govt. targeting 18GW of interconnector capacity
by 2030 according to EWP and will legislate to
enable competitive tendering building,
ownership and operation of the onshore
electricity network
Launched Offshore Transmission Network
Review
Smart Systems Plan due in
Spring 2021
Energy Data Strategy due in
spring 2021
Consulting on updates to the
Gas Act
Source: Barclays Research, BEIS, Ofgem, Ofwat
Market share
Having already set their Net Zero 2050 target in law, the UK has c.10GW of installed offshore
wind capacity and a goal of 40GW by 2030 (including 1GW of floating offshore wind). In his
keynote Conservative Party speech on 6th October 2020, Boris Johnson pledged to invest
£160mn in ports and factories for next-generation turbines and improve infrastructure in
such places as Teesside and Humber in England, and in Scotland and Wales.
Barclays | European Utilities
12 May 2021 56
FIGURE 83
The UK has c.10GW of commissioned offshore wind and 15GW confirmed in the pipeline
Source: BNEF
Alongside this, included in the government’s efforts to promote the offshore wind industry,
the Department for Business, Energy and Industrial Strategy published the Offshore Wind
Sector Deal on 7th March 2019. The deal is designed to facilitate the development of offshore
wind in the UK with an emphasis on the UK supply chain. In this, the government has made
available £557m for Contracts for Difference.
An overall view of the renewables market, by market share, is shown in the table below. SSE
is market leader with 6% market share, followed very closely by RWE, Iberdrola and Drax.
FIGURE 84
Market share in renewables – solar / wind / biomass (46 GW in 2019)
Source: BNEF, Barclays Research
Current key players in the UK offshore wind market include utilities such as Orsted, Vattenfall,
Innogy, SSE and Scottish Power, as well as financial investors including infrastructure funds
and pension funds.
9.9
5.2
9.8
13.1
15.7
0.02.04.06.08.0
10.012.014.016.018.0
Co
mm
issi
on
ed
Fin
an
cin
g
secu
red
/u
nd
er
co
nst
ruct
ion
Pe
rmit
ted
An
no
un
ced
/p
lan
nin
g
be
gu
n
Pro
ject
ab
an
do
ne
d
Ca
pa
cit
y t
ota
l (G
W)
SSE
6% RWE
6%IBE
6%
Drax
6%
Orsted
5%
Macquarie
3% Octopus
3%Greencoat
2%
Other
63%
Barclays | European Utilities
12 May 2021 57
FIGURE 85
The main players in the UK, as % of commissioned offshore wind
Source: Barclays research estimates, BNEF, 4C Offshore
UK targets until 2030
Under the government’s efforts to promote and support the offshore wind industry and to
reach the 40GW target, BEIS published the Offshore Wind Sector Deal on 7th March 2019.
The deal is designed to facilitate the development of offshore wind in the UK with an
emphasis on the UK supply chain. In this, the government has made available £557m for
Contracts for Difference.
FIGURE 86
UK Offshore Wind project lifecycle
Source: Deloitte, Barclays Research
The 40GW target looks achievable: The UK has c.10GW of offshore wind currently
operational, with a further 8GW under construction or the FID plans make it operational
through to 2025. This leaves a further 22GW that needs to be under construction by 2027. In
our view, it takes a minimum of 5 years to develop an offshore wind farm from seabed lease
to being operational. There were a further 2.8GW of Crown Estate extensions announced in
September 2020. To reach 40GW by 2030 the UK would need 4-5GW initiated every year, via
Orsted
24%
RWE
15%
Green Investment
Group
8%Vattenfall
6%
Global Infrastructure
Partners
6%
SSE
5%
ScottishPower
Renewables
3%
Equinor
3%
Masdar
3%
Greencoat
3%
Copenhagen
Infrastructure
Partners
2%
Others
22%
Seabed Rights
• The Crown Estate owns the seabed and leases parts of it out for offshore wind
development through a competitive process.
Consent to build
• After winning a lease, the developer must apply for Development Consent Order from BEIS or permissions from local authorities and also obtain a generation license from Ofgem.
Transmission
• Under the Generator-build model, transmission assets from offshore to onshore grid are built by the wind farm developer and then transfered to an offshore transmission owner (OFTO).
Economic Support
• Once consents are approved, developers compete for Contract for Difference, an economic support measure from BEIS.
Barclays | European Utilities
12 May 2021 58
the Crown Estate seabed auctions out to 2025 as well as at least 3GW per annum over the
coming 7 years through the CFD Auctions. This is eminently achievable, in our view.
The Crown Estate in England and Wales will run lease for seabed every 2 years, and Scotland
will run for c.10GW September 2021.
Our view on 2050 electrification scenarios for the UK
We see total UK power consumption reaching 400TWh under a medium electrification case,
rising to 600TWh under a high electrification scenario. This is an annual 1% rise in
consumption at the low end and reaching 3% per annum growth in the high scenario.
Overall, with electrification of the economy we see the potential for >100GW of wind and
solar in the UK, with a low case of 78GW and a high case of 250GW (100% renewable future
in a high electrification scenario). The middle case would be 116GW.
FIGURE 87
Scenario Analysis: with a range of electrification of the economy, we could see the need
for between 80GW to 170GW (up to 246GW if 100% powered by wind/solar)
Scenario 2050
Current
2018
Low
electrification
Medium
electrification
High
electrification
Total energy consumed mn TOE 143 141 136 131
Electricity consumed mn TOE 26 34 51 74
Residual fuel mn TOE 117 107 85 57
Electricity consumed TWh 300 400 579 863
% growth pa 0.9% 2.2% 3.4%
70% wind/solar/hydro
Wind/solar/hydro TWh 69.8 280 418 604
Wind/solar/hydro GW 33.2 80 119 172
GW delta per annum 1.5 2.7 4.3
TWh pa growth 2.4% 4.1% 5.3%
Other electricity TWh 230 120 179 259
100% wind/solar/hydro
Wind/solar/hydro TWh 69.8 400 579 863
Wind/solar/hydro GW 33.2 114 170 246
GW delta per annum 2.5 4.3 6.7
TWh pa growth 3.9% 5.2% 6.5%
Other electricity TWh 230 - - -
Source: BEIS, Barclays Research estimates
Barclays | European Utilities
12 May 2021 59
COMPANY SUMMARIES Encavis
Grenergy
Iberdrola
Orsted
RWE
Solaria
SSE
Barclays | European Utilities
12 May 2021 60
ESG OVERVIEW: ENCAVIS (ECV GY)
Identify: There are 3 factors materially influencing the investment recommendation:
1) Growth in installed renewable generation capacity, 2) Asset rotation and 3)
Development of the renewable energy PPA market in Europe.
Blocks represent an aggregated view of
leading ESG score providers (one indicates
a very low average score, five indicate a
very high average score). Icons show the
dispersion of those views (no bars
indicates only one source provider, two
bars indicate dispersion between
providers, full bars indicate aligned views).
For more details, click here.
Source: Barclays Research, Sustainalytics,
Vigeo Eiris
Further Reading
European Utilities: Green
stimulus provides significant
renewable vaccine, 5th June
2020
ESG Research: Utilities –
Powering change: the global
focus on sustainability, 3rd June
2020
European Utilities and Energy:
Net Growth from Net Zero, 3rd
February 2020
Impact: We incorporate ESG factors through underlying growth rates and multiples.
Encavis is significantly exposed to the positive secular growth trends in renewables and
infrastructure. We use a premium valuation of these assets (existing solar capacity at
~14.9x 2022E EV/EBITDA and existing wind capacity at ~9.3x). Through Encavis Asset
Management, the company offers customised portfolios for institutional investors.
Future: Encavis is a renewable energy developer, specialising in onshore wind and solar
development as well as the technical operation of solar assets. The company acquires
ready-to-build, turnkey-projects of existing parks with Feed-in-Tariffs to operate over their
commercial life. The company is expanding further to negotiating projects with PPAs and,
after gaining experience in Spain and the UK, is looking to develop further in emerging PPA
markets such as Italy, Germany and France. In total, Encavis has a pipeline volume of >3GW
over the next three years. The company also hopes to double its own generation capacity
by 2025 to 3.4GW, and, in part, fund this by disposal of minority interests in selected wind
and solar parks of up to 39% to free up liquidity for investment in additional parks.
Engage: 3 key ESG questions for company engagement:
How much do you expect to profit from the European Green Deal?
Germany recently revealed an ambitious green hydrogen strategy. As a renewable
energy developer, what is your involvement in this?
Where do you see the future of the PPA market for renewables in Europe? Do you see
pressure on renewable prices as more capacity comes online?
Strategy & Ambition:
Improve MSCI ESG rating from “AA” to “AAA” by 2025.
Increase share of green electricity purchases to 100% by the end of 2022.
Significant increase in non-subsidised electricity production by the end of 2025.
Key ESG Metrics
Environmental 2018 2019 2020 The company is committed to the environment at all levels of the business,
supporting employees through subsidizing use of bicycles and local transport,
replacing air travel with digital meetings where possible, and using recycled
office materials.
Renewable electricity production
(GWh) N/A 2,660 3,443
Carbon saved thousand t/y N/A N/A 955.43
Social 2018 2019 2020 Encavis emphasizes a commitment to their local community and employee
wellbeing. The company supports various local charities and encourages
employees to take personal and professional development courses.
Total employee turnover (%) N/A N/A 10.5
Governance 2018 2019 2020
Encavis scores poorly in terms of females on the board, however there is a focus
on promoting females into management positions with just under a third of
women in these positions currently.
Female supervisory board
members N/A N/A 11%
Females in management N/A N/A 28%
Source: Barclays Research
Barclays | European Utilities
12 May 2021 61
Encavis (OW, PT €18.0)
We initiate coverage on Encavis with an Overweight rating and an €18.0 price target. Our
positive assessment is based on our view that Encavis’s ~31% year-to-date share price
underperformance against the European utility sector SX6P is overdone. This
underperformance is mainly related to a lower weighting of Encavis in the Ishares Global
Clean Energy index, which is now complete since 19 April when the reweighting completed.
More importantly we see Encavis’s current share price undervaluing its sizable renewables
growth pipeline and existing renewables assets given the possibility of a favourable impact
from the 26 Sep German Federal elections (if there is Green Party involvement in the next
German government this would likely be positive for Encavis as one of Germany’s renewable
and energy transition champions).
FIGURE 88
We see significant growth in the installed renewable capacity of Encavis reaching 3.4 GW
in 2025E in-line with Encavis Fast Forward 2025 strategic outlook
Source: Company data, Barclays Research
Valuation
Our €18.0/share price target for Encavis is based on a sum-of-the-parts methodology using
a group WACC of 4.8%. Our WACC assumes a cost of equity of 8.0%, a post-tax cost of debt
of 1.6% and assumed long-term gearing of 50% (net debt / debt + equity).
1,000
1,500
2,000
2,500
3,000
3,500
2020A 2021E 2022E 2023E 2024E 2025E
MW
Barclays | European Utilities
12 May 2021 62
FIGURE 89
Encavis – Sum-of-the-parts valuation
Business units Valuation (€m) €/share % of EV Implied 2022E
EV/EBITDA (x)
Existing solar parks 2,662 19.2 63% 14.9
Existing wind parks 585 4.2 14% 9.3
Growth pipeline 984 7.1 23%
Technical Services 12 0.1 0% 8.0
Asset Management 76 0.5 2% 9.5
HQ/Consolidation -77 -0.6 -2% 8.0
Encavis EV 4,242 30.6 100% 15.9
Financial assets 88 0.6 2%
Net financial debt -1,608 -11.6 -38%
Hybrid debt -150 -1.1 -4%
Provisions -75 -0.5 -2%
Minorities -10 -0.1 0%
Equity value 2,487 18.0 59%
Shares outstanding (m) 138.4
Equity value (€ / share) 18.0
Source: Barclays Research
The main components of our SOTP valuation of Encavis are:
Existing solar parks: The main component of our SOTP valuation is the existing installed
solar parks, which account for ~63% of our EV. Our valuation of these assets reflects the
existing contracted nature of these assets (existing renewable assets have feed-in-tariffs
for an average of 13 years). The premium-valuation of the installed solar assets is a result
of these favourable feed-in-tariffs (FIT) and the reflection of a long asset life. It is
important to highlight that we model a significant step-down in the achieved power price
to €35.0/MWh (flat) for when the FITs end, which we see as a conservative assumption
as this is significantly below current power price forwards (the 1-year forward German
baseload power price is currently around €61/MWh).
Existing wind parks: Encavis is mainly a solar player, which is reflected by existing
onshore wind parks only accounting for ~14% of EV. Note that we do not reflect a
terminal value for these wind assets and we have a conservative 25-year asset life (in-line
with assumed accounting life).
It is important to highlight that we see the implied capacity multiples we derive as reasonable
for the installed contracted solar and wind capacity. This is underlined by our €1,982/kW
figure for solar and €1,370/kW figure for onshore wind.
FIGURE 90
We see our implied capacity multiples for Encavis’ installed solar and wind capacity as
reasonable
Valuation (€m) Installed gross capacity (MW) EUR/kW
Solar Parks 2,662 1,343 1,982
Wind parks 585 427 1,370
TOTAL 3,247 1,770 1,834
Source: Barclays Research
Barclays | European Utilities
12 May 2021 63
Growth pipeline: Our valuation of Encavis’s growth pipeline is an important part of our
EV valuation (~23% of EV). We value this pipeline at ~€1.0bn and this is a reflection of 10
years of growth investments over 2021-30E. This reflects Encavis’s target for installed
renewable capacity of ~3.4 GW in 2025E. We then assume a continuation of these general
growth trends for another 5 years. In our view this is a firm pipeline as Encavis has an
existing project pipeline of ~3.0 GW and only needs around 1.6 GW to reach its 2025
target for installed renewables capacity of ~3.4 GW. It is important to underline that we
only reflect the net growth capex in the valuation of this renewables pipeline and exclude
the expected wind farmdowns.
Technical Services, Asset Management and HQ/Consolidation: For Encavis’s other
operating subdivisions, which are small in nature, we reflect multiples valuation. In the
case of Asset Management (~2% of EV) our 9.5x 2022E EV/EBITDA multiple reflects the
our high expected future growth of these operations (planned 3-5 new Infrastructure
funds equivalent to €150 to €200m according to Encavis’ guidance) of additional equity
per annum until 2025).
Financial assets: This is the assumed 2021E book value for Encavis’s financial assets,
which is not deducted from net financial debt. These are mainly equity investments in
infrastructure funds.
Net financial debt, hybrid debt and provisions: We reflect the actual 2020A book value
for the debt items in our SOTP valuation of Encavis.
Minorities: We have derived the negative minorities item through applying a 30.0x PE
multiple for 2020A minority interest.
Catalysts
Quarterly results
The market will pay close attention to the financial performance of Encavis at its respective
quarterly results over the next year.
FIGURE 91
Encavis – Quarterly results timetable
Event Date
1Q21 results 14-May-21
2Q21 results 13-Aug-21
3Q21 results 15-Nov-21
FY21 results End-Mar-22
Source: Company data
The main market focus should be on the financial outturn compared to expectations and
guidance. It is important to remember that Encavis’s current 2021 financial guidance does
not reflect any growth investments this year except the Jan 2021 commissioning of the
Talayuela Spanish solar project. The FY21 results should be of particular interest as this is
when Encavis should provide further detail on expected 2022 financial performance.
German federal election on 26 Sep 2021
The next German federal elections are set to take place on 26 Sep 2021. These elections could
be a positive catalyst for Encavis. The Green Party has moved to the largest vote share in the
polls (see Figure below).
Barclays | European Utilities
12 May 2021 64
FIGURE 92
Green Party has moved to largest vote share in German federal election polls this year
Source: INSA, Forsa, Kantar, YouGov, GMS, Allensbach, Forschungsgruppe Wahlen, Infratest dimap
As seen from the evolution of German federal election polls’ results this year, the Green Party
is currently polling with the highest vote share at around 27-28% with the Conservative
alliance CDU/CSU as second with around 23-34%.
Encavis , as one of Germany’s renewable energy champions, would likely be viewed as
benefitting if there were Green involvement in a future government.
The Green Party has already stated (source: Bloomberg, 30 April 2021) that one of its main
government policies would be to accelerate the shift to renewable power in Germany. This
would include installing solar panels on every new roof and using 2% of land in Germany for
wind power. In addition, the cornerstone of the Greens’ campaign is a €500bn investment
program over ten years. This would include initiatives in climate-neutral infrastructure next
to biotechnology, high-speed Internet and quantum computers. Given the Greens’ strong
renewables and climate focus, we would see any strength in the German federal election as
a positive for listed major German energy transition players, like Encavis, RWE and E.ON.
0
5
10
15
20
25
30
35
40
Jan-21 Feb-21 Mar-21 Apr-21 May-21
%
Grüne CDU/CSU SPD FDP AfD Linke Others
Barclays | European Utilities
12 May 2021 65
Financials
The following table provides an overview of our main financial projections for Encavis.
FIGURE 93
Encavis – Forecast summary
€m 2020A 2021E 2022E 2023E 2024E 2025E
Revenue 292.3 322.3 351.1 380.1 409.2 438.6
%-change 7% 10% 9% 8% 8% 7%
Operating EBITDA 224.8 244.1 266.0 288.0 309.9 331.9
%-change 3% 9% 9% 8% 8% 7%
Operating EBIT 132.2 141.5 157.0 172.5 188.0 203.5
%-change 0% 7% 11% 10% 9% 8%
Net Income (attributable to Encavis shareholders) 10.1 11.9 22.4 30.6 38.8 47.1
%-change -54% 18% 88% 36% 27% 21%
Operating earnings 59.9 62.9 70.4 78.6 86.8 96.5
%-change 7% 5% 12% 12% 10% 11%
Operating cash flow 213 215 230 247 265 282
%-change 12% 1% 7% 8% 7% 7%
Average number of shares outstanding (m) 137.8 138.4 138.4 138.4 138.4 138.4
EPS (net income) (€) 0.07 0.09 0.16 0.22 0.28 0.34
EPS (Adjusted) (€) 0.43 0.45 0.51 0.57 0.63 0.70
%-change 2% 5% 12% 12% 10% 11%
DPS (€) 0.28 0.30 0.32 0.34 0.36 0.38
%-change 8% 7% 7% 6% 6% 6%
Pay-out ratio 380% 348% 197% 154% 128% 112%
Financial net debt 1608 1681 1715 1737 1747 1745
Source: Company data, Barclays Research
Barclays | European Utilities
12 May 2021 66
ESG OVERVIEW: GRENERGY (GREG.MC)
Identify: Grenergy’s core business is the generation of renewable energy. As such, there
are three factors materially influencing the investment recommendation: 1)
decarbonisation of power, 2) electrification of the economy and 3) decarbonisation of the
residual.
Blocks represent an aggregated view of
leading ESG score providers (one indicates
a very low average score, five indicate a
very high average score). Icons show the
dispersion of those views (no bars
indicates only one source provider, two
bars indicate dispersion between
providers, full bars indicate aligned views).
For more details, click here.
Source: Barclays Research, Sustainalytics,
Vigeo Eiris
Further Reading
Powering change: the global
focus on sustainability
Utilities: Net growth from net
zero
Impact: Grenergy is a pure-play renewable developer with c.200MW of installed renewable
capacity at the end of 2020. A material proportion of our valuation of Grenergy pertains to the
group’s renewables project pipeline. This part of the valuation will become increasingly
relevant as the utility increases the visibility of its project pipeline. We currently value its
renewables pipeline at €40/sh, or 76% of EV. We expect the electrification of the economy and
transition towards net zero to be the key growth driver for Grenergy.
Future: Grenergy will continue to develop and deliver on its current renewables pipeline.
As the world continues to transition towards Net Zero and more countries outline energy
transition plans, Grenergy will be able to further expand its pipeline and operations. For
example, given the promising renewables backdrop in Italy and the UK, Grenergy has
recently announced projects in early development phases in these regions.
Engage: 3 key ESG questions for company engagement:
How are you thinking about the development of utility-scale storage over the next 10
years?
What is the impact you see for Grenergy from the EU’s ‘green’ stimulus package?
Grenergy operates across various emerging markets. How do you ensure that
economic value from projects is retained by the country and local communities?
Strategy & Ambition:
2.5GW of installed renewable capacity by 2023
Key ESG Metrics
Environmental 2017 2018 2019 Grenergy’s renewable operations under construction and in backlog would see
a large level of carbon emission avoided. The company’s projects are also best
in class environmentally, having received no red flags in environmental audits
and suffering no delays as a result of environmental or social issues.
tCO2eq avoided due to projects N/A N/A 691,501
Project delays due to community or
ecological impacts N/A N/A 0
Social 2017 2018 2019 Grenergy has a clear focus on supporting local communities through
employment, community work and using 31% local suppliers. The company
provides extensive employee training and has had no employee accidents.
Employee training hours N/A N/A 406
Local employees N/A N/A 84%
Governance 2017 2018 2019
In terms of governance, Grenergy exemplifies best practice. A third of the board
is female, the company has 50% independent directors and 50% of their
committees are made up of women.
Women in the Board of Directors N/A N/A 33.3%
Independent Directors N/A N/A 50%
Source: Barclays Research, company data
Barclays | European Utilities
12 May 2021 67
GRENERGY
We initiate coverage on Grenergy at OW, PT €45.2/sh
We initiate coverage on Grenergy with an OW rating and €45.2 PT. We estimate Grenergy
offers double-digit growth over the next five years, and we believe this is not reflected in
the share price. We think a discount would not be justified due to its high exposure to Latin
America. We think the share price is not taking into account the transformation in its
geographical mix, with future higher weight in strong currency markets like Spain Our
downside case (€28.7) reflects our ‘black-sky’ scenario, where we give a value of zero for
all aspirational pipelines and therefore a floor valuation and downside risk. We value only
secured pipeline, i.e. assets under development with land rights, but not yet permitted and
with an offtake contract (pre-Final Investment Decision, FID).
Investment case for Grenergy:
1) A rapid transformation to increase exposure to strong currency markets: Grenergy’s
focus is on sustainable renewables development comprising solar and wind
technologies. By the end of 2021 we see Grenergy managing 658MW in different
markets (Chile, Spain, Colombia, Peru, Mexico and Argentina), and capacity under
construction of 309MW. Spain is likely to be the key market for transformation, moving
from no exposure by the end of 2020 to becoming their biggest market (45% of installed
capacity) by 2023E. This will allow Genergy to reduce significantly its exposure to Latin
America.
FIGURE 94
Geographical diversification at end 2020 (installed capacity)
FIGURE 95
Estimated geographical diversification by 2023E (installed
capacity)
Source: Grenergy, Barclays Research Source: Grenergy, Barclays Research
2) We see Grenergy as a growth company with an attractive project backlog: We see
Grenergy’s installed capacity growing to ~3.6GW over 2021-25 or 78% CAGR over the
same period. More than 90% of that new capacity is expected to be solar PV. Our
conviction in the high visibility of the company’s project backlog is based on the positive
global framework for renewables development, and specifically positive developments
in renewable targets across Europe and Spain, including the EU Green Stimulus Plan and
Spain’s National Energy Plan. According to our estimates, capacity under construction
will peak by the end of 2022E at 1.2GW.
Chile
52%
Peru
18%
Mexico
18%
Argentina
12%
Spain
45%
Chile
38%
Colombia
11%
Italy
4%
Peru
1%Argentina
1%
GRE SQ / GREG.MC
Stock Rating
OVERWEIGHT
Industry View
POSITIVE
Price Target
EUR 45.20
Price (10-May-2021)
EUR 24.70
Potential Upside/Downside
+83.0%
Barclays | European Utilities
12 May 2021 68
FIGURE 96
78% CAGR in installed capacity 2021-2025E
FIGURE 97
End 2022E peak in capacity under construction
Source: Grenergy, Barclays Research estimates Source: Grenergy, Barclays Research estimates
3) Grenergy looks set to benefit from the worldwide energy transition: Grenergy’s key
markets are Chile and Spain; the latter, we believe, is facing a material transformation in
the next ten years. The growth opportunity that the Spanish market offers is based on
replacing thermal and later nuclear capacity with renewable energy. Grenergy is also
targeting other markets in Europe, in order to rebalance its exposure between Latin
America and Europe. We see three different growth opportunities in Europe:
The UK’s commitment to net zero by 2050. This scenario predicts up to 40GW of solar by
2050 compared to current 13GW capacity. The advantage of this market is that spot and
forward price forecasts are significantly higher compared with the Spanish spot price,
representing c.77% average higher price forecast for the next 20 years. Additionally, being
a growing market for solar PPAs, prices in the UK are over 50% higher than PPA prices in
Spain.
Italy’s National Energy and Climate plan (NECP) includes capacity additions of 12.9GW
between now and 2025E, and 27GW between 2025 and 2030E. Of that capacity 55% of
the total capacity additions is planned to be solar in the first period and the share of solar
is expected to increase to 89% of total new capacity additions in the period 2025 to 2030E
(24GW).
Poland is the European market with the highest dependency on coal and, therefore, a
substantial opportunity to replace closing capacity with new ‘greener’ capacity.
4) Key risks relate to load factors, pricing and interest rates. Based on Grenergy’s
significant renewables focus, we think the key risks relate to pricing obtained by
individual power plants, particularly the future power prices, and more specifically the
captured wholesale power price for each technology, the level of power purchase
agreement (PPA) achieved and the annual load factor achieved by each power plant. The
most material risk relates to the underlying Spanish wholesale power price. Every 1%
decrease in the power price equates to a 1% reduction in 2025E pre-tax profit, in our
estimates. In terms of load factors, solar PV is the most sensitive business area. Every 1%
change in the long-term load factor of overall load factors equates to a 3% impact on
2025E pre-tax profit. Looking at the debt-related risks for Grenergy, we calculate every
50bps increase in the average cost of debt equates to a 6% reduction in 2025E pre-tax
profit.
198
658
1456
2512
3567 3567
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2020 2021E 2022E 2023E 2024E 2025E
MW
0
460
798
1056 1055
00
200
400
600
800
1,000
1,200
1,400
2020 2021E 2022E 2023E 2024E 2025E
MW
Total new additions Total under construction
Barclays | European Utilities
12 May 2021 69
Spain, a fast growing renewables market for Grenergy
At the end of 2020, Grenergy had no operating capacity in Spain. We estimate Grenergy will
have 200MW of solar PV capacity operating by the end of 2021 and 1.9GW operating by the
end of 2025E by reaching an installation rate of 500MW / year by 2025E.
FIGURE 98
77% CAGR in installed capacity 2021-2025E
FIGURE 99
End 2024E peak in capacity under construction (575MW)
Source: Grenergy, Barclays Research estimates Source: Grenergy, Barclays Research estimates
We believe there are three main reasons that make Grenergy’s future expansion in the
Spanish power market credible:
1) There is room for material new renewables capacity
Spain is a relatively big power market in Europe. In 2020 total installed capacity amounted to
105.2GW of capacity of which renewables (including conventional hydro capacity) amounted
to 54.6GW or 52% of total capacity. This capacity covered, without problems, a peak demand
of 40.4GW in January 2020, before the lockdown. Power demand reached 236.5TWh, while
power demand, adjusted by temperature and calendar year, dropped by 5% yoy in 2020, due
to the negative impact of the lockdown.
The slowdown in power demand has created excess capacity that will be addressed with the
final shutdown of remaining coal plants by June 2021. This makes it possible to avoid 4.8TWh
of coal production in 2021 and part of 2022. Additionally, Spain generated 65TWh gas fired
CCGT and cogeneration in 2020, which could be flexed down to accommodate new
renewables capacity, as its back-up production threshold is significantly below that level.
Finally, Spain saw 13TWh reduction in power demand to accommodate lockdown. We think
a big part of that power demand is likely to return: we forecast moderate power demand
growth of 0.8% CAGR for the period 2021-25, assuming 245TWh power demand by 2025.
2) Highly fragmented renewables market
Out of the installed capacity at the end of 2020, Iberdrola, Endesa and EDP have only 43%
market share in onshore wind capacity and only 13% in solar PV and thermal solar capacity
in Spain. This leaves room for smaller developers to grow in new capacity, particularly in the
solar market, where big utilities are late coming to this market.
0200
400
872
1447
1947
0
500
1,000
1,500
2,000
2,500
2020A 2021E 2022E 2023E 2024E 2025E
MW
200 200
472
575
500
0
100
200
300
400
500
600
700
2020A 2021E 2022E 2023E 2024E 2025E
MW
New additions Under construction
Barclays | European Utilities
12 May 2021 70
FIGURE 100
Market share of big utilities in onshore wind capacity (2020)
FIGURE 101
Market share of big utilities in Spanish solar capacity (2020)
Source: company data, Red Electrica, Barclays Research Source: company data, Red Electrica, Barclays Research
3) Spain, a fast growing PPA market
Spain is home to the world’s second-largest PPA market (after the US) in terms of capacity
of renewables under agreements. This is overwhelmingly skewed towards solar PV given the
attractive prices that solar PPAs in the region fetch relative to other countries; however, we
note that onshore wind agreements are also on the rise.
FIGURE 102
Evolution of the Spanish corporate PPA market
Source: Bloomberg New Energy Finance
PPAs are electricity supply agreements between a power producer (the seller) and a customer
(the buyer) with 5-10-year tenors. The PPA is the bilateral contract that defines the amount
of electricity to be supplied and the negotiated price. The number of renewable PPAs entered
into by corporates has surged over the last year in Europe as companies increase their
commitment to decarbonisation and introduce targets for renewable electricity usage. For
example, in 2019 Amazon entered into a 149MW solar PPA in Spain after the company
pledged to source 80% renewable electricity by 2024 and 100% by 2030.
Iberdrola
25%
Endesa
10%
EDP
8%
Other
57%
Iberdrola
8%Endesa
5%
Other
87%
4 69 301
4,207
46
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2017 2018 2019 2020 2021
Co
rpo
rate
PP
As
in S
pa
in (
MW
)
Solar PV Onshore Wind
Barclays | European Utilities
12 May 2021 71
Risks to our renewables growth scenario - Supply of renewables capacity
constrained by grid access
At present, there are big plans for new renewable capacity additions from small and big
developers in the Iberian market (see chart below). Nevertheless, we think projects that target
a) auctions, or b) consumers directly through commercial action, will be constrained by grid
access. Having projects with grid access already granted is a significant competitive
advantage. As such, we believe Grenergy is currently in a strong competitive position.
FIGURE 103
Current total capacity in different phases of grid access application (273GW total)
Source: Red Electrica, as of 25.03.21
The Spanish government will most likely publish its new Infrastructure plan by the end of
2021. The infrastructure plan is the key roadmap to investments in the Spanish transmission
network and will be essential in removing bottlenecks in connections of new renewables
projects with capacity above 50MW. For Grenergy, this plan could represent not only the
granting of grid access for long-term projects, but also upside potential, as new transmission
lines will give Grenergy access to a new project pipeline.
FIGURE 104
Investments in the transmission network are still low
FIGURE 105
New kilometers of high-voltage grid have dropped
substantially
Source: Red Electrica, Barclays Research estimates Source: Red Electrica, Barclays Research estimates
0
20
40
60
80
100
120
With connection With grid access permit Grid access permit
under authorization
Not submitted
GW
Solar PV - HV grid Wind - HV grid Solar PV - LV grid Wind - LV grid
0
100
200
300
400
500
600
700
800
900
1,000
EURmn
0
200
400
600
800
1,000
1,200
1,400
1,600
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
E
2022
E
2023
E
2024
E
2025
E
km
Transmission grid 400 kV Transmission grid 220 kV
Barclays | European Utilities
12 May 2021 72
However, recent news flow is not supportive of a scenario of quick grid access availability for
new capacity. During its H2 20 results presentation, Red Electrica, Spain’s system operator,
announced the submission of a €6.4bn investment plan for Spain’s transmission network for
the period 2021-26: over €1bn/year capex. Later, on February 24, 2021 Red Electrica updated
its 2021-25 strategic plan by announcing a new capex plan of €4.4bn over the next five years.
Of that plan, only €2.85bn, or €670mn p.a., will be spent in the transmission network
(including storage facilities). The company attributed this slow ramp-up in capex (from
~€400mn p.a. currently) to the permitting process in Spain for large transmission projects.
Chile – a key growth market for Grenergy
Chile represented 52% of Grenergy’s total installed capacity at the end of 2020 and it will
continue to contribute to Grenergy’s future growth strategy. We forecast installed capacity
to grow by 72% CAGR over the period 2021-2025E. By the end of 2021E, we forecast
Grenergy managing 257MW in Chile and with capacity under construction of 215MW.
FIGURE 106
72% CAGR in installed capacity 2021-2025E
FIGURE 107
End 2022E peak in capacity under construction (614MW)
Source: Grenergy, Barclays Research estimates Source: Grenergy, Barclays Research estimates
This growth should position Grenergy as a top renewables player within Chile at a time when
there is clear momentum towards decarbonisation within the country.
FIGURE 108
1,535MW of installed capacity by 2024 would see Grenergy become one of the top
renewable players in Chile (ex. Hydro)
Source: BNEF
103
257
471
1055
1535 1535
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2020 2021E 2022E 2023E 2024E 2025E
MW
0
154
214
584
480
00
100
200
300
400
500
600
700
2020 2021E 2022E 2023E 2024E 2025E
MW
New additions Under construction
189
194
203
218
261
317
418
631
685
1,299
0 200 400 600 800 1,000 1,200 1,400
Colburn
Daruan Group
Grupo Ibereolica
Naturgy
Latin America Power
AES
JPMorgan
Actis
Acciona
Enel
To
p 1
0 R
en
ew
ab
le E
ne
rgy
Pla
yers
(MW
)
Barclays | European Utilities
12 May 2021 73
Chile committed to zero net carbon emissions by 2050 and approved the Energy Efficiency
Law to achieve this target. According to the Ministry of Energy, renewable energy should
grow by 2% CAGR until 2050, while their growth projections in installed capacity should grow
by 12% in 2021, reaching 38% of total installed capacity (3,593MW in January 2021).
Chile’s renewables mix has been dominated by hydro, however in recent years the mix has
shifted and solar and onshore wind annual capacity additions have overtaken. Since 2014,
Chile has seen an average installation rate of over 500MW of solar capacity and over 200MW
of onshore wind capacity.
FIGURE 109
Renewable generation in Chile has been growing since 2009
FIGURE 110
But in recent years, there has been a large jump in new
capacity additions
Source: BNEF Source: BNEF
No bottlenecks expected in transmission lines in 2022
We do not see a scenario of a return to renewables curtailment and price volatility, where
renewable development outpaces transmission expansion. Chile is currently launching a
bidding process to build the first HVDC transmission line (Kimal-Lo Aguirre line) in the
country, which is set to be awarded in November 2021. The project involves building a 1,500
km transmission line of 2,000MW capacity which will connect to existing Kimal and Lo
Aguirre substations, which will bolster interconnection between the northern and central
regions. Whilst we believe this is positive for future investments, preparing Chile’s energy
system for transmission of renewable energy from the north toward the demand-heavy
capital Santiago, the project is only scheduled to be completed around 2031.
The key risk for the market and Grenergy’s expansion has been the country’s disjointed grid.
In the past this has led to extreme curtailment of renewables and wholesale price volatility,
punishing renewable generators, however the commissioning of two key transmission lines
in 2017 and 2019 enabled better flow of electricity and eased price swings. The average level
of curtailment has fallen from a 14% peak in 2017 to below 2% in 2020. Going forward Chile
looks set to double its renewable generation capacity over the next few years whilst retiring
at least 11 coal-fired units by 2024.
Grenergy highly exposed to distributed generation market in Chile
Grenergy is particularly focused on two niche markets for distributed generation in Chile: the
Small Generation Means (PMG, ‘Pequeños Medios de Generación’) and Small Distributed
Generation Means (PMGD, ‘Pequeños Medios de Generación Distribuida’). These options
have become an alternative to PPAs, given the declining demand for this type of contract in
Chile. We see attractive returns in these markets, given the high incentive legal framework.
122 172 205 207 4021,2901,643
2,7763,745
4,2774,965
0
2,000
4,000
6,000
8,000
10,000
12,000
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
Ch
ile C
um
ula
tive
In
sta
lled
Re
ne
wa
ble
Ca
pa
city
(M
W)
PV Onshore Wind
8
440277
892
592452 494
102 50 33
187
448
76
241
377
80 194
0
200
400
600
800
1,000
1,200
Ne
w C
ap
aci
ty A
dd
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by
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log
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MW
)
PV Onshore Wind
Barclays | European Utilities
12 May 2021 74
Both markets have the following operational and financial advantages and therefore are
attractive markets:
PMGs are projects with installed capacity up to 9 MW, but in projects under 3 MW, the
environmental permit is not required, which reduces the development time and upfront
capex.
PMG projects can request a ‘self-dispatch’ operation scheme at the transmission network
level, which grants instant dispatch and no curtailment for at least 12 months.
PMGs can get partial or total waivers in transmission fees.
PMG projects can sell energy to the system at the marginal cost or at a stabilized price
regime, equivalent to a $50-60/MWh PPA today. The latter is a theoretical price that can
be understood as an approximation of the short and long-term energy market prices,
where: a) short-term price will consider the weighted value of all PPAs currently operating
in the market, and b) long-term price for the weighted average over time of the spot
market prices for the next 4 years. These price regimes grant developers like Grenergy
easier access to financing.
PMGD projects (up to 9 MW) can also enjoy ‘self-dispatch’ at the distribution network
level, get transmission toll reductions, have access to the stabilized price regime and do
not need to have an environmental permit for projects under 3 MW.
Chile had 167MW of PMG plants and 1,278MW in PMGD plants in January 2021. Grenergy is
likely to continue developing capacity under the PGMD regime in coming years and we
forecast that most of 2021 new capacity will be transferred to Build-to-Sell activities.
In spite of growing levels of renewables in Chile, an official PPA market has struggled to take
off, due to: a) Chile’s unique geography means power prices differ along the length of the
country, and b) lack of demand. Outside of its PMGD projects, Grenergy will look to secure
‘synthetic’ power purchase agreements by signing contracts with multiple industrial off-
takers for 5-7 year terms. These agreements will mirror a baseload style PPA, wherein
Grenergy will assume the baseload reconstruction cost. Whilst more complex than a
traditional PPA with a single off-taker, we believe this method of hedging for Grenergy
enables flexibility in the locations of its projects and development pipeline to ensure an
optimal price is achieved.
FIGURE 111
A PPA market in Chile has struggled to take off
FIGURE 112
PPA locations (bubble size based on PPA capacity)
Source: BNEF Source: BNEF
80 106 106 138
1019
136
0
200
400
600
800
1000
1200
2015 2016 2017 2018 2019 2020
Sig
ne
d P
PA
Ca
pa
city
(M
W)
Solar Wind Total
Barclays | European Utilities
12 May 2021 75
The ESG angle – the decommissioning question
We believe decommissioning is not a key risk to ESG credentials. More than 80% of
dismantled windfarms nowadays are recycled in a second life in other countries. Blades
recycling sees advances every year; we are convinced that when assets reach the end of their
lifetime there will be suitable solutions to recycle the blades. There are some Spanish
companies which specialize specifically in blades recycling, by cutting, crushing and sorting
the different components in order to recycle the fibre glass in a further stage. The resulting
products may be used for construction purposes, cement factories and plastics.
Silicon solar panels are 90% recyclable, and Tier 1 manufacturers used by Grenergy have a
recycling code that allows Grenergy to manage the withdrawal and recycling of the solar
panels once their useful life has ended under the indicated ratio of 90%.
Key catalysts – delivering its renewables project pipeline
Capital Markets Day by the end of 2021. We think Grenergy needs to update its project
pipeline and its new targeted markets after the recent capital increase. We think it is important
to give more visibility into expansion plans, particularly for Europe, after years of strong
expansion in Latin America. We also think that Grenergy has to clarify its hedging policy going
forward, and if it is considering vertical integration by entering into retail activities in Europe.
Presentation of environmental permits before May 2022. All Spanish renewable developers
have to present environmental permits obtained, and are at risk of losing their current grid
access if they fail to do so. We have considered this factor when incorporating specific
capacity additions in our forecasts for Grenergy.
End of 2021 sees the expiry of the PGM and PGMD regulatory regimes. Grenergy faces
uncertainties about any changes inconditions under these regimes for small projects in Chile.
The changes will particularly affect Grenergy’s Built-to-Sell margins, given the high EBITDA
margins we project for projects in 2021E.
Delivery of 400GW of new solar panel manufacturing capacity by 2022. This should
support increasing solar panel prices in 2021. We consider 2021 as a transition year between
an oversupplied 2020 and 2022, when growing demand for solar panels will be accompanied
with additional manufacturing capacity. Meanwhile, we expect solar panel prices to increase
by 9-10% during 2021E. We consider that declining panel prices are critical for Grenergy to
achieve high project IRRs. Every 10% increase in upfront capex for solar farms reduces our
central case of 9% project IRR by 130bps.
Spain, one of the key beneficiaries of the EU recovery. Spain will be one of the biggest
beneficiaries of the EU’s recovery fund, with €140bn in Next Generation EU funds, 37%
focused on green transition. We expect funds from the EU stimulus plan to start arriving in
Q4 2021. On 7 October, the government presented a €72bn stimulus plan just for the period
between 2021 and 2023, a fiscal push intended to boost gross domestic product by an
additional 2.5% and make the economy more digital and greener.
Current freeze on renewables pipeline to be lifted by 1 July 2021. Following the publication
of the June 2020 Law regulating access to the grid, we expect Spain to resume the application
process for new projects in 1 July 2021. According to the law, distribution companies are
required to update all node capacity in the distribution network by that date, before reopening
all websites for applications of grid access by new projects.
Barclays | European Utilities
12 May 2021 76
Valuation – we initiate with a PT €45.2
We consider the following assumptions in our sum-of-the-parts valuation:
Power generation assets are valued at standard EV/MW ratios derived from DCF
methodology of individual power plants for each market. We value operating capacity
forecast for the end of 2021E at €356mn EV or €5.2/sh.
Our renewables pipeline value is embedded in the DCF by markets. We include ten years
of pipeline and we consider the first five years’ pipeline as firm. Overall, we estimate a
pipeline value of €40/sh or 89% of our PT.
We use different Waccs depending on the country risk exposure of Grenergy. We use the
highest Wacc in Argentina, followed by the rest of the Latin American markets to which
they are exposed. We use the lowest Wacc for the Spanish activities.
FIGURE 113
Grenergy: Sum-of-the-parts valuation
Concept Value (€m) EV/ EBITDA 21E Comment
Chile Solar 448 DCF value, Wacc @8% nominal post-tax
Chile Wind 17 DCF value, Wacc @8% nominal post-tax
Spain Solar 864 DCF value, Wacc @ 5.6% nominal post-tax
Peru Solar 46 DCF value, Wacc @8% nominal post-tax
Peru Wind 65 DCF value, Wacc @8% nominal post-tax
Colombia Solar 3 DCF value, Wacc @8% nominal post-tax
Argentina Wind 21 DCF value, Wacc @9% nominal post-tax
Mexico Solar 9 DCF value, Wacc @8% nominal post-tax
Sum of present values 1,473 36
Less net debt -212
Equity 1,261
# shares (mn) 27.9
Equity per share (EUR) 45.2
Source: Barclays Research estimates
Key risks and sensitivities for Grenergy
There are several key risks for Grenergy, but the most important relate to the achieved power
and PPA prices we forecast for its renewable assets. This includes our average load factor
projections for these assets over the medium term.
Power price and PPA forecasts
With Spain being the most important market for Grenergy, the related Spanish power price
and PPA forecasts are a material risk element for the group.
FIGURE 114
Key sensitivities for Grenergy
Sensitivity Our assumption Flex Pre-tax 2025E impact (€m) % pre-tax 2025E
Spain Wholesale Base EUR/MWh 49.2 +/-1% 9 6%
Spain PPA Price 36.4 +/-1% 1 1%
Solar Capacity Factor Spain 22% +/-1% 4 3%
Cost of debt 4% +/-0.5% 8 6%
Source: Barclays Research
Barclays | European Utilities
12 May 2021 77
Load factor forecasts
The main load factor related risk for Grenergy is that related to Spanish solar PV. As shown
in the table, every one percentage point change in the long-term load factor of Spanish solar
PV equates to a 3% impact on 2025E pre-tax profit.
Interest rate risk
Looking at the debt-related risks for Grenergy, the largest material risk factor in respect of
financial expenses and pre-tax profit is the average interest rate on net debt. A 50bps change
in the average cost of debt impacts by 6% our pre-tax estimate for 2025E. We assume a long-
term cost of debt of 4%.
Financials
The following tables contain our detailed forecasts of Grenergy’s P&L, balance sheet and cash
flow statement.
FIGURE 115
Profit and loss account - Grenergy
(€mn) 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Revenue 46 85 113 124 179 254 315 366
Depreciation & amortization -3 -1 -1 -7 -14 -29 -43 -52
EBITDA 18 18 24 36 73 128 165 213
EBITDA (adj) 18 18 24 36 73 128 165 213
EBIT 15 18 23 29 59 99 121 162
EBIT (adj) 15 18 23 29 59 99 121 162
Associate income 0 0 0 0 0 0 0 0
Pre-tax income 11 14 16 20 36 66 73 110
Pre-tax income (adj) 11 14 16 20 36 66 73 110
Minority interest 0 0 0 0 0 0 0 0
Net income 10 11 15 17 31 53 59 88
Net income (adj) 10 11 15 17 31 53 59 88
NOPAT 15 30 16 24 50 79 97 129
EPS (adj) 0.41 0.48 0.64 0.60 1.10 1.91 2.11 3.15
EPS (reported) 0.41 0.48 0.64 0.60 1.10 1.91 2.11 3.15
DPS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Source: Grenergy, Barclays Research estimates
FIGURE 116
Growth in the profit and loss account - Grenergy
(%) 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Sales % 83% 34% 9% 44% 42% 24% 16% 83%
EBITDA % 0% 28% 52% 103% 75% 28% 30% 0%
EBIT % 14% 32% 26% 104% 67% 22% 33% 14%
PBT % 29% 10% 27% 84% 83% 11% 49% 29%
Tax rate % -71% 29% 16% 16% 20% 20% 20% -71%
Net recurrent profit % 18% 33% 10% 83% 74% 10% 49% 18%
Source: Grenergy, Barclays Research estimates
Barclays | European Utilities
12 May 2021 78
FIGURE 117
Balance sheet - Grenergy
(€mn) 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Cash and equivalents 13 29 21 21 21 21 21 21
Net PP&E 15 70 145 350 792 1237 1654 1602
Tangible fixed assets 58 148 249 454 896 1341 1758 1707
Intangible fixed assets 3 9 9 9 9 9 9 9
Financial assets (non-current) 1 8 16 16 16 16 16 16
Total assets 61 158 258 463 905 1351 1767 1716
Total net assets 25 37 48 170 201 254 313 400
Pension liabilities 0 0 0 0 0 0 0 0
Other long-term liabilities 0 10 13 13 13 13 13 13
Short and long-term debt 15 70 149 233 644 1036 1394 1255
Total liabilities 36 121 210 293 704 1097 1455 1315
Net debt/(funds) 2 41 128 212 623 1015 1373 1234
Shareholders' equity 25 37 49 66 96 149 208 296
Minorities 0 0 0 0 0 0 0 0
Capital employed 27 78 177 277 719 1165 1581 1530
Total invested capital 45 122 231 332 773 1219 1636 1584
Source: Grenergy, Barclays Research estimates
FIGURE 118
Cash flow statement - Grenergy
(€mn) 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Change in working capital -2 7 1 0 0 0 0 0
Cash flow from operations 10 16 -8 24 44 82 102 139
Capital expenditure -27 -63 -80 -212 -456 -475 -460 0
Free cash flow -17 -27 -64 -195 -420 -425 -406 78
Equity free cash flow -17 -27 -64 -195 -420 -425 -406 78
Source: Grenergy, Barclays Research estimates
Barclays | European Utilities
12 May 2021 79
European Utilities Industry View: POSITIVE
Grenergy Renovables (GREG.MC) Stock Rating: OVERWEIGHT
Income statement (€mn) 2020A 2021E 2022E 2023E CAGR Price (10-May-2021) EUR 24.70
Price Target EUR 45.20
Why Overweight? Genergy offers double - digit
growth over the next five years, based on organic
growth in two markets, Spain and Chile. Exposure to
Latin America is a risk, but we think it will be diluted
by faster growth in Spain than in Chile. We think both
the geographical diversification and the dilution of the
Latin American risk have been ignored by investors.
Upside case EUR 80.60
Assuming its market share remains constant and the
high scenario of installations materialises. Our ‘blue-
sky’ scenario uses a 2050 capacity estimate.
Downside case EUR 28.70
In our ‘black-sky’ scenario we give a value of zero for
all aspirational pipelines and therefore a floor
valuation and downside risk. We value only secured
pipeline- i.e. assets under development with land
rights, but not yet permitted and with offtake
contract.
Upside/Downside scenarios
Revenue 113 124 179 254 30.8%
EBITDA (adj) 24 36 73 128 75.7%
EBIT (adj) 23 29 59 99 62.4%
Pre-tax income (adj) 16 20 36 66 62.4%
Net income (adj) 15 17 31 53 51.8%
EPS (adj) (€) 0.64 0.60 1.10 1.91 43.9%
Diluted shares (mn) 24 28 28 28 5.5%
DPS (€) 0.00 0.00 0.00 0.00 N/A
Margin and return data Average
EBITDA (adj) margin (%) 20.9 29.1 40.9 50.6 35.4
EBIT (adj) margin (%) 20.4 23.4 33.1 39.1 29.0
Pre-tax (adj) margin (%) 13.7 15.9 20.3 26.2 19.0
Net (adj) margin (%) 13.4 13.5 17.1 21.0 16.2
ROIC (%) 8.4 5.3 5.2 5.7 6.2
ROA (%) 6.7 4.5 4.1 5.0 5.1
ROE (%) 31.2 25.4 31.8 35.7 31.0
Cash flow and balance sheet (€mn) CAGR
Cash flow from operations -8 24 44 82 N/A
Capital expenditure -80 -212 -456 -475 N/A
Free cash flow -64 -195 -420 -425 N/A
Net PP&E 145 350 792 1,237 104.4%
Total net assets 48 170 201 254 73.6%
Capital employed 177 277 719 1,165 87.4%
Shareholders' equity 49 66 96 149 45.2%
Net debt/(funds) 128 212 623 1,015 99.2%
Valuation and leverage metrics Average
P/E (adj) (x) 38.6 41.2 22.5 12.9 28.8
EV/EBITDA (adj) (x) 34.5 24.9 17.9 13.3 22.7
EV/EBIT (adj) (x) 35.3 31.0 22.1 17.2 26.4
Equity FCF yield (%) -10.8 -28.3 -60.9 -61.6 -40.4
P/BV (x) 12.0 10.5 7.2 4.6 8.6
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Net debt/capital (%) 72.6 76.5 86.7 87.2 80.7
Net debt/EBITDA (adj) (x) 5.4 5.9 8.5 7.9 6.9
Selected operating metrics
Payout ratio (%) 0.0 0.0 0.0 0.0
Interest cover (x) 3.0 3.1 2.6 3.0
Spreads changes (%) N/A N/A N/A N/A
Source: Company data, Bloomberg, Barclays Research
Note: FY End Dec
Barclays | European Utilities
12 May 2021 80
ESG OVERVIEW: IBERDROLA (IBE.MC)
Identify: There are 3 factors materially influencing the investment recommendation:
1) decarbonisation of electricity, 2) bad debt and 3) electrification of the economy.
Blocks represent an aggregated view of
leading ESG score providers (one indicates
a very low average score, five indicate a
very high average score). Icons show the
dispersion of those views (no bars
indicates only one source provider, two
bars indicate dispersion between
providers, full bars indicate aligned views).
For more details, click here.
Source: Barclays Research, Sustainalytics,
Vigeo Eiris
Further Reading
Green stimulus provides
significant renewable vaccine
Powering change: the global
focus on sustainability
Utilities: Net growth from net
zero
Impact: Our valuation for Iberdrola includes a non-negligible proportion of renewables project
pipeline valuation. This part of the valuation will become increasingly relevant as the utility
increases visibility of its project pipeline. We currently value its pipeline at €3.9/sh or 26% of
our new PT of €15. We assume that Iberdrola reaches zero emissions in Europe by 2030. If we
were to incorporate in full the company’s ambition to reduce its net carbon footprint to zero
by 2050, our valuation of the project pipeline would vary depending on the % of electrification
achieved in each market. We estimate that every 5% additional electrification of its current
market adds €2.7/sh added value.
Future: The ambition of net zero has gained momentum across society, governments and
investors alike. Iberdrola is not only participating in the decarbonisation of electricity, but
it is also ambitious about increasing market share through the electrification of the
economy. Iberdrola is also likely to be active in the final stage of decarbonisation by
contributing to the decarbonisation of the residual (i.e. the part of the economy that cannot
be electrified) with ‘green hydrogen’.
Engage: 3 key ESG questions for company engagement:
How are you thinking about the development of utility-scale storage over the next 10
years, and in terms of hydrogen?
Do you have any rate tools available for customers?
Is there an executive in charge of ESG initiatives and reporting? If so, who does that
person report to?
Strategy & Ambition:
Iberdrola aims to have virtually zero emissions in Europe by 2030.
Iberdrola maintains a commitment to achieving emissions neutrality by 2050.
Its key purpose is to build a ‘healthier, more accessible energy model, based on electricity’.
Key ESG Metrics
Environmental 2017 2018 2019 Iberdrola reached in 2019 minimum historical levels of carbon emissions per
MWh generated. This downward trend is likely to continue while it grows its
renewables portfolio going forward.
Renewables capacity (GW) 29 29 32
Specific emissions from global mix
(kg/MWh) 136 112 110
Social 2017 2018 2019 In 2019 Iberdrola added more reconnections of households than
disconnections, following the payment of pending bills. During Covid-19 many
countries have introduced limitations to disconnections for non-payments.
Net residential disconnections
(000’) 35 33 -3.5
Injured workers 631 570 587
Governance 2017 2018 2019 Iberdrola continues to increase the number of female Board members. It
contrasts with a stable proportion of women in senior leadership positions,
which remains flat at 23%.
Women in the Board of Directors 5 5 6
Women in senior leadership, % 23 23 23
Source: Company data, Barclays Research
Iberdrola Sa
E
S
G
Barclays | European Utilities
12 May 2021 81
IBERDROLA
Reiterate OW rating – increase PT to €15/sh (from €14)
We reiterate our OW rating for Iberdrola and increase our PT to €15 (from €14). The key
drivers of value will be the execution of the organic growth pipeline and potential cost
synergies from acquisitions in the US (PNM Resources) and Brazil (CEP). Iberdrola has
reinforced its vertical integration structure, which should offer protection from power price
deflation. Iberdrola has not yet priced in all the benefits from the integration of CEP and
PNM Resources, and value creation from project pipeline execution. Our downside case
(€17.2) assumes: 1) a 50 bps increase in the Spanish risk-free rate, and 2) a ‘black-sky’
scenario. In our ‘black-sky’ scenario, we give a value of zero for all aspirational pipelines
and therefore a floor valuation and downside risk. We value only secured pipeline, i.e. assets
under development with land rights, but not yet permitted and with offtake contract (pre-
Final Investment Decision, FID).
Key potential catalysts – execute worldwide renewables pipeline
Boost in Spanish generation margins due to ‘low-cost’ generation. Due to a rebound to a
normal hydro year in Iberia and weak power demand, operators managed to minimise the
thermal gap and replace it with ‘fixed cost’ technologies like renewables. We expect weak
power demand to translate into low spot power prices, but a generation mix rich in fixed-
cost technologies should offset most of the margin deterioration in coming quarters.
Worldwide: Execution of project pipeline - We highlight the following landmark projects: a)
Vineyard Wind (Avangrid / Copenhagen Infrastructure Partners) - BOEM has recently
issued a favourable Record of Decision for Vineyard Wind 1, which enables the beginning of
construction activities, b) Park City Wind (Avangrid / Copenhagen Infrastructure Partners)
- Negotiating contracts with CT utilities, c) Kitty Hawk (Avangrid) - The Site Assessment Plan
has been approved by BOEM, while the Construction and Operations Plan (COP) has been
submitted.
Valuation – we increase our PT to €15 (from €14)
We increase our PT by 7% to €15 (from €14 previously), after updating our renewables
pipeline and including all the projects up until 2030. This change is consistent with our
methodology of forecasting ten years of pipeline for all European utilities stocks.
We take into consideration the following assumptions in our sum-of-the-parts valuation:
In power generation activities, we apply a DCF per technology, in order to reflect the
current market price for clean spark/dark spreads and lower load factors for thermal
capacity. This mainly explains the big differences in EV/MW ratios for each technology.
The regulated networks’ DCF values imply higher EV/ EBITDA multiples, as they reflect
long-term assumptions related to allowed returns remaining above the cost of capital. We
assume that WACC outperformance in Iberia justifies a 15% premium to RAB. In other
markets with growth in RAB (Brazil, UK and US), the premium is higher.
We include part of the value of its renewable asset pipeline and we set an estimated
project pipeline big enough for Iberdrola to deliver on decarbonisation of electricity.
IBE SM / IBE.MC
Stock Rating
OVERWEIGHT
Industry View
POSITIVE
Price Target
EUR 15.00
Price (10-May-2021)
EUR 11.47
Potential Upside/Downside
+30.8%
Barclays | European Utilities
12 May 2021 82
FIGURE 119
SOTP value - Iberdrola
SOTP EV (€m) EV/ MW
(€m) MW
EV/
EBITDA
(x)
EBITDA
(€m)
RAB
(€m)
EV /
RAB Comment
2021E 2021E 2022E
Spain thermal & nuclear
generation & supply 11,393 1.1 10,099 7.0 1,635 DCF @6.9% WACC
Spain Distribution 15,045 9.2 1,640
DCF @5.2% WACC terminal
value RAB 2021E
o/w regulated distribution 11,353 9,546 10,071 19%
DCF @5.2% WACC terminal
value RAB 2021E
o/w services 3,693
DCF @5.2% WACC terminal
value zero
UK Supply 2,416 6.0 400 DCF @6.9% WACC
UK Transmission & Distribution 11,216 11.2 1,001
DCF @5.2% WACC terminal
value RAB 2021E
o/w regulated distribution 10,635 8,257 8,711 29%
DCF @5.2% WACC terminal
value RAB 2021E
o/w services 581
DCF @5.2% WACC terminal
value zero
US Network 18,639 13.6 1,371
DCF @5.2% WACC terminal
value RAB 2021E
o/w regulated distribution 18,150 12,973 13,920 40%
DCF @5.2% WACC terminal
value RAB 2021E
o/w services 488
DCF @5.2% WACC terminal
value RAB 2021E
Mexico & Brazil thermal
generation & retail 8,555 1.0 8,808 8.7 985 DCF @6.2% WACC
Brazil Distribution 7,649 6.4 1,186
DCF @7.2% WACC terminal
value RAB 2021E
o/w regulated distribution 7,273 4,501 4,978 62%
o/w services 376
Renewables 70,078 2.1 33,900 22.1 3,170
Other businesses - 21 Book value
Other (90) 5.0 (18) Book value
Total EV 144,900 12.7 11,391 35,277 37,681 34%
Financial investments 2,000 -
Treasury stock - -
Net Debt (43,059) End 2021E (net of taxes)
Minorities (Avangrid +
Neoenergia) (5,565) P/E 21E 13x
Provisions (4,377) End 2021E (net of taxes)
Equity value 93,898
Shares in issue (m) 6,240
Fair value per share (€/sh) 15.0
Source: Barclays Research estimates
Key assumptions and sensitivities
We identify the following key drivers of Iberdrola’s valuation. These drivers relate mainly to
power generation and power networks in Europe, North America and Brazil, renewables
generation in several markets and various aspects of our sum-of-the-parts valuation.
Barclays | European Utilities
12 May 2021 83
FIGURE 120
Iberdrola main sensitivities
Variable
Barclays
assumption Flex
Valuation impact
(€/share)
% of price
target
Renewables pipeline - NPV/capex (x) 0.4 0.1x 0.10 1%
Renewables achieved power prices - Europe (€/MWh) 70 1 0.03 0%
Renewables achieved power prices - North America (€/MWh) 40 1 0.05 1%
Renewables achieved power prices - Brazil (€/MWh) 45 1 0.02 0%
UK distribution networks - implied 2021 RAB premium 26% 10% 0.14 1%
Spanish distribution networks - implied 2021 RAB premium 30% 10% 0.14 1%
US distribution networks - implied 2021 RAB premium 29% 10% 0.14 1%
Latam distribution networks - implied 2021 RAB premium 58% 10% 0.07 1%
UK T&D networks - allowed WACC nominal pre tax 8.5% 1% 0.18 1%
Spanish distribution networks - allowed WACC nominal pre tax 6.5% 1% 0.15 1%
US distribution networks - allowed WACC nominal pre tax 8.1% 1% 0.17 1%
Brazil distribution networks - allowed WACC nominal pre tax 9% 1% 0.05 1%
Annual cost synergies remaining (€mn) 200 10% 0.03 0%
Minorities (€mn) 5,565 10% -0.08 -1%
Group WACC 5.1% 10bps -0.20 -2%
Source: Barclays Research estimates
Implied NPV/ capex ratio in renewables pipeline: Iberdrola shows relatively average
sensitivity to this ratio, as shown in the sensitivity table.
Renewable power prices including subsidies: We use average achieved prices for
aggregated renewables activities in their different regions. These are the main
sensitivities for the renewables division, as production volumes tend to be stable
compared to a historical average of load factors for each wind farm.
RAB premiums: US networks represent the biggest RAB contributor to our EV value,
and therefore any change in perception of WACC outperformance in that division
should have a relatively material impact in our valuation. UK and Spanish RAB make a
similar contribution to group RAB, while Brazil has the smallest contribution.
Minorities: The largest negative item in our EV valuation is minorities, standing at
€5.6bn. The majority of these minority interests are related to a 19% stake in Avangrid,
Iberdrola’s US affiliate, and a 48% stake in Neoenergia, Iberdrola’s Brazilian affiliate.
Group WACC: Iberdrola shows a high sensitivity to WACC changes, with a 10bps
increase in the Spanish 10Y bond yield implying a 3% decrease in our fair value.
Barclays | European Utilities
12 May 2021 84
Financial forecasts
The following tables contain our detailed forecasts of Iberdrola’s P&L, balance sheet and cash
flow statement.
FIGURE 121
Profit and loss account – Iberdrola
(€mn) 2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Revenue 31263 35076 36438 33145 35306 38035 40459 43550 47242
Depreciation & amortisation -4606 -3910 -4227 -4474 -4485 -4780 -5322 -5558 -5828
EBITDA 7319 9349 10104 10010 11038 11841 12870 14212 15568
EBITDA (adj) 7319 9349 10104 10010 11038 11841 12870 14212 15568
EBIT 2713 5439 5877 5536 6553 7061 7549 8654 9741
EBIT (adj) 2713 5439 5877 5536 6553 7061 7549 8654 9741
Associate income -29 56 -51 -24 6 6 6 6 6
Pre-tax income 2026 4348 4729 5034 5343 5792 6137 7104 8074
Pre-tax income (adj) 2026 4348 4729 5034 5343 5792 6137 7104 8074
Minority interest 366 323 408 341 425 454 478 552 627
Net income 2804 3014 3406 3611 3742 4064 4308 4989 5671
Net income (adj) 2804 3014 3406 3611 3742 4064 4308 4989 5671
NOPAT 4583 4239 4741 4346 5111 5508 5888 6750 7598
EPS (adj) (€) 0.44 0.47 0.54 0.57 0.59 0.64 0.68 0.78 0.89
EPS (reported) (€) 0.44 0.47 0.54 0.57 0.59 0.64 0.68 0.78 0.89
DPS (€) 0.33 0.35 0.40 0.42 0.45 0.47 0.48 0.53 0.59
Source: Company data, Barclays Research estimates
FIGURE 122
Growth in profit and loss account - Iberdrola
(%) 2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Sales % 7% 12% 4% -9% 7% 8% 6% 8% 8%
EBITDA % -6% 28% 8% -1% 10% 7% 9% 10% 10%
EBIT % -40% 101% 8% -6% 18% 8% 7% 15% 13%
PBT % -46% 115% 9% 6% 6% 8% 6% 16% 14%
Tax rate % -69% 22% 19% 22% 22% 22% 22% 22% 22%
Net reported profit % 11% 7% 13% 6% 4% 9% 6% 16% 14%
Source: Company data, Barclays Research estimates
Barclays | European Utilities
12 May 2021 85
FIGURE 123
Balance sheet – Iberdrola
(€mn) 2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Cash and equivalents 3197 2801 2113 3427 2981 3167 3345 3532 3704
Net PP&E 64506 66539 71632 72080 77405 80944 84432 88529 92875
Tangible fixed assets 21598 23116 26827 28996 30190 31547 33028 35130 37633
Intangible fixed assets 21148 21000 20368 18222 18524 18848 19191 19560 19958
Financial assets (non-current) 1791 1710 1957 1145 4551 4558 4564 4571 4577
Total assets 110689 113038 122370 122518 130217 135034 139713 145259 151227
Total net assets 42746 44116 47195 47218 48714 50395 52219 54690 57591
Pension liabilities 2533 2420 2661 2318 2318 2318 2318 2318 2318
Other long-term liabilities 15976 16255 18278 20207 20207 20207 20207 20207 20207
Short and long-term debt 37295 38162 39882 38569 46039 48418 50615 52809 54838
Total liabilities 67943 68922 75175 75300 81503 84639 87494 90569 93636
Net debt/(funds) 34098 35361 37769 35142 43059 45252 47270 49277 51133
Shareholders' equity 37075 38447 40227 35352 36422 37649 38995 40914 43188
Minorities 5671 5669 6968 11866 12291 12745 13224 13776 14403
Capital employed 76844 79477 84964 82360 91772 95646 99488 103966 108724
Source: Company data, Barclays Research estimates
FIGURE 124
Cash flow statement – Iberdrola
(€mn) 2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Change in working capital -445 -797 -433 -593 -379 -5 -5 -6 -7
Cash flow from operations 5686 7586 7768 7935 8268 9286 10097 11086 12112
Capital expenditure -5594 -5237 -7240 -9246 -9810 -8319 -8809 -9655 -10174
Free cash flow -6062 -5705 -7159 -9967 -9563 -7596 -8248 -8469 -8411
Equity free cash flow -6062 -5705 -7159 -9967 -9563 -7596 -8248 -8469 -8411
Source: Company data, Barclays Research estimates
Barclays | European Utilities
12 May 2021 86
European Utilities Industry View: POSITIVE
Iberdrola (IBE.MC) Stock Rating: OVERWEIGHT
Income statement (€mn) 2020A 2021E 2022E 2023E CAGR Price (10-May-2021) EUR 11.47
Price Target EUR 15.00
Why Overweight? Thanks to its valuable business mix
and proven management skills, we consider Iberdrola
one of the best models in the utilities sector. We see
Iberdrola as a key contributor to net zero carbon. We
consider Iberdrola's renewables pipeline to be
undervalued compared to its renewables capacity
needs derived from the electrification of the economy.
Upside case EUR 17.50
Assuming its market share remains constant and the
high scenario of installations materialises. Our ‘blue-
sky’ scenario uses a 2050 capacity estimate.
Downside case EUR 9.00
We assume 1) a 0.3x lower NPV / capex ratio in the
valuation of its renewables pipeline, 2) a 50 bps
increase in the Spanish risk-free rate and 3) a weak
year for renewable activities. In our ‘black-sky’
scenario we give a value of zero for all aspirational
pipelines.
Upside/Downside scenarios
Revenue 33,145 35,306 38,035 40,459 6.9%
EBITDA (adj) 10,010 11,038 11,841 12,870 8.7%
EBIT (adj) 5,536 6,553 7,061 7,549 10.9%
Pre-tax income (adj) 5,034 5,343 5,792 6,137 6.8%
Net income (adj) 3,611 3,742 4,064 4,308 6.1%
EPS (adj) (€) 0.57 0.59 0.64 0.68 6.1%
Diluted shares (mn) 6,362 6,362 6,362 6,362 0.0%
DPS (€) 0.42 0.45 0.47 0.48 4.7%
Margin and return data Average
EBITDA (adj) margin (%) 30.2 31.3 31.1 31.8 31.1
EBIT (adj) margin (%) 16.7 18.6 18.6 18.7 18.1
Pre-tax (adj) margin (%) 15.2 15.1 15.2 15.2 15.2
Net (adj) margin (%) 10.9 10.6 10.7 10.6 10.7
ROIC (%) 5.3 5.7 5.8 5.9 5.7
ROA (%) 2.9 3.0 3.1 3.1 3.0
ROE (%) 7.8 8.5 8.8 9.0 8.5
Cash flow and balance sheet (€mn) CAGR
Cash flow from operations 7,935 8,268 9,286 10,097 8.4%
Capital expenditure -9,246 -9,810 -8,319 -8,809 N/A
Free cash flow -9,967 -9,563 -7,596 -8,248 N/A
Net PP&E 72,080 77,405 80,944 84,432 5.4%
Total net assets 47,218 48,714 50,395 52,219 3.4%
Capital employed 82,360 91,772 95,646 99,488 6.5%
Shareholders' equity 35,352 36,422 37,649 38,995 3.3%
Net debt/(funds) 35,142 43,059 45,252 47,270 10.4%
Valuation and leverage metrics Average
P/E (adj) (x) 20.2 19.5 17.9 16.9 18.6
EV/EBITDA (adj) (x) 12.6 12.2 11.6 10.8 11.8
EV/EBIT (adj) (x) 22.7 20.5 19.4 18.5 20.3
Equity FCF yield (%) -13.7 -13.1 -10.4 -11.3 -12.1
P/BV (x) 2.1 2.0 1.9 1.9 2.0
Dividend yield (%) 3.7 3.9 4.1 4.2 4.0
Net debt/capital (%) 42.7 46.9 47.3 47.5 46.1
Net debt/EBITDA (adj) (x) 3.5 3.9 3.8 3.7 3.7
Selected operating metrics Average
Payout ratio (%) 74.5 74.1 72.5 71.3 73.1
Interest cover (x) 5.5 5.5 5.6 5.3 5.5
Source: Company data, Bloomberg, Barclays Research
Note: FY End Dec
Barclays | European Utilities
12 May 2021 87
ESG OVERVIEW: ORSTED (RWE DC)
Identify: There are 3 factors materially influencing the investment recommendation:
1) Growing installed renewable capacity; 2) Decreasing percentage of coal-based thermal
power in the generation mix; 3) Development of renewable hydrogen projects.
Blocks represent an aggregated view of
leading ESG score providers (one indicates
a very low average score, five indicate a
very high average score). Icons show the
dispersion of those views (no bars
indicates only one source provider, two
bars indicate dispersion between
providers, full bars indicate aligned views).
For more details, click here.
Source: Barclays Research, Sustainalytics,
Vigeo Eiris
Further Reading
European Utilities: Green
stimulus provides significant
renewable vaccine, 5th June
2020
ESG Research: Utilities –
Powering change: the global
focus on sustainability, 3rd June
2020
European Utilities and Energy:
Net Growth from Net Zero, 3rd
February 2020
Impact: We incorporate ESG factors through underlying growth rates and multiples.
Orsted is significantly exposed to the positive secular growth trends in renewables and
infrastructure. We use a premium valuation of these assets (offshore wind at 17.5x 2022
EV/EBITDA and onshore wind/solar at 14.2x).
Future: Orsted is a global leading renewables player with strong growth ambitions. The
company is the world’s biggest offshore wind developer with c.7.5GW, and is targeting
15GW of capacity by 2025. Orsted is also focussed on onshore operations, with a joint
wind and solar target of 5GW by 2025. Near term, the company has a pipeline of just over
9GW of renewable capacity that has been awarded/contracted, with 4GW of this already
at FID and awaiting installation. Furthermore, Orsted is exploring opportunities within
other innovative renewable technologies. Orsted has reached final investment decision on
its first renewable hydrogen project, H2RES in Denmark, which will have a capacity of 2MW
and the ability to produce up to 1,000kg of hydrogen daily. In addition, Orsted is exploring
the potential of carbon capture technology at the company’s biomass-fired CHP plants.
Engage: 3 key ESG questions for company engagement:
How much do you expect to profit from the European Green Deal?
Many countries in Europe have revealed ambitious green hydrogen strategies. As a
leading renewables player, what is your involvement in this?
You have a strong global presence in offshore wind, what are your thoughts on the
development of floating wind technology?
Strategy & Ambition:
Installed renewable capacity of +30GW by 2030, including installed offshore wind capacity of 15GW by 2025
99% green share of energy generation by 2025
Carbon-neutral by 2025
Key ESG Metrics
Environmental 2018 2019 2020 As Orsted has expected its renewable energy capacity, the share of green
energy in the mix has naturally increased. The company is targeting a 99%
share by 2025, which should help further decrease Scope 3 emissions.
Green energy share, % 75 86 90
Scope 3 GHG emissions, million
tonnes CO2e 36.2 34.6 25.3
Social 2018 2019 2020 The company focusses on employee wellbeing and satisfaction, monitoring
index scores and aiming for a top 10% score among companies. Orsted has
seen some increase in LTIF, specifically for contracts, however compared to
other utilities the number is relatively low.
Employee satisfaction, index 0-100 76 77 78
Lost-time injury frequency, % 1.5 2.1 1.7
Governance 2018 2019 2020 Ørsted has joined ‘the UN Convention on the Elimination of All Forms of
Discrimination against Women’ as is promoting gender diversity in the
workplace through development programmes. Female board members, % 38 33 33
Independent board members, % 100 100 100
Source: Barclays Research
Barclays | European Utilities
12 May 2021 88
Orsted – initiate with UW; PT 800DKK
Summary:
1) We initiate with an 800DKK price target and Underweight rating. Orsted has developed a
global leading portfolio of offshore wind assets and pipeline, but we see the relative implied
valuation of this pipeline as too high versus its renewable peer group.
2) Orsted’s ambition is to develop 15GW of offshore wind and 5GW of onshore by 2025, and
develop 30GW, both onshore and offshore, by 2030, as set out at their 2018 Capital Markets
Day. We expect these targets to be raised at their 2 June 2021 Capital Market day.
3) Our base case scenario is that Orsted owns/develops 32.5GW of offshore wind by 2030 as
well as 15GW of onshore technologies.
4) If assets commissioned and under construction only are valued then we value Orsted at
458DKK, rising to 560DKK if the secured pipeline only is included (our ‘black-sky valuation).
Our base case is an 800DKK valuation, using the same methodology as we use for other
renewable companies (i.e. 10-year pipeline). Our ‘blue-sky’ valuation is a 1,265DKK/share
valuation – essentially assuming a 6.5-7% ROIC versus a 4.3-4.8% WACC – a 200-250bp
ROIC-WACC spread on a 2050 estimated development of 140GW of offshore wind and 50GW
of onshore renewables.
5) Every 1% change in WACC (assuming ROICs remain the same) changes our base case
valuation by between 30-40% and every €10/MWh change in power prices (c.20%) changes
valuation by 20-30%.
6) We estimate the current share price implies a pipeline length of 12 years being priced into
Orsted. With less than 4 years of secured pipeline in order to reach 2030 targets Orsted holds
significant risk that it will not secure enough projects to meet its demanding valuation.
FIGURE 125
We have an operating valuation of DKK222bn, with a secured pipeline of DKK56bn, meaning an aspirational pipeline of
DKK97bn
Source: Barclays estimates
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
EV
DK
Km
n
Total commissioned Total secured Total aspirational
Barclays | European Utilities
12 May 2021 89
Orsted is a global leader in offshore wind, with c.10GW offshore wind
developed, 6.0GW net wind owned and 11GW net secured: a 6% market
share.
Orsted was an early mover into offshore wind, and is comfortably the global leader in offshore
wind, with a 15% UK market share, 11% European and 6% global – including all projects
commissioned, under construction, permitted/secured and announced/planning.
As at end Q1 2021, Orsted has developed 7.6GW of offshore wind, and has a further 1.4GW
under construction at Hornsea 2 in the UK and 900MW in Greater Changhua in Taiwan
(totalling c.10GW gross). After sell-downs, Orsted owns a net 4.4GW of offshore wind
operational as at Q1 2021, rising to 6.0GW after commissioning of their net share of Hornsea
2 and Greater Chanugua and the sell down of the operating Borselle 1 and 2.
On top of this Orsted has a further 7.5GW of gross secured projects (5.8GW net) excluding
Hornsea 3 and 4 (a further 5GW). These projects are those which have secured seabed lease
and are awaiting PPA/FID. This means Orsted is in a position to develop a gross 17.5GW of
projects, reaching a net owned position of 11.9GW offshore wind assets and 16.9GW
including Hornsea 3 and 4.
Our ‘black-sky’ valuation assumes this 16.9GW of capacity in offshore wind.
Orsted does not just develop and operate offshore wind. It also has substantial onshore wind
and solar assets, with 3.8GW of assets of which 2.3GW are onshore wind in the US, 1.1GW
solar in the US and 0.4GW of wind in Ireland and the UK, following the acquisition of
Brookfield Renewables (expected to close Q2 2021).
We summarise net ownership of technologies as at end 2021 in the figure below. Onshore
technologies now make up over one third of total installed capacity.
Orsted had a 5GW onshore technology target by 2025, but with nearly 4GW already under
management we expect that this ambition will be increased materially at the upcoming CMD
on the 2 June.
FIGURE 126
Orsted is a pre-eminent offshore wind renewable player but has over 1/3 of its capacity
in onshore wind and solar (GW at end 2021E)
Source: Orsted, Barclays estimates
Offshore wind
64%
Onshore wind
29%
Solar
7%
Barclays | European Utilities
12 May 2021 90
FIGURE 127
62% of Orsted’s offshore wind operating/under
construction assets are in the UK, end 2021e
FIGURE 128
Offshore wind operating and secured pipeline projects are
currently dominated by the UK, with the growth of the US
important (as of Q1 2021)
Source: Orsted, Barclays estimates Source: Orsted, Barclays estimates
Orsted’s core offshore wind market has been the UK. This market underpinned its early mover
advantage. Orsted has over 55% of all installed capacity still within the UK, However, Orsted
is now only third to SSE and RWE for total secured capacity post Round 4 Crown Estate lease.
FIGURE 129
In the UK, Orsted has the highest installed/under construction but is third behind SSE and
RWE* (End 2020)
Source: BNEF, Barclays estimates *BNEF definitions of project stages may differ slightly to Orsted’s own assumptions
The following charts summarise the installed capacity of Orsted by geography – the UK’s
offshore wind subsidy regime has been instrumental in the creation of the Orsted narrative
and still accounts for over half of all net operational and under construction GWs. Including
secured wind farms, we estimate that Orsted has the largest market share globally of all
utilities.
Orsted has identified a number of key global markets to export its sector leading offshore
wind skills. Broadly these are in three areas:
Europe
The US
Asia (Taiwan/Korea/Japan/Vietnam)
UK
62%Denmark
9%
Germany
12%
Europe
6%
USA
0%
Taiwan
11%
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
MW
Operating Secured
7.9 7.67.3
4.5
3.7
2.1 2.11.5 1.5 1.5
0.7 0.7 0.6 0.5 0.4 0.3 0.20
1
2
3
4
5
6
7
8
GW
of
Ca
pa
cit
y
Commissioned Financing secured/under construction Waiting for FID Announced/planning begun
Barclays | European Utilities
12 May 2021 91
FIGURE 130
Orsted has the highest market share for installed capacity, but including permitted
projects this falls from 8.0% to 5.7% (as of end-2020)
Source: BNEF
FIGURE 131
Orsted has 16% of net European offshore wind capacity as at end 2019
Source: WindEurope
8.0%
13.1%
18.8%
14.3%
5.7%
10.6%12.4%
4.1%
8.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Global Europe UK Asia (Taiwan,
Korea, Japan,
Vietnam)
USO
rste
d M
ark
et
Sh
are
s (%
)
Commissioned + Under Construction Permitted + Announced/Planning Begun
Others, 30%
Orsted, 16%
RWE, 12%Vattenfall, 7%
Macquarie Capital,
4%
Global
Infrastructure
Partners, 4%
Northland Power,
3%
SSE, 3%
Stadwerke
Munchen, 2%
Iberdrola, 2%
Siemens, 2%Equinor, 2%
EnBW, 2% PKA, 2%
Copenhagen
Infrastructure
Partners, 1%
Eneco, 1% Masdar, 1%
Barclays | European Utilities
12 May 2021 92
FIGURE 132
Orsted is a technology champion – offshore wind
Source: Barclays
Our base case for Orsted is a 10-year pipeline
We have split Orsted’s valuation into a number of building blocks:
1) Operating/under construction
2) Secured pipeline – our black sky
3) Aspirational pipeline out to 2030 – our base case
4) Blue sky valuation – a pipeline value to 2050
We discuss future expected returns earlier in this note. Our view is that investors should not
count on an NPV positive investment profile through to 2050 – although this is our blue sky
scenario.
Our base case is a 10-year pipeline and the reason for this is to take into account a number
of risks and uncertainties over future pipeline progression.
We see a number of risks to these returns:
Downside risks include:
6) Technology shifts into alternative solutions (floating wind, next generation solar,
nuclear)
7) Competition driving down returns
8) Over-estimating achieved power prices with renewables increasingly setting power
prices with zero marginal costs
9) Long-run power prices set by deflationary capital costs of renewables
10) Change in regulation – in particular burdening renewables with increasing societal costs
We also see a number of upside risks to these returns:
6) Lack of capital for the up to €700bn per annum capital requirement
Barclays | European Utilities
12 May 2021 93
7) Re-regulation of the power markets removing marginal cost dynamics
8) Green hydrogen power demand putting floor on power prices
9) Capital cost deflation on secured projects
10) Long-run power prices set by inflationary capital costs of renewables
These are not risk-free assets and we see WACC at 4.5-4.8% for contracted renewable assets
– higher than regulated utilities, but less than conventional/merchant power (7-8%).
1) Operating/under construction assets are 6.8GW offshore and 3.8GW onshore
wind/solar
We estimate Orsted will have 6.0GW of offshore wind commissioned or under construction
as at the end of 2021.
We estimate Orsted will also have 3.8GW of onshore wind and solar at the end of 2021. We
have also included Orsted’s acquisition of Brookfield Renewables assets in our numbers. This
acquisition, announced 16 April 2021, is a €571mn EV company with 389MW of wind in
operation and under construction, 149MW in advanced development and more than 1GW of
development pipeline in Ireland and the UK. This transaction is expected to close Q2 2021.
This transaction did not change Orsted’s guidance for EBITDA for the full year.
We value these offshore assets at a DKK186bn (€25.0bn), and DKK36bn (€4.8bn) for onshore
assets.
Orsted has developed 7.5GW offshore wind over the past decade, but recent build rate is
closer to 2GW/year. In onshore wind Orsted has nearly 4GW of capacity with a development
rate of 1GW/year.
Barclays | European Utilities
12 May 2021 94
FIGURE 133
Orsted has 6.0GW of operating/under construction offshore wind. We value these at DKK186bn, €25.0bn
Offshore wind Country
MW 100%
Dec 21
Ownership
(Dec 21)
MW
net
Commissioning
date
EV
proportional
Dec 21
(LOC)
LC
mn/
MW
net
EBITDA
2022 mn
EV/
EBITDA
Equity value to
Orsted DKK
UK (£)
Barrow UK 90 100% 90 2006 100 1.1 22 4.6 841
Burbo Bank UK 90 100% 90 2007 144 1.6 34 4.2 1,205
Burbo Bank Extension UK 259 50% 130 2017 587 4.5 68 8.7 4,922
Gunfleet Sands 1 and 2 UK 185 50% 98 2010 539 2.9 74 7.3 4,522
Hornsea 1 UK 1,218 50% 609 2019 3,299 5.4 329 10.0 27,673
Hornsea 2 UK 1,386 100% 1,386 2022 3,528 2.5 132 26.8 29,591
Lincs UK 270 25% 68 2013 303 4.5 33 9.1 2,540
London Array UK 630 25% 158 2013 736 4.7 81 9.1 6,171
Race Bank UK 573 50% 287 2018 1,868 6.5 161 11.6 15,672
Walney 1 and 2 UK 367 50% 184 2012 1,713 4.7 207 8.3 14,373
Walney Extension UK 659 50% 330 2018 1,773 5.4 193 9.2 14,877
West of Duddon Sands UK 388 50% 194 2014 963 5.0 105 9.1 8,082
Westermost Rough UK 210 50% 105 2015 575 5.5 61 9.5 4,827
UK operational UK 6,325 3,726 16,128 4.5 1,500 10.8 135,297
Denmark (DKK)
Horns Rev 1 Denmark 158 40% 63 2003 57 0.9 26 2.2 57
Horns Rev 2 Denmark 209 100% 209 2010 319 1.5 46 7.0 319
Anholt Denmark 400 50% 200 2013 2,279 11.4 772 3.0 2,279
Nysted Denmark 166 43% 71 2003 121 1.7 14 8.5 121
Avedore Holme Denmark 11 100% 11 2011 73 6.6 9 8.2 73
Denmark operational 944 555 2,849 5.7 867 3.3 2,849
Germany (Eu)
Borkum Riffgrund 1 Germany 312 50% 156 2015 416 2.7 90 4.6 3,098
Borkum Riffgrund 2 Germany 465 50% 233 2018 880 3.8 128 6.9 6,561
Gode Wind 1 Germany 345 50% 173 2016 555 3.2 103 5.4 4,136
Gode Wind 2 Germany 263 50% 132 2016 473 3.6 85 5.6 3,522
Germany operational 1,385 0% 693 2,279 2,323 3.4 406 5.7
Europe other (Eu)
Borssele 1 and 2 Netherlands 752 50% 376 2021 1,105 2.9 99 11.1 8,236
Europe operational 752 0% 376 1,105 2.9 99 8,236
USA ($)
Block Island Wind USA 30 100% 30 2016 278 9.3 28 9.8 1,815
Operational 30 30 278 9.3 28 9.8 1,815
Taiwan (T$)
Formosa 1 Taiwan 128 35% 45 2017 7,000 156.3 - - 1,552
Greater Changua 1 Taiwan 605 50% 303 2022 48,152 159.2 2,903 16.6 10,674
Greater Changua 2a Taiwan 295 100% 295 2022 46,959 159.2 2,831 16.6 10,410
Operational 1,028 642 102,111 158.8 5,733 17.8 22,636
Total offshore wind operating 10,464 6,021 188,148 31.25 18,469 10.2 188,148
Source: Orsted, Barclays estimates
Barclays | European Utilities
12 May 2021 95
FIGURE 134
Orsted owns 4.3GW of onshore technologies with a value of 34bn DKK, (€4.8bn)
Onshore Country
MW
100%
MW
net
EV
proportional
Dec 21
LC mn/
MW
net
EBITDA
2022 mn
EV/EBITDA
or expected
IRR
Equity value
to Orsted
LOC
Equity value
to Orsted
DKK
North America
operational USA 2,591 2,591 3,904 1.51 454 8.6 3,904 25,529
North America
operational USA 1,327 1,327 601 0.45 36 16.9 601 3,928
Europe operational UK/Ireland 389 389 655 1.68 64 10.2 655 4,883
Total onshore operational (DKK) 3,789 4,307 4,307 34,340 3,679 9.3 34,340
Source: Orsted, Barclays estimates
2) Secured projects. Orsted also has secured another 12.5GW of offshore wind
assets in development.
Orsted has 12.5GW of gross projects in offshore wind development, or 10.8GW net.
Developing these over the coming decade would mean a gross build rate of 1.25GW/year
gross (1.08GW net).
Barclays | European Utilities
12 May 2021 96
FIGURE 135
Orsted has 10.8GW of secured offshore renewable projects in development that we value at DKK56.0bn (€7.5bn)
Offshore wind Country
MW 100%
Dec 21
Ownership
(Dec 21)
MW
net
Commissioni
ng date
EV
proportional
Dec 21
(LOC)
LC mn/
MW
2022
EBITDA
Estimated
IRR
Equity
value to
Orsted
DKK
UK (£)
Hornsea 3 UK 2,400 100.0% 2,400 2027 1,443 0.6 - 7.2% 12,106
Hornsea 4 UK 2,600 100.0% 2,600 2030 1,495 0.6 - 7.4% 12,539
Secured/consented 5,000 5,000 2,938 0.6 - 24,645
Germany (Eu)
Borkum Riffgrund 3 Germany 900 100.0% 900 2025 508 0.6 - 6.8% 3,787
Gode Wind 3 Germany 242 100.0% 242 2024 166 0.7 - 7.4% 1,241
Secured/consented 1,142 1,142 674 0.6 - 7.1% 5,028
Europe other (Eu)
Baltica 2 Poland 1,500 50.0% 750 2028 482 0.6 - 6.9% 3,596
Baltica 3 Poland 1,000 50.0% 500 2026 360 0.7 - 7.3% 2,680
Secured 2,500 1,250 842 0.7 - 7.1% 6,276
North America
Revolution Wind USA 704 50.0% 352 2028 269 0.8 - 7.0% 1,759
South Fork USA 130 50.0% 65 2028 50 0.8 - 7.0% 325
Sunrise Wind USA 880 100.0% 880 2030 704 0.8 - 7.3% 4,606
Ocean Wind (Mid-
Atlantic) USA 1,100 100.0% 1,100 2030 881 0.8 - 7.3% 5,758
Skipjack Wind (Mid-
Atlantic) USA 120 100.0% 120 2030 96 0.8 - 7.3% 628
Secured/consented 2,934 2,517 2,000 0.8 - 13,075
Asia Pacific
Greater Changua 2b
and 4 Taiwan 920 100.0% 920 2026 31,417 34.1 - 7.4% 6,964
Secured/consented 920 920 31,417 34.1 6,964
Total 12,496 10,829 55,988 5.2 7.2% 55,988
Source: Orsted, Barclays estimates
FIGURE 136
There is limited visibility to Orsted’s onshore technology pipelines – we value at 325mn DKK (€43.3mn)
Onshore Country
MW
100%
Ownership
(Dec 21)
MW
net
Commissioning
date
EV
proportional
Dec 21 (LOC)
LC/
MW
Estimated
IRR
Equity
value to
Orsted DKK
North America Wind USA
North America Solar USA
Europe secured/consented UK/Ireland 149 100% 44 0.29 0.1 44 325
Onshore total 149 44 - - 325
Total (DKK) 1,069 964 241,371 250 325
Source: Orsted, Barclays estimates
Barclays | European Utilities
12 May 2021 97
3) We estimate a total 2030 aspirational pipeline of a further c15.6GW offshore
wind
The following table summarises the upcoming tender auctions in Europe, the US and Asia
that Orsted has said it is interested in.
We estimate that Orsted could win 8.35GW of capacity through 2021 and 2022 in Europe
alone – with 1.25GW net Baltica 2 and 3 already secured, and we estimate the 2.4GW Hornsea
3 will be entering the UK CfD auction.
FIGURE 137
We estimate that Orsted will secure 8.35GW of European capacity 2021-2023
Country Round
Quantity gross
(MW)
Orsted expected net
wins (MW) Note
Denmark
Borholm Energy Island Offshore
Wind Tender 2,000
North Sea Energy Islands Offshore
Wind Tender 2,000
Hesselo Offshore Wind Tender TBA (2021) 1,200
Thor Offshore Wind Tender Dec, 2020 1,000
Total 6,200 2,000
France Offshore Wind Tender Round 10 June, 2024 1,000
Offshore Wind Tender Round 8 June, 2022 1,000
Offshore Wind Tender Round 7 June, 2022 250
Cotentin Manche Normandy
Offshore Wind March 12, 2021 1,050
Offshore Wind Tender Round 5 June, 2021 250
Offshore Wind Tender Round 6 June, 2022 250
Offshore Wind Tender Round 9 June, 2023 1,000
Total 4,800 2,000
Germany Offshore Wind Auction Sept., 2021 958
Total 958 -
Ireland RESS Auction Round 5 2025 GWh 2,500
RESS Auction Round 4 2023 GWh 4,000
RESS Auction Round 3 2021 GWh 3,000
RESS Auction Round 2 GWh 3,000
Total GWh 12,500 -
Italy Large-Scale Round 5 700
Large-Scale Round 6 800
Large-Scale Round 7 800
Total
Netherlands
Offshore Wind (Noorden van de
Waddeneilanden) Dec, 2022 700
Offshore Wind (Zone Hollandse
Kust (west)) Dec, 2021 1,400
Total 1,400 700
Poland Offshore Wind Allocation March, 2021 5,900
Total 5,900 1,250 Baltica 2 and 3 secured
Spain
Renewable Energy Auctions -
Round 2 TBA 3,500
Renewable Energy Auctions -
Round 3 TBA 3,500
Renewable Energy Auctions -
Round 4 TBA 3,500
Renewable Energy Auctions -
Round 5 TBA 3,500
Renewable Energy Auctions -
Round 6 TBA 3,500
Total 17,500
UK CfD Allocation Round 4 12,000
Total 12,000 2,400
2,400MW seabed already secured
(Hornsea 3)- FID auction
Europe total 8,350
Source: Company data, Barclays estimates
Barclays | European Utilities
12 May 2021 98
FIGURE 138
Upcoming offshore wind auctions and tenders
Date Country/Region Capacity
Q2 2021 US - New Jersey 2 Up to 2,400 MW
H2 2021 US - Maryland 2 c.400MW
H1 2021 Poland 5,900MW
H1 2021 Japan Round 1 c.1,500MW
Q2 2021 French Tender 4 1,000MW
H2 2021 US - Rhode Island Up to 600MW
H2 2021 US - Massachusetts 3 1,600MW
H2 2021 US - Maryland 3 c.400MW
H2 2021 Denmark Tender 800-1,000MW
2021 German Tender 900MW
Q4 2021/Q1 2022 Holland Coast Tender 1,520MW
H1 2022 Taiwan Auction TBA
H2 2021 - 2023 US - Conneticut 4 c.1,000MW
Source: Orsted, Barclays Research
We have put together an estimate of offshore wind tender wins to come up with an
aspirational GW expectation for Orsted to get our 10-year baseline estimate.
Orsted has a number of ambitions, as set out in their 2018 Capital markets day:
Develop 15GW of offshore by 2025 (gross, pre sell-downs)
Develop 30GW of gross projects by 2030, both onshore and offshore
Develop 5GW of onshore projects by 2025
We estimate these numbers will be revised upwards at their CMD in June. We estimate a total
offshore wind market size of 180GW at 2030. Orsted are expecting 161GW – and we have
slightly higher numbers in North America and Asia.
We estimate Orsted should have an economic interest in 32.5GW commissioned and under
construction as at 2030, which is 15.6GW more capacity than the secured pipeline currently
shows.
This would be a net build rate of 2.65GW/year for offshore pipeline in our base case out to
2030.
FIGURE 139
We estimate an offshore wind market of 180GW by 2030, with Orsted having >30GW
market share
Region
Total GW
installed/under
construction 2030
% market
share Orsted net GW
Orsted
commissioned
Already
secured
Aspiration
addition
UK 40 30% 12.0 3.7 5.0 3.3
Denmark 10 25% 2.5 0.6 - 1.9
Germany 20 20% 4.0 0.7 1.1 2.2
Other Europe 30 15% 4.5 0.4 1.3 2.9
North America 30 15% 4.5 0.0 2.5 1.9
Asia 50 10% 5.0 0.6 0.9 3.4
Global 180 32.5 6.0 10.8 15.6
Source: Barclays estimates
Barclays | European Utilities
12 May 2021 99
FIGURE 140
We value Orsted’s expected offshore wind pipeline to 2030 at DKK79.6bn (€11bn)
Offshore wind Country
MW 100%
Dec 21
Ownership
(Dec 21) MW net
Commissioning
date
EV proportional
Dec 21 (LOC)
LOC
mn/MW
net
EBITDA
2022
mn
expected
IRR
Equity
value to
Orsted
DKK
Aspirational UK 3,300 3,300 1,275 0.4 - 6.6% 10,693
Aspirational Denmark 1,900 100.0% 1,900 5,754 3.0 - 0.1 5,754
Aspirational Germany 2,200 100.0% 2,200 1,026 0.5 - 6.7% 7,651
Aspirational
Europe
other 2,900 2,900 1,751 0.6 - 7.1% 13,049
Aspirational USA 1,900 1,900 1,521 0.8 - 7.3% 9,945
Aspirational Asia 3,400 3,400 146,836 43.2 8.4% 32,550
Total 15,600 15,600 82,899 79,641 5.1 - 79,641
Source: Barclays estimates
Putting all these assumptions together values Orsted’s offshore wind portfolio at 17.5x 2022
EBITDA.
We value Orsted’s 10-year offshore baseline pipeline at a 17.5x 2022 EBITDA
Offshore wind
MW 100%
Dec 21
Ownership
(Dec 21)
MW
net
EV
proportional
Dec 21
(DKK)
DKK
mn/MW
net
EBITDA
2022 mn
EV/
EBITDA
Equity
value to
Orsted DKK
Operational 10,464 6,021 188,148 31.2 18,469 10.2 188,148
Secured 12,496 10,829 55,988 5.2 - - 55,988
Aspirational 15,600 15,600 79,641 5.1 - - 79,641
Total 38,560 32,450 323,778 10.0 18,469 17.5 323,778
Source: Barclays estimates
We value Orsted onshore at DKK52bn
On onshore technologies we expect Orsted’s build rate to more than double from current
levels and reach nearly 15GW of capacity by 2030 – an aspiration of a further 11GW in the
coming decade.
FIGURE 141
We expect Orsted to develop a further 11GW in onshore technologies over the coming
decade
Onshore MW/year MW 2021 MW 2030
Additional
aspirational
Build rate 2018 to 2021 614 4,307
New development rate 1,239 149 15,456 11,000
Source: Barclays estimates
Barclays | European Utilities
12 May 2021 100
FIGURE 142
We value Orsted’s expected onshore pipeline to 2030 at DKK17.4bn (€2.4bn)
Onshore Country MW 100% MW net
EV
proportional
Dec 21
LOC
mn/MW
net
EBITDA
2022 mn
EV/EBITDA
or
expected
IRR
Equity
value to
Orsted
LC
Equity
value to
Orsted
DKK
North America
aspirational USA 4,000 4,000 882 0.22 6.2% 882 5,768
North America
aspirational USA 5,000 5,000 900 0.18 6.6% 900 5,885
Europe
aspirational UK/Ireland 2,000 2,000 770 0.39 7.2% 770 5,742
Total (DKK) 11,000 11,000 1.6 17,395
Source: Barclays estimates
FIGURE 143
We value Orsted’s overall baseline onshore pipeline at 14.2x 2022 EBITDA
MW 100% MW net
EV proportional
Dec 21
DKKmn/
MW
net EBITDA
2022 mn
EV/EBITDA or
expected IRR
Equity value to
Orsted DKK
Total
commissioned 4,307 4,307 34,340 8.0 3,679 9.3 34,340
Total secured 149 149 325 2.2 - 325
Total aspirational 11,000 11,000 17,395 1.6 - 17,395
Total onshore
(DKK) 15,456 15,456 52,060 3.37 3,679 14.2 52,060
Source: Barclays estimates
Putting both onshore and offshore technologies together we estimate a 10-year
pipeline at DKK376bn
FIGURE 144
We estimate a base case renewable valuation of DKK376bn
Total MW 100% MW net
EV proportional
Dec 21 DKKmn/MW
net EBITDA
2022 mn
EV/EBITDA or
expected IRR
Equity value to
Orsted DKK
Total
commissioned 14,771 10,328 222,488 21.5 22,148 10.0 222,488
Total secured 12,645 10,978 56,313 5.1 - 56,313
Total aspirational 26,600 26,600 97,037 3.6 - 97,037
54,016 47,906 375,838 7.85 22,148 17.0 375,838
Source: Barclays
4) Orsted Blue-Sky 190GW renewables 2050 potential
There is no doubting the potential scale for offshore wind capacity globally. As we discussed
earlier in this note, we estimate that total global renewable demand could be upwards of
24,000GW from the current 2,710GW, and OECD 9,000GW and Europe 5,000GW. We see
offshore wind potential for over 1,000GW, with Europe at 500GW, North America 100GW
and Asia over 500GW.
We estimate that Orsted could develop 190GW by 2050, with a c.15% market share in Europe
and North America offshore wind plus a further 50GW of onshore capacity – essentially
tripling current onshore build rates, in line with our net zero estimates and getting to
4.5GW/year for offshore.
Barclays | European Utilities
12 May 2021 101
Of course, €1bn invested in 2049 is worth less than €1bn invested next year – and we have
used a 7% cost of equity – unlevered – for these cashflows. This means a 60% discount, or a
0.4x multiplier, for the pipeline value.
Overall this gives Orsted’s blue sky valuation of a further DKK195bn, or €26bn.
FIGURE 145
We estimate that Orsted could have a blue-sky valuation of a further DKK195bn, or €26bn
Installed capacity Market share Orsted (GW) Base case capacity to 2030 Delta
Europe 500 15.0% 75.0 23.0 52.0
North America 100 15.0% 15.0 4.5 10.5
Asia 500 10.0% 50.0 5.0 45.0
Total 140.0 32.5 107.5
Build rate GW/year 4.5
Orsted (GW)
onshore renewables GW 50 11.0 39.0
Build rate GW/year 1.6
Total renewables GW 190
Build rate GW/year 6.1
Value undiscounted Offshore 0.6 Eu mn/MW
Onshore 0.2 Eu mn/MW
Time value of money discount 0.4 x
Blue sky value Total 26.2 Eu bn
195.3 bn KRR
Source: Barclays estimates
FIGURE 146
Worldwide offshore wind capacity potential
Source: Iberdrola. Barclays Research
Barclays | European Utilities
12 May 2021 102
We estimate a range in valuation of between 569 and 1265DKK/share
FIGURE 147
Our base case value for Orsted is 800DKK/share with a range of 435-1265DKK/share
Renewables
valuation
segment DKKmn
Renewables
valuation
cumulative
DKKmn
sotp
adjustments
total equity
value
number of
shares
Equity value per
share
Basic value: commissioned/under
construction 222,645 222,488 - 39,945 182,543 420.1 435
+ secured ‘black-sky’ 56,313 278,801 - 39,945 238,856 420.1 569
+ aspirational baseline 97,037 375,838 - 39,945 335,893 420.1 800
+ blue sky 195,344 571,182 - 39,945 531,237 420.1 1,265
Source: Barclays estimates
Our base case estimates – we see EBITDA rising 4.5x from 2020 to 2030
We estimate EBITDA will rise to c.DKK72bn by 2030. Assuming the company remains on a
similar EV/EBITDA multiple of today’s 16-20x, we estimate a 9.6%-12.9% TSR return. If
EBITDA multiples reduce to in line with other European utilities (12.0x) then TSR will be
c.5.1%
FIGURE 148
We estimate Orsted net capacity will reach 45GW by 2030
(pre-sell downs)
FIGURE 149
generating nearly 200TWh
Source: Orsted, Barclays estimates Source: Orsted, Barclays estimates
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
MW
inst
alle
d n
et
Offshore Onshore Solar
-
50,000
100,000
150,000
200,000
250,000
GW
h g
ener
ate
d n
et
Offshore Onshore Solar
Barclays | European Utilities
12 May 2021 103
FIGURE 150
We estimate Orsted EBITDA will increase form DKK16.5bn to DKK74.1bn by 2030 on our base case assumptions
Source: Orsted, Barclays estimates
FIGURE 151
We estimate an equity TSR IRR of between -1.8% and +13.3% through to 2030
Current share price 880
EBITDA (DKK) 2030 72,023
multiple x 8 12 16 20
EV 576,187 864,281 1,152,374 1,440,468
Net debt and other liabilities -311,710 -311,710 -311,710 -311,710
Equity value DKK mn 264,477 552,570 840,664 1,128,757
DKK/share 630 1,315 2,001 2,687
IRR share price -3.3% 4.1% 8.6% 11.8%
Dividend yield 1.5% 1.5% 1.5% 1.5%
TSR -1.8% 5.6% 10.1% 13.3%
Source: Barclays estimates
FIGURE 152
Orsted has significant EPS volatility as gains on asset sales are included – but we see a tripling of EPS by 2030 vs 2020
underlying
Source: Orsted, Barclays estimates
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
EBIT
DA
DK
mn
Underlying EBITDA EBITDA
-
10
20
30
40
50
60
70
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
EPS
DK
K/s
har
e
EPS
Barclays | European Utilities
12 May 2021 104
EPS is volatile as it includes sell-downs – but will Orsted need to sell-down
going forward?
Our base case is that Orsted develops and ends up owning a net 32.5GW by 2030 of offshore
wind and 15GW of onshore technologies.
To date Orsted has sold down stakes in its pipeline to finance its growth. We believe asset
sales in their pipeline can be done more or less to meet Orsted’s financial ratios and balance
sheet requirements.
The following EPS profile is volatile, as Orsted reports asset sales within its EPS. We have
examined the balance sheet based on net debt/EBITDA for Orsted under our base case, as
well as if Orsted were to sell down to 50% on their pipelines.
FIGURE 153
if Orsted were to continue to sell down their wind farms EPS
will be higher initially, but lower over time
FIGURE 154
EBITDA relationship is more pronounced – sell downs create
initial EBITDA at the expense of longer term EBITDA
Source: Orsted, Barclays estimates Source: Orsted, Barclays estimates
FIGURE 155
Net debt/EBITDA is manageable, in our view, even without any more asset sell-downs
Source: Orsted, Barclays estimates
-
20
40
60
80
100
120
140
160
180
2015 2017 2019 2021 2023 2025 2027 2029 2031 2033
EP
S D
KK
/sh
are
EPS EPS with sell-downs
-
20,000
40,000
60,000
80,000
100,000
120,000
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
20
26
20
27
20
28
20
29
20
30
20
31
20
32
20
33
EB
ITD
A D
K m
n
Base case (no sell downs) With sell downs
-4.00
-2.00
-
2.00
4.00
6.00
8.00
10.00
Ne
t d
eb
t /
EB
ITD
A
Base - no selldowns Selldowns
Barclays | European Utilities
12 May 2021 105
Orsted is not just renewables… building a material presence in Hydrogen
Orsted believes that green, renewable hydrogen could be the next frontier for onshore and
offshore wind developers. Over the past year, momentum around hydrogen and its ability to
decarbonise hard-to-abate sectors has been growing. We believe Orsted can play a critical
role in the hydrogen market, as the supplier of electricity through offshore and onshore wind
for green hydrogen specifically. Over the past months, the company has been ramping up
their hydrogen project pipeline and partnering with various players across the technology’s
value chain.
For example, at the end of 2020, Orsted announced a partnership with BP to develop large-
scale green hydrogen production at a refinery in north-west Germany. The Lingen project
would see a 50 MW electrolyser installed, and the companies are working towards reaching
FID in early 2022 for operation by 2024. Orsted and BP have also applied for funding from the
EU Innovation Fund for the facility.
More recently, in April 2021, Orsted announced plans to construct a large-scale offshore wind
project in the North Sea (2GW) and 1GW of electrolyser capacity, which would connect via
45km of hydrogen pipelines to industrial companies in Belgium and the Netherlands. If the
SeaH2Land project receives the green light, it could be operational by 2030.
FIGURE 156
Orsted hydrogen projects pipeline
Project Size MW (initial/full
project potential)
Country Dates Partners
Westkuste 100 30/700+ Germany Funding approved, Rafinerie Heide, Hynaims, Holclim +
others
Lingen Green Hydrogen 50/500 Germany FID 2022, Operation 2024 BP
Yara Sluiskil 100 Netherlands FID late 2021/22, operational
2024/25
Yara
SeaH2Land 1,000 Netherlands Operation 2030 Yara, ArcelarMittal, Dow + others
H2RES 2 Denmark FID achieved, operation late 2021 Everfuel, DSV + others
Green Fuels for Denmark 10/250/1,300 Denmark Operational 2023, fully scaled by
2030
Maersk, DFDS, DSV, SAS + others
DFDS Europe Seaways TBD Denmark Fully operational by 2027 DFDS, Ballard, Lloyds Register + others
Gigastack 100 UK Second phase of study has
received funding for FEED study
Phillips, ITM Power
Oyster 1 TBD Grant received, design work until
2024
ITM Power, Siemens Gamesa, Element
Energy
Source: Orsted, Barclays Research
Barclays | European Utilities
12 May 2021 106
Sum of the parts valuation: 800DKK
FIGURE 157
We value Orsted with an DKK800/share valuation
Offshore Wind Country
MW
100% MW net
EV
proportional
Dec 21
LC mn/
MW
net
EBITDA
2022 mn
EV/EBITDA
or expected
IRR
Equity
value to
Orsted
LC
Equity value to
Orsted DKK
Operational UK 6,325 3,726 16,128 4.48 1,500 10.8 16,128 135,297
Secured/consented UK 5,000 5,000 2,938 0.59 - 7.3% 2,938 24,645
Aspirational UK 3,300 3,300 1,275 0.39 - 6.6% 1,275 10,693
UK total (GBP) UK 14,625 12,026 20,341 1.69 1,500 13.6 20,341 170,635
Operational Denmark 944 555 2,849 5.69 867 3.3 2,849 2,849
Secured/consented Denmark - - - - -
Aspirational Denmark 1,900 1,900 5,754 3.03 - 7.2% 5,754 5,754
Denmark total (DKK) Denmark 2,844 2,455 8,602 3.50 867 9.9 8,602 8,602
Germany operational Germany 1,385 693 2,323 3.35 406 5.7 2,323 17,316
Secured/consented Germany 1,142 1,142 674 0.59 - 7.1% 674 5,028
Aspirational Germany 2,200 2,200 1,026 0.47 - 6.7% 1,026 7,651
Germany total (Eur) Germany 4,727 4,035 4,024 1.00 406 9.9 4,024 29,995
Europe operational Netherlands 752 376 1,105 2.94 99 11.1 1,105 8,236
Secured/consented Poland 2,500 1,250 842 0.67 - 7.1% 842 6,276
Aspirational Europe 2,900 2,900 1,751 0.60 - 7.1% 1,751 13,049
Europe total (Eur) Denmark 6,152 4,526 3,697 0.82 99 37.3 3,697 27,561
North America operational USA 30 30 278 9.25 28 9.8 278 1,815
North America
secured/consented USA 2,934 2,517 2,000 0.79 - 7.2% 2,000 13,075
North America aspirational USA 1,900 1,900 1,521 0.80 - 7.3% 1,521 9,945
North America total (USD) USA 4,864 4,447 3,798 0.85 28 133.8 3,798 24,835
Asia operational Taiwan 1,028 642 102,111 158.82 5,733 17.8 102,111 22,636
Asia secured/consented Taiwan 920 920 31,417 34.15 - - 31,417 6,964
Asia aspirational Asia 3,400 3,400 146,836 43.19 - 8.4% 146,836 32,550
Asia total (TWD) Asia 5,348 4,962 280,364 56.50 5,733 48.9 280,364 62,150
-200
Total operational (DKK) 10,464 6,021 188,148 18,469 10.2 188,148 188,148
Total secured (DKK) 12,496 10,829 55,988 - 55,988 55,988
Total aspirational (DKK) 15,600 15,600 79,641 79,641 79,641
Total offshore wind (DKK) 38,560 32,450 323,778 9.98 18,469 17.5 323,778 323,778
Source: Barclays estimates
Barclays | European Utilities
12 May 2021 107
Onshore Country
MW
100% MW net
EV
proportional
Dec 21
LC
mn/MW
net
EBITDA
2022 mn
EV/EBITDA
or expected
IRR
Equity
value to
Orsted
LC
Equity value to
Orsted DKK
North America operational USA 2,591 2,591 3,904 1.51 454 8.6 3,904 25,529
North America
secured/consented USA
North America aspirational USA 4,000 4,000 882 0.22 6.2% 882 5,768
North America wind (USD) USA 6,591 6,591 4,786 0.73 454 10.5 4,786 31,297
North America operational USA 1,327 1,327 601 0.45 36 16.9 601 3,928
North America
secured/consented USA
North America aspirational USA 5,000 5,000 900 0.18 6.6% 900 5,885
North America solar (USD) USA 6,327 6,327 1,501 0.24 36 42.1 1,501 9,813
Europe operational UK/Ireland 389 389 655 1.68 64 10.2 655 4,883
Europe secured/consented UK/Ireland 149 149 44 0.29 6.8% 44 325
Europe aspirational UK/Ireland 2,000 2,000 770 0.39 7.2% 770 5,742
Europe wind (Eu) UK/Ireland 2,538 2,538 1,469 0.58 64 22.9 1,469 10,950
Total onshore (DKK) 15,456 15,456 52,060 3.37 3,679 14.2 52,060 52,060
Markets and bioenergy Country EV (DKK)
EBITDA
22 EV/EBITDA
Equity value to
Orsted DKK
Total CHP plants
Denmark/U
K 4,934 1,113 4.4 4,934
Gas markets and infrastructure
Denmark/U
K 7,021 666 10.5 7,021
Other, incl project
development Denmark -4,883 -348 14.0 - 4,883
Hydrogen development Europe 3,500 3,500
Total 10,572 1,431 7.4 10,572
Other -2,576
Orsted total
total operational 233,060
total secured 56,313
total aspirational 97,037
Total 386,410 21,002 18.4 386,410
Net debt - 16,059
Hybrid - 20,595
Provisions - 13,863
Equity value 335,893
Share count year end 420.1
Value per share 800
Source: Barclays estimates
Barclays | European Utilities
12 May 2021 108
Sensitivities to power prices, WACC and incremental growth
FIGURE 158
Every 1% change in WACC (or ROIC) is 200-250DKK/share impact and every 10/MWh
($/Eu/£) or c.20% change in power prices in 150DKK/share
Base case WACC +3% +2% +1% Base -1% -2% -3%
Power prices -20/MWh 505
-10/MWh 652
Base 319 442 599 800 1,057 1,389 1,820
+10/MWh 947
+20/MWh 1,095
Source: Barclays estimates
Catalysts
Capital Markets Day on 2nd June 2021
US offshore wind tenders throughout 2021- we expect Orsted to bid for seabed leases
in the 6.4GW of US offshore wind tender auctions over 2021-22.
UK CfD auction late 2021- 2.4GW Hornsea 3 will be entering the UK CfD auction,
securing a contract would enable construction of the project.
Allocation of EU Innovation funds H1 2021– Orsted’s hydrogen development project
are largely dependent of receiving EU funding in order to advance. We expect allocation
of such funding will be viewed positively in moving these projects from aspirational to
reaching final investment decision.
Barclays | European Utilities
12 May 2021 109
FINANCIAL SUMMARIES
Barclays | European Utilities
12 May 2021 110
ESG OVERVIEW: SOLARIA (SLRS.MC)
Identify: Solaria is a developer and generator of solar energy. There are three factors
materially influencing the investment recommendation: 1) decarbonisation of power, 2)
electrification of the economy and 3) decarbonisation of the residual.
Blocks represent an aggregated view of
leading ESG score providers (one indicates
a very low average score, five indicate a
very high average score). Icons show the
dispersion of those views (no bars
indicates only one source provider, two
bars indicate dispersion between
providers, full bars indicate aligned views).
For more details, click here.
Source: Barclays Research, Sustainalytics,
Vigeo Eiris
Further Reading
Powering change: the global
focus on sustainability
Utilities: Net growth from net
zero
Impact: A material proportion of our valuation of Solaria pertains to the group’s renewables
project pipeline. This part of the valuation will become increasingly relevant as the utility
increases the visibility of its project pipeline. We currently value its renewable pipeline at
€1,483mn, or 52% of EV. We expect the electrification of the economy and transition towards
net zero to be the key growth driver for Solaria.
Future: Solaria will continue to develop and deliver on its current renewable pipeline. As
the world continues to transition towards Net Zero and more countries outline energy
transition plans, Solaria will be able to further expand its pipeline and operations. For
example, in addition to the company’s build out of renewables in Spain, Solaria has a
growing pipeline in Portugal. As well, once new regulation and new grid planification is
introduced in Spain, Solaria will be able to unleash towards 4GW of reserve pipeline.
Engage: 3 key ESG questions for company engagement:
How are you thinking about the development of utility-scale storage over the next 10
years?
What is the impact you see for Solaria from the EU’s ‘green’ stimulus package?
How do you deal with the local communities (NGOs, residents, farmers, municipalities)
that can oppose the implementation of solar farm projects?
Strategy & Ambition:
3.325GW of installed renewable capacity by 2023, 18GW by 2030
Reduce own emissions by 14% by 2021 and eventually become a carbon neutral company.
Increase female representation to 25%.
Key ESG Metrics
Environmental 2018 2019 2020 Solaria has been rapidly expanding its renewable generation capacity, and in
doing so has increased also its direct emissions. The company is targeting a
reduction in this and has ambitions to become a carbon neutral company.
Renewable generation (GWh) N/A 114.8 506.68
Direct emissions (tnCO2) N/A 135.78 186.06
Social 2018 2019 2020
Solaria have made a firm commitment to developing human capital and
promoting integrity and responsibility within their workforce. Over the last year,
the company has implement significantly more training programs for
employees and introduced ESG specific training.
Employee training hours N/A 494 1,777
Employee accidents N/A 0 2
Governance 2018 2019 2020
Solaria is actively promoting diversity and inclusion within their workforce, and
aims to increase female representation to 25%. It has a strong code of conduct,
which ensures that the company is at all times in compliance with regulation.
Women in the Workforce N/A 21% 23%
Independent Directors, % N/A 33% 33%
Source: Barclays Research, company data
Barclays | European Utilities
12 May 2021 111
SOLARIA
We initiate on Solaria with EW, PT of €16.7/sh
We initiate on Solaria with an EW rating and a €16.7 PT. We think Solaria will deliver above
average growth in the European utilities sector, but in our view its demanding multiples
already price in most of its growth potential. We also think there is mounting pressure on
its past policy of high returns, given their merchant exposure and the increasing
competition for retail margins in Spain. Our downside case (€7.7) reflects our ‘black-sky’
scenario, where we give a value of zero for all aspirational pipelines and therefore a floor
valuation and downside risk. We value only secured pipeline, i.e. assets under development
with land rights, but not yet permitted and with offtake contract (pre-Final Investment
Decision, FID). Our upside case (€22.6) considers our ‘blue sky’ scenario. Assuming its
market share remains constant and the high scenario of installations materialises, our
‘blue-sky’ scenario uses a 2050 capacity estimate.
Investment case:
1) Solaria to contribute to the energy transition in Spain: Solaria’s main focus is the
Spanish power market with 93% of its solar PV asset portfolio. By the end of 2021, we
see Solaria reaching a capacity of 2.1GW in operation in Spain and 1.2GW under
construction. Uruguay, Italy and Greece will remain marginal markets in Solaria’s
portfolio, while Portugal is likely to represent only 1% of installed capacity by 2025E.
Spain is facing a material transformation in the next ten years. The growth opportunity
that the Spanish market offers is based on replacing thermal and later nuclear capacity
with renewable energy. Overall, Spain is targeting an increase in installed capacity of
renewables from 105GW to 161GW, as per its National Energy and Climate Plan. We
consider this as a minimum target to be delivered.
FIGURE 159
Geographical diversification by end 2020
FIGURE 160
Spain to remain their key market by 2025E
Source: Solaria, Barclays Research Source: Solaria, Barclays Research estimates
2) Solaria is a growth company with an attractive project backlog: We see Solaria’s
installed capacity growing by ~5.7GW over 2021-25 to 6.2GW. Our conviction in the high
visibility of the company’s project backlog is based on the positive global framework for
renewables development, and specifically positive developments in renewable targets in
Spain. In addition, portfolio visibility is supported by a high percentage of projects with
grid access guaranteed (5.9GW) pending environmental permitting. We think this is a
material competitive advantage for Solaria.
Spain
93%
Italy
3%
Uruguay
4%Greece
0%
Spain
98%
Portugal
1%Italy
0%Uruguay
1%
Greece
0%
SLR SM / SLRS.MC
Stock Rating
EQUAL WEIGHT
Industry View
POSITIVE
Price Target
EUR 16.7
Price (10-May-2021)
EUR 15.24
Potential Upside/Downside
+9.5%
Barclays | European Utilities
12 May 2021 112
FIGURE 161
62% CAGR in installed capacity 2021-2025E
FIGURE 162
End 2021E peak in capacity under construction
Source: Solaria, Barclays Research estimates Source: Solaria, Barclays Research estimates
3) Key risks relate to load factors, pricing and interest rates: Based on Solaria’s significant
renewables focus, we think the key risks relate to pricing obtained by individual power
plants, particularly the future pool price, and more specifically the captured pool price
for each technology and the level of power purchase agreement (PPA) achieved and the
annual load factor achieved by each power plant. The most material risk relates to the
underlying Spanish wholesale power price. Every 1% decrease in the power price equates
to a 6% reduction in 2025E pre-tax profit. In terms of load factors, onshore wind is the
most sensitive business area. Every 1% change in the long-term load factor of Spanish
solar PV equates to a 3% impact on 2025E pre-tax profit.
Solaria strategy is focused on delivering above average returns
Solaria has a policy of minimum 12% unlevered IRR after taxes, which is quite unusual
considering that, according to BNEF, average unlevered onshore wind returns in Spain are 5-
5.5% following the last auction and 8.5-9.5% for merchant (including retail margin). We
believe that Solaria’s targets are realistic in the short /medium term. We think the difference
between Solaria and most of independent developers is in the cost of connection. Solaria’s
policy of keeping this cost at minimum is the key differentiating factor. Nevertheless, we think
the access to low connection capex requirement projects will become more difficult over the
long run and therefore Solaria will be unable to meet this target.
The table below shows that assuming an upfront capex of €0.35mn/MW (instead of
€0.46mn/MW), we obtain an unlevered IRR of 12.7% post-tax for a project with minimum
connection costs and below market cost for solar panels.
75360 550
2150
3025
3875
5125
6230
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2018 2019 2020 2021E 2022E 2023E 2024E 2025E
(MW)
1600
875 850
12501105
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2021E 2022E 2023E 2024E 2025E
(MW)
New additions Under Construction
Barclays | European Utilities
12 May 2021 113
FIGURE 163
Our base case for Solaria’s solar PV project DCF and assumptions
Source: Barclays Research estimates
The specific location of a project can minimize the cost of connection. But we think this will
become more difficult, as competitors aim for the same locations. For example, solar PV
projects that are close to the distribution network of a small city or projects that use existing
infrastructure (like Solaria’s 600MW project in the site of the shutdown Garona nuclear plant
or the 626MW project in the site of Trillo nuclear plant that will shut down in 2035). Another
example is hybrid projects: if we allocate the connection cost to the onshore wind farm
(€90k/MW), the cost of connection of the solar PV farm can be below €10k/MW. This low
connection cost (€8k/MW for Solaria) compares to expensive connection costs for more
remote solar PV projects averaging €75k/MW, with lower unlevered IRRs at the same PPA
price assumption. We think that Solaria’s cost advantage is unsustainable over the long run
and that Solaria’s future unlevered IRRs will decline.
FIGURE 164
Connection costs for Spanish renewable plants
Source: BNEF, Barclays Research
Assumptions: (EURm) 2022 2023 2024 2025 2026… 2051
Project cost (EURm) 17.3 Revenues 3 3 3 3 3 3
Capacity (MW) 50 Operating costs 0.5 0.5 0.5 0.5 0.5 0.5
Load factor 23.0% EBITDA 3 3 3 3 3 3
Availability 100% EBITDA margin 86% 86% 86% 86% 86% 86%
Output (GWh) 100 DD&A 1 1 1 1 1 1
Ownnership 100% EBIT 2 2 2 2 2 2
Project financing 70% EBIT margin 56% 56% 56% 56% 56% 56%
Off Balance sheet debt (EURm) 12.1 Taxes -0.5 -0.5 -0.5 -0.5 -0.5 -0.5
In-service Date 2022 NOPAT 1 1 1 1 1 1
Financing terms (years) 15 Net cash flow -14 3 3 3 3 3
Cost of Borrowing 3.8%
Opex (EUR/MWh) 5
Tax rate 25%
Asset life (years) 30
Merchant price (EUR/MWh) 48
PPA price (EUR/MWh) 33
Annual Escalator 0%
PPA duration (years) 10
Unlevered IRR
Pre-Tax IRR 17%
Post-Tax IRR 12.7%
NPV (EURm) 12.2
NPV / capex (x) 0.7
0
20
40
60
80
100
120
140
Onshore
wind - High
Onshore
wind -
Average
Onshore
wind - Low
Solar PV -
High
Solar PV -
Average
Solar PV -
Low
Hydrid
'000 EUR
Barclays | European Utilities
12 May 2021 114
Risks to our unlevered IRR estimates: Merchant risk exposure
So far, Solaria has been successful in signing all its capacity under PPAs and auction contracts
(180MW awarded in January Spanish auction). Regarding their three first utility scale projects
(Garona, Trillo and Villaviciosa, amounting to 2.1GW), Solaria has signed already 24% of the
capacity and it is in negotiations to sign for the remaining 1.6GW. We still believe that their
merchant risk is very high and that there is a material risk of declining returns in the stock.
It is worth noting that each plant under PPA contracts has some merchant exposure. PPAs
can be signed on a baseload basis (typical in wind) or ‘pay as produced’ (typical in solar PV).
Baseload PPAs typically command higher prices, as the off-taker pays the developer for
assuming the risk of volatility on energy production. Most of PPA term sheets signed are
baseload products for 50% of the P50 production of onshore wind assets, the rest being
exposed to merchant prices. This percentage increases to 75% in solar PPAs given the high
predictability of production, resulting in lower exposure to merchant. Prices in both types of
PPAs are usually lower than the expected forecast wholesale market prices. The main reason
is: a) the lack of liquidity and b) a discount required over market prices to attract demand for
this type of contract.
Another merchant risk raises when PPA contracts expire
Today’s power price references are derived from different costs:
Market spot and forward prices reflect variable costs.
PPA and CfD prices reflect mainly fixed costs.
We believe that PPA and CfD contracts are exposed to capture power prices at expiring date
of the contracts. As we will flag later, the sensitivity to future wholesale power prices is
material. We assume that long-term power prices will be determined by the new entrant cost.
The future new entrant cost in Spain should reflect:
Future fixed cost of the ‘new entrant’ technology (in the case of Spain, solar PV). The
trend in these costs is downwards.
Costs associated with balancing the network, to back-up capacity (the cost of storage
capacity added to the wind farm), and power back-up costs (baseload reconstruction costs).
The trend in these costs is upwards, as the penetration of renewables capacity increases.
We have assumed a ~€33/MWh long-run marginal cost in Spain assuming:
A long-term total cost of solar of €15/MWh, based on an upfront cost of €0.3mn/MW.
A long-term all-in balancing cost of €18/MWh, per our calculation included in our report
Utilities: Net growth from net zero.
Barclays | European Utilities
12 May 2021 115
FIGURE 165
Forecast evolution of ‘new entrant’ cost
Source: Red Electrica, Barclays Research estimates
We think all available power price references today reflect current market conditions, such as
the current variable cost of CCGT plants (including the cost of carbon emissions) and the
current fixed cost of renewables. Over the total useful life of a wind farm (30-35 years), the
impact of short/medium-term pricing becomes almost irrelevant for the purposes of
estimating a project IRR, if 10 years later, when the PPA contract expires, the wind or solar
PV farm is again exposed to new market conditions.
All-in balancing costs do not impact our project IRR calculations
The question at this point is whether Solaria will have to incur any of the all-in balancing costs
and therefore whether the previously calculated project IRR will be lower, assuming the same
long-term new entrant cost/price reference. The straightforward answer, in our view, is no,
as these costs will be generated by other agents or, in some cases, are passed through to the
final consumer.
If we analyse the impact of each cost in our estimated project IRR:
Direct balancing costs are those associated with the running of the network, such as
ensuring power flows are balanced, voltage and frequency is controlled and there are no
brown- or black-outs on the system. These costs are borne by consumers of the network
rather than renewable developers like Solaria. The costs are ‘socialised’ and included
within the Spanish access fee, which represents 50% of the total tariff. We estimate this
cost at €9/MWh long term, vs. ~€5/MWh today.
FIGURE 166
Impact of costs in our project IRR calculations
Cost
2050
(€/MWh)
Incl. in
new entry
cost
Socialized Impacting
IRR
Future
involvement
Total cost of solar PV 15 15 No Yes Yes
Balancing costs 9 - Yes No No
Back-up costs 8 8 No No No
Capacity back-up cost 10 10 No No Yes
Total 42 33
Source: Barclays Research estimates
0
5
10
15
20
25
30
35
40
2021E Medium term Long term
EUR/MWh
Fixed cost All-in balancing costs
Barclays | European Utilities
12 May 2021 116
Back-up costs (baseload reconstruction costs) are costs associated with ensuring power is
available, regardless of whether the renewable source is generating or not. Solaria can
mitigate these costs in two ways: a) signing CfD in renewables auctions, and b) diluting the
cost within its retail margins, which we have not included in our project IRR calculations.
Note that this cost is related to the power price paid for electricity supplied by third parties
at spot or near-term power prices. We estimate this cost at €8/MWh long term.
Capacity payments or the cost of back-up capacity. Currently, these costs are external to
renewable developers such as Solaria. In Spain, these costs are associated with
investment incentive for CCGT plants and some pump storage plants built after 1998. Our
long-term cost forecast of €10/MWh captures the cost of any type of energy storage
(batteries, green hydrogen, pump storage plants). Although these are interesting
diversification alternatives for Solaria, in our forecast time horizon, we do not consider
any of these investment options. Therefore, this cost should not be included in our project
IRR calculations.
The ESG angle. We believe decommissioning is not a key risk to ESG credentials.
Silicon solar panels are 90% recyclable, and Tier 1 manufacturers used by Solaria have a
recycling code that allows Solaria to manage the withdrawal and recycling of the solar panels
once their useful life has ended under the indicated ratio of 90%.
Key catalysts – delivering its renewables project pipeline
Announcement of other utility scale projects after the announcement of the Trillo
construction start. Solaria announced recently the beginning of construction for Trillo (May
7). The 626MW solar project will be Solaria’s largest to date and a clear indication of their
ability to deliver on large-scale solar projects. We believe this will also increase confidence on
other large projects in Solaria’s pipeline, such as Garona (600MW), Villaviciosa (932.5MW)
and Navarra (410MW).
Presentation of environmental permits before mid-2022. At the risk of losing current grid
access, all Spanish renewable developers have to present secured environmental permits, at
risk of losing their grid access if they fail to. We have considered this factor as a growth
opportunity for Solaria, as cancelled grid access could be re-allocated among financially
reliable players like Solaria. The RDL 23/2020 June 2020 introduces new deadlines that allow
better visibility of the pipelines of Spanish developers such as Solaria, as there is clear
incentive for the company’s to advance development sooner or risk losing pipeline capacity:
3 months – withdraw unfeasible project and abandon grid access permit, receive back
bank guarantee
6 months – application for prior administrative authorisation and admission for
processing
22 months – receive environmental impact assessment approval
25 months – receive prior administrative authorisation
28 months – construction permit
5 years – reach commercial operation date
Current freeze on renewables pipeline to be lifted by 1 July 2021. Following the publication
of the June 2020 Law regulating access to the grid, we expect Spain to resume the application
process of new projects to resume in 1 July 2021. According to the law, distribution
companies are required to update all node capacity in the distribution network by that date,
before reopening all websites for application of grid access by new projects. We estimate that
Barclays | European Utilities
12 May 2021 117
Solaria could potentially submit 3GW of new capacity by then. This freeze does not impact
Solaria’s 5.9GW of secured pipeline in Spain.
Valuation – we initiate with a €16.7 PT
We take into consideration the following assumptions in our sum-of-the-parts valuation:
Power generation assets are valued at standard EV/MW ratios derived from DCF
methodology of individual power plants for each market. The average ratio is at a discount
to peers, as the weight of merchant wind farms in Spain is higher than peers’ weightings.
We value operating capacity forecast by the end of 2021E at €1,379mn EV or €11/sh EV.
We value Solaria’s renewables pipeline at €1,483mn or €11.9/sh or 52% of our EV
estimate. We use five years of firm project pipeline and another five years of aspirational
pipeline to 2030E.
Solaria has technical guarantees for an amount of over €300mn. The Technical
guarantees are released upon the commercial operation date (i.e. obtaining the
Exploitation Authorization for the relevant project) or earlier if there is any resolution or
report from the public authorities impeding the construction of the project. According to
RD 1183/2020 29 December, companies are required a bank warranty for the projects
equivalent to €40k/MW. We do not include this off-balance sheet item in our SOTP
valuation.
We estimate Solaria has a tax credit of €76mn NPV from past losses, which translates into
an effective tax rate of 10-12% in coming years.
FIGURE 167
Solaria: Sum-of-the-parts valuation
Concept Value (€m) EV/ EBITDA 21E (x) Comment
Operating capacity @ end of 2021 1,379 DCF value, Wacc @6.2% nominal post-tax
Pipeline value from 2022 1,483 DCF value, Wacc @6.8% nominal post-tax
Enterprise value 2,862 42.2
Net debt -852 Estimated 2021E
Provisions - Estimated 2021E
Tax credit 76 Estimated 2021E
Equity value 2,086
Number of shares (mn) 125
Equity Value per share (€) 16.7
Source: Barclays Research estimates
Key risks and sensitivities for Solaria
There are several key risks for Solaria, but the most important relate to the achieved power
and PPA prices we forecast for its renewable assets. This includes our average load factor
projections for these assets over the medium term.
Power price and PPA forecasts
With Spain being the most important market for Solaria, the related Spanish power price and
PPA forecasts are a material risk element for the group.
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FIGURE 168
Key sensitivities for Solaria
Sensitivity Our assumption Flex Pre-tax 2025E
impact (€m)
% pre-tax
2025E
Spain Wholesale Base EUR/MWh 49.2 +/-1% 18 6.7%
Spain PPA Price 36.4 +/-1% 4 1.7%
Solar Capacity Factor Spain 23% +/-1% 9 3%
Cost of debt 3% +/-0.5% 8 3%
Source: Barclays Research
Load factor forecasts
The main load factor related risk for Solaria is that related to Spanish solar PV. As shown in
the table, every one percentage point change in the long-term load factor of Spanish solar PV
equates to a 3% impact on 2025E pre-tax profit.
Interest rate risk
Looking at the debt-related risks for Solaria, the most material risk factor in respect of
financial expenses and pre-tax profit is the average interest rate on net debt. We assume a
long-term cost of debt of 3%.
Financials
The following tables contain our detailed forecasts of Solaria’s P&L, balance sheet and cash
flow statement.
FIGURE 169
Profit and loss account - Solaria
(€mn) 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Revenue 34 35 53 97 179 261 358 439
Depreciation & amortization 14 14 15 27 40 48 54 67
EBITDA 31 31 49 68 140 222 309 381
EBITDA (adj) 31 31 49 68 140 222 309 381
EBIT 17 17 33 41 100 173 254 314
EBIT (adj) 17 17 33 41 100 173 254 314
Associate income 0 0 0 0 0 0 0 0
Pre-tax income 7 6 20 23 71 140 215 270
Pre-tax income (adj) 7 6 20 23 71 140 215 270
Minority interest 0 0 0 0 0 0 0 0
Net income 21 24 30 20 61 112 172 216
Net income (adj) 21 24 30 20 61 112 172 216
NOPAT 13 13 24 46 114 208 305 377
EPS (adj) (€) 0.18 0.19 0.24 0.16 0.49 0.89 1.38 1.73
EPS (reported) (€) 0.18 0.19 0.24 0.16 0.49 0.89 1.38 1.73
DPS (€) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Source: Solaria, Barclays Research estimates
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12 May 2021 119
FIGURE 170
Growth in the profit and loss account - Solaria
(%) 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Sales % 8% 2% 54% 83% 84% 46% 37% 23%
EBITDA % 17% 2% 57% 39% 107% 58% 39% 23%
EBIT % 15% -1% 99% 22% 145% 73% 47% 23%
PBT % -4% -22% 250% 13% 210% 96% 54% 25%
Tax rate % -171% -71% 29% -12% -14% -20% -20% -20%
Net recurrent profit % 42% 12% 27% -33% 203% 82% 54% 25%
Source: Solaria, Barclays Research estimates
FIGURE 171
Balance sheet - Solaria
(€mn) 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Cash and equivalents 93 118 81 81 81 81 81 81
Net PP&E 242 385 496 1031 1300 1551 1936 2257
Tangible fixed assets 383 576 670 1206 1477 1729 2116 2438
Intangible fixed assets 12 24 46 44 43 41 39 38
Financial assets (non-current) 34 53 68 68 68 68 68 68
Total assets 395 601 716 1250 1520 1770 2155 2476
Total net assets 193 223 243 304 416 588 804
Pension liabilities 0 0 0 0 0 0 0 0
Other long-term liabilities 15 3 5 5 5 5 5 5
Short and long-term debt 205 352 420 933 1139 1277 1488 1592
Total liabilities 224 407 493 1007 1215 1355 1567 1672
Net debt/(funds) 112 234 339 852 1058 1196 1407 1510
Shareholders' equity 171 193 223 243 304 416 588 804
Minorities 0 0 0 0 0 0 0 0
Capital employed 283 427 561 1094 1362 1611 1995 2314
Total invested capital 302 482 634 1167 1435 1684 2067 2387
Source: Solaria, Barclays Research estimates
FIGURE 172
Cash flow statement - Solaria
(€mn) 2019 2020 2021E 2022E 2023E 2024E 2025E
Change in working capital 0 0 0 0 0 0 0
Cash flow from operations 14 47 47 101 160 226 283
Capital expenditure -100 -134 -560 -308 -298 -438 -387
Free cash flow -73 -95 -487 -154 -41 -78 57
Equity free cash flow -73 -95 -487 -154 -41 -78 57
Source: Solaria, Barclays Research estimates
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European Utilities Industry View: POSITIVE
Solaria Energia y Medio Ambiente (SLRS.MC) Stock Rating: EQUAL WEIGHT
Income statement (€mn) 2020A 2021E 2022E 2023E CAGR Price (10-May-2021) EUR 15.24
Price Target EUR 16.70
Why Equal Weight? We think Solaria can deliver
above average growth in European utilities sector, but
uncertainties remain related to how sustainable can
be that growth between 2025 and 2030, based on
aspirational project piepline. Additionally we think its
high return policy will have to be revised down, given
increasing comeption for retail margins in Spain.
Upside case EUR 22.60
Assuming its market share remains constant and the
high scenario of installations materialises. Our ‘blue-
sky’ scenario uses a 2050 capacity estimate.
Downside case EUR 7.70
In our ‘black-sky’ scenario we give a value of zero for
all aspirational pipelines and therefore a floor
valuation and downside risk. We value only secured
pipeline- i.e. assets under development with land
rights, but not yet permitted and with offtake
contract.
Upside/Downside scenarios
Revenue 53 97 179 261 69.9%
EBITDA (adj) 49 68 140 222 65.6%
EBIT (adj) 33 41 100 173 73.1%
Pre-tax income (adj) 20 23 71 140 89.8%
Net income (adj) 30 20 61 112 54.2%
EPS (adj) (€) 0.24 0.16 0.49 0.89 54.2%
Diluted shares (mn) 125 125 125 125 0.0%
DPS (€) 0.00 0.00 0.00 0.00 N/A
Margin and return data Average
EBITDA (adj) margin (%) 91.7 69.7 78.4 84.9 81.2
EBIT (adj) margin (%) 62.8 42.0 56.0 66.4 56.8
Pre-tax (adj) margin (%) 38.3 23.6 39.9 53.4 38.8
Net (adj) margin (%) 57.1 20.8 34.3 42.7 38.7
ROIC (%) 4.8 2.9 5.7 8.3 5.4
ROA (%) 3.2 2.0 5.0 8.3 4.6
ROE (%) 13.7 8.3 20.2 26.8 17.3
Cash flow and balance sheet (€mn) CAGR
Cash flow from operations 47 47 101 160 50.2%
Capital expenditure -134 -560 -308 -298 N/A
Free cash flow -95 -487 -154 -41 N/A
Net PP&E 496 1,031 1,300 1,551 46.2%
Total net assets 223 243 304 416 23.2%
Capital employed 561 1,094 1,362 1,611 42.1%
Shareholders' equity 223 243 304 416 23.2%
Net debt/(funds) 339 852 1,058 1,196 52.3%
Valuation and leverage metrics Average
P/E (adj) (x) 62.7 94.1 31.0 17.1 51.2
EV/EBITDA (adj) (x) 46.0 40.6 21.2 14.0 30.4
EV/EBIT (adj) (x) 67.1 67.5 29.6 17.9 45.5
Equity FCF yield (%) -5.0 -25.6 -8.1 -2.2 -10.2
P/BV (x) 8.6 7.8 6.3 4.6 6.8
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Net debt/capital (%) 60.4 77.8 77.7 74.2 72.5
Net debt/EBITDA (adj) (x) 6.9 12.6 7.6 5.4 8.1
Selected operating metrics
Payout ratio (%) 0.0 0.0 0.0 0.0
Interest cover (x) 2.6 2.3 3.5 5.1
Spreads changes (%) N/A N/A N/A N/A
Source: Company data, Bloomberg, Barclays Research
Note: FY End Dec
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12 May 2021 121
ESG OVERVIEW: SSE (SSE LN)
Identify: There are 2 factors materially influencing the investment recommendation:
1) Electrification of the economy increasing demand for power infrastructure, and 2)
Renewable generation.
Blocks represent an aggregated view of
leading ESG score providers (one indicates
a very low average score, five indicate a
very high average score). Icons show the
dispersion of those views (no bars
indicates only one source provider, two
bars indicate dispersion between
providers, full bars indicate aligned views).
For more details, click here.
Source: Barclays Research, Sustainalytics,
Vigeo Eiris
Further Reading
European Utilities: Green
stimulus provides significant
renewable vaccine, 5th June
2020
ESG Research: Utilities –
Powering change: the global
focus on sustainability, 3rd June
2020
European Utilities and Energy:
Net Growth from Net Zero, 3rd
February 2020
Impact: We believe SSE’s transmission infrastructure generation capacity will be essential
in the UK’s transition to Net Zero. We incorporate ESG factors into our valuation through
our Capex and growth estimates. Significant investment will be required by transmission
operators in preparing the grid for a low-carbon system. We value SSE by considering
Ofgem’s Net Zero Re-opener, which funds known and justified Net Zero investment in the
baseline, and uses uncertainty mechanisms to provide funding in-period when Net Zero
needs become clearer.
Future: SSE’s core business lines will be instrumental in supporting the UK towards Net
Zero. In Renewables, SSE has an operational offshore wind portfolio of 487MW and the
largest development pipeline in the UK and Ireland at 6.5GW of offshore wind, with
potential for further seabed acreage. By 2030, SSE plans to treble renewable energy output
to 30TWh a year. In 2020 SSE closed its last operational coal plan and has continued
construction of its 840MW CCGT power station to provide flexible thermal energy in the
energy transition and is exploring opportunities in CCUS and hydrogen. In June 2019, SSEN
Transmission published ‘A Network for Net Zero’, its business plan for the RIIO-T2 price
control period between 2021 and 2026. A key deliverable of this is a network that connects
10GW of renewable generation in north Scotland by 2026.
Engage: 3 key ESG questions for company engagement:
The cost of running the power system rises with increasing renewables. As a regulated
utility, do you see as putting pressure on margins?
Do you see a future for thermal generation without CCUS in a Net Zero world?
Post-subsidies, where do you see power prices for your offshore wind assets?
Strategy & Ambition:
Cut carbon intensity of electricity by 60% by 2030
Switch 3,500 vehicles to electric by 2030
A network that connects 10GW of renewable generation in the north of Scotland by 2026
Key ESG Metrics
Environmental 2017 2018 2019
SSE has been increasing its renewable generation, and has ambitions to cut
carbon intensity of electricity by 60% by 2030. In addition, the company has
been reducing scope 1 and 2 emissions since 2017.
Renewable generation (% of total
output) 28.4 31.7 37.7
Scope 1 and 2 emissions (million
tonnes CO2e) 11.07 9.52 8.91
Social 2017 2018 2019 SSE has clearly been focused on employee wellbeing, in terms of promoting
flexible working opportunities over the past few years and also achieving a
reduction in injury rates.
Total Recordable Injury Rate 0.2 0.16 0.16
Employees that say they can ‘work
differently’ (%) 37 44 61
Governance 2017 2018 2019 SSE scores less well in terms of governance, although we see progress on
reducing the gender pay gap and a third of the board female is relatively good
compared to other European utilities. % Women on the board 30 30 30
Median gender pay gap 19.6 21 18.4
Source: Barclays Research
Sse Plc
E
S
G
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12 May 2021 122
SSE – upgrade to OW PT 1770p
Summary:
1) We update our valuation for SSE and increase our PT from 1575p to 1770p and upgrade
from an EW to an OW rating ,implying nearly 25% share price upside and a 5.7% dividend
yield we see a TSR of nearly 30%.
2) SSE is now composed of predominantly two asset classes: regulated networks and
renewables, with 92% of its EV derived from these two. Both these asset classes are
undergoing particularly strong growth driven by the energy transition story. We expect
RAB growth of 6-7% annual growth with Ofgem’s Net Zero 1 scenario, and we expect to
see net renewable output tripling from 10.7TWh to >30TWh by 2030 and gross
renewable (pre sell-downs) nearly 5x to 50TWh.
3) On regulated networks we see the potential for SSE to achieve a RORE of 9.0% in their
regulated networks versus a cost of equity of 6.8%, and coupled with strong long-term
growth we estimate a 34% premium to RAB valuation, and a significant discount to the
recent WPD acquisition (c.60% premium).
4) SSE has one of the strongest offshore wind pipelines in European utilities, with a total of
4.6GW of secured offshore and onshore wind renewables. We estimate SSE will secure
5.9GW of further capacity by 2030 to meet our 17.2GW of total renewables by 2030.
5) We estimate the current share price reflects a pipeline length of 3.4 years, of which SSE
has actually secured 4.9 years of projects by EV.
6) Our upside valuation for SSE is 2585p, which reflects our view that SSE will have over
17GW of renewables (pre sell downs) by 2030 and 60GW by 2050 – a build rate of 1.1GW
by 2030 and an increase to 1.5GW/year thereafter.
7) Catalysts include the ScotWind auction due September 21, the UK CfD auction later this
year, the CMA referral in Q3 for regulated networks. Scottish politics will continue to
provide headwinds, but we believe these will be more than countered by clarity on the
UK and Scottish Govt ambitions around COP26 and the energy transition narrative.
SSE has the right assets in the right place at the right time
SSE is adjusting its shape to focus predominantly on regulated networks and renewables and
has been shrinking its thermal power and retail operations. The following pie-chart
summarises the look for SSE as at March 21. Over 92% of SSE valuation is from these two
asset classes. We see significant NPV +ve growth in both regulated networks, and renewables.
SSE is in the process of selling its 33% stake in its Gas Distribution division, SGN, which would
reduce the RAB of SSE from £10.3bn (March 22) to £8.3bn and reduce networks contribution
from 43% to 38%.
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12 May 2021 123
FIGURE 173
Over 90% of SSE is regulated networks and renewables (21 Mar 2021)
Source: Barclays estimates
SSE has a strong position in networks, and renewables provide a generation
of growth
Regulated networks:
SSE has stakes in five regulated activities: In Electricity Transmission they own and run
Scottish-Hydro Transmission, in the North and West of Scotland, in Electricity Distribution
they own Scottish-Hydro Distribution and Southern Distribution and they own 33% stakes in
two gas distribution assets: Scotland and Southern, both of which are currently in the process
of a sale.
We see very strong growth prospects for their regulated activities
With RIIO-2 Final Determination in December, Ofgem highlighted three scenarios for totex in
SSE’s electricity transmission and gas distribution activities: Final Determination (FD), Net
Zero 1 (NZ1) and Net Zero 2 (NZ2). We use NZ1 as our base case. This leads to an annual
increase in Transmission RAB of 12% per annum – the highest of all UK regulated assets.
The RAB growth in the SGN assets is more muted. Under the three scenarios, we see RAB
growth of just 1.4-2.1% per annum.
We expect to see the Business plans for Electricity Distribution later through 2021 and we
expect to see a material pick-up in totex here too, with EVs, heat pumps and DSO activities
materially increasing as the UK goes through its energy transition.
Regulated
networks
43%
Hydro
10%
Wind
40%
Thermal
3%
Other
4%
Regulated networks Hydro Wind Thermal Other
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12 May 2021 124
FIGURE 174
Meeting the net-zero target in the UK would see a significant increase in transmission
needs
Source: SSE
FIGURE 175
SSE could see annual growth in their transmission RAB of 12% under a Net Zero 1 scenario
£mn SHET SGN Total NGET NGGT (TO+SO) NGET SO Total
RAB 2021 3,452 6,480 9,933 14,490 6,480 250 21,220
Totex
RIIO-1 actual 2,021 2,773 4,794 6,163 1,981 8,144
FD 2,376 2,776 5,151 6,187 2,092 8,279
NZ1 (base case) 3,490 3,183 6,673 7,275 3,206 10,481
NZ2 4,354 3,183 7,537 10,820 3,206 14,026
RAB 2026
FD 5,058 6,944 12,003 16,489 6,443 250 23,182
NZ1 (base case) 6,089 7,194 13,283 17,378 7,249 250 24,878
NZ2 6,913 7,194 14,107 20,279 7,249 250 27,778
Total growth pa %
FD 7.9% 1.4% 3.9% 2.6% -0.1% 0.0% 1.8%
NZ1 (base case) 12.0% 2.1% 6.0% 3.7% 2.3% 0.0% 3.2%
NZ2 14.9% 2.1% 7.3% 7.0% 2.3% 0.0% 5.5%
Source: Ofgem, Barclays estimates
One thing to note is that if SSE were to significantly increase totex spending, the marginal
financing of this would be through the marginal cost of debt, which at current rates is c.0%
real (CPIH) versus allowances of 1.82% real. This increases the achieved RORE by >1.5% on
this marginal investment.
We see achieved returns of c.9% RORE – leading to a >30% premium to RAB valuation.
Baseline returns could rise with the CMA referral – results expected Q3
Ofgem set allowed returns, totex and revenues in December 2020 for the regulated
transmission and gas distribution companies.
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12 May 2021 125
SSE, like every utility, appealed the returns to the CMA. Historically if regulated companies
appealed, they had to appeal the entire review. This time they can pick and choose. This
includes just the cost of capital for example.
The CMA had a final allowed RORE of 4.73% real for the water company appeals in February
2021. Our cost of equity is 4.8% real. We estimate 4.8% real baseline achieved returns for
SSE’s regulated assets going forward.
FIGURE 176
Ofgem allowed 4.3% real in their Final Determination in December 2020 and the CMA allowed 4.73% real for the water
companies that appealed. We have 4.8% allowed baseline real returns in our basecase.
Ofwat FD -
December 2019
CMA
referral -
Sept 20
CMA
update -
Jan 21
CMA Final
decision
Ofgem DD -
July 2020
Ofgem FD -
Dec 2020
Ofgem FD -
Dec 2020
Our cost of
RIIO2 equity
Midpoint Midpoint Midpoint Base case Gas Distn and
Trans
Electricity
Transmission Midpoint
CPIH CPIH CPIH CPIH CPIH CPIH CPIH CPIH
Gearing 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 55.0% 60.0%
Risk-free rate -1.4% -1.0% -1.1% -1.3% -1.5% -1.58% -1.0%
TMR 6.5% 7.0% 6.7% 6.8% 6.5% 6.5% 6.4%
ERP 7.9% 7.9% 7.8% 8.2% 8.0% 8.1% 7.4%
Asset beta 0.36 0.31 0.30 0.29 0.365 0.35 0.39
Debt beta 0.125 0.04 0.075 0.075 0.125 0.075 0.125
Equity beta 0.71 0.76 0.75 0.71 0.725 0.76 0.78
Cost of equity step 1 4.2% 5.1% 4.8% 4.5% 4.3% 4.55% 4.25% 4.8%
Step 2 cross-reference -0.1% 0.0%
Cost of equity step 2 4.2% 5.1% 4.8% 4.5% 4.2% 4.55% 4.25% 4.8%
Step 3 Achieved return
reduction/addition 0.25% -0.25% -0.25% -0.22%
Cost of equity 4.2% 5.1% 4.8% 4.73% 3.95% 4.3% 4.02% 4.8%
Cost of debt 2.2% 2.5% 2.12% 2.18% 1.74% 1.82% 1.82% 1.7%
Gearing 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 55.0% 60.0%
WACC (plain-vanilla real) 2.97% 3.50% 3.18% 3.20% 2.62% 2.81% 2.81% 2.96%
Source: Ofwat, Ofgem, CMA, Barclays estimates
We estimate an achieved return on equity of 9.0% nominal for SSE in RIIO-2.
The following tables summarise our views of achieved returns in UK regulated utilities. We
calculate achieved returns using a five stage model:
1) Baseline RORE;
2) Fast track allowance;
3) Totex outperformance;
4) ODI outperformance;
5) Financing outperformance.
Barclays | European Utilities
12 May 2021 126
FIGURE 177
We estimate SSE could achieve 9.0% ROREs, whilst UK waters could achieve ROREs of 8.7-10.3%
Ofwat
Baseline
(CPIH real)
Fast track
award Totex OP ODI OP Financing OP Total Real CPIH Total Nominal
Pennon Group 4.2% 0.1% 2.0% 0.5% 1.5% 8.3% 2.0% 10.3%
Severn Trent 4.2% 0.1% 1.2% 1.4% 1.1% 8.0% 2.0% 10.0%
United Utilities 4.2% 0.1% 0.2% 0.8% 1.4% 6.7% 2.0% 8.7%
Ofgem
Baseline
(CPIH real)
Fast track
award Totex OP ODI OP Financing OP Total Real CPIH / RPI Total Nominal
NG RIIO-2 ET 4.8% -0.2% 1.7% 0.2% 0.5% 7.0% 2.0% 9.0%
NG RIIO-2 GT 4.8% -0.2% 1.7% 0.2% 0.5% 7.0% 2.0% 9.0%
SSE RIIO-2 ET 4.8% 0.0% 1.7% 0.0% 0.5% 7.3% 2.0% 9.0%
SSE RIIO2-ED 4.8% 0.0% 1.7% 0.0% 0.5% 7.3% 2.0% 9.0%
Source: Ofgem, Barclays estimates
FIGURE 178
Every 1% change in RORE adds c.12p/share to valuation and £1bn totex (capex) is
19p/share valuation
Totex (£bn) RORE 6% RORE 7% RORE 8% Base Case
9.0% RORE 10% RORE 11%
5 1,695 1,704 1,714 1,723 1,732 1,741
6 1,712 1,722 1,732 1,742 1,752 1,762
7 1,728 1,739 1,750 1,761 1,772 1,783
7.6 Base case
NZ1 1,736 1,748 1,759 1,770 1,782 1,793
8.4 NZ2 1,761 1,774 1,786 1,799 1,811 1,824
10 1,778 1,791 1,804 1,818 1,831 1,844
Source: Barclays
The following table summarises the valuation ranges for regulated utilities using a steady-
state EV/IC and a growing DDM based model. We value SSE’s assets at a 30-40% premium
to RAB.
Every 10% change in total RAB valuation is worth c.£1bn or 100p/share. Every 10% change
in valuation of their 33% stake in Gas Distribution from our 30% premium to the £2bn RAB
estimate is £200mn, or 20p/share.
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12 May 2021 127
FIGURE 179
Every 1% change in achieved RORE impacts valuation by c.5-10% premium to RCV
Achieved RORE
outperformance Required ROE 5% 6% 7% 8% 10%
5.0% EV/IC valuation 0.0% -6.3% -10.7% -14.1% -18.8%
5.0% DDM valuation 0.0% -22.2% -36.4% -46.2% -58.8%
6.0% EV/IC valuation 7.5% 0.0% -5.4% -9.4% -15.0%
6.0% DDM valuation 31.3% 0.0% -19.2% -32.3% -48.8%
7.0% EV/IC valuation 15.0% 6.3% 0.0% -4.7% -11.3%
7.0% DDM valuation 69.0% 25.6% 0.0% -16.9% -38.0%
8.0% EV/IC valuation 22.5% 12.5% 5.4% 0.0% -7.5%
8.0% DDM valuation 115.4% 55.6% 21.7% 0.0% -26.3%
9.0% EV/IC valuation 30.0% 18.8% 10.7% 4.7% -3.8%
9.0% DDM valuation 173.9% 90.9% 46.5% 18.9% -13.7%
10.0% EV/IC valuation 37.5% 25.0% 16.1% 9.4% 0.0%
10.0% DDM valuation 250.0% 133.3% 75.0% 40.0% 0.0%
11.0% EV/IC valuation 45.0% 31.3% 21.4% 14.1% 3.8%
11.0% DDM valuation 352.9% 185.2% 108.1% 63.8% 14.9%
Source: Barclays Research estimates
UK water stocks are trading at a 20% premium to RAB
FIGURE 180
The UK Water sector is trading at a 20% premium to March 22 RAB with United Utilities
trading at a discount to both Severn Trent and Pennon
March 2022 Valuations Pennon
Severn
Trent
United
Utilities Sector
Share price (p) 1,030 2,472 969
Valuation (p) 1,060 2,560 1,110
Rating OW EW OW
upside 5% 6% 17%
No. of shares (m) 421 238 682
Market capitalisation (£m) 4,338 5,883 6,608 16,829
Net debt (£m) March 2022 - 195 6,313 7,457 13,575
Provisions + minorities (£m) 52 427 -598 - 119
Enterprise value (£m) 4,195 12,624 13,446 30,285
minus
Non-core valuation (£m) March 2022 3 487 159 649
Adjusted enterprise value 4,192 12,137 13,307 29,636
Capital value (CV)
Headline capital value (£m) March 2022 3,393 9,649 11,650 24,692
add/minus RAB log-down (£mn) -
Adjusted capital value (£mn) 3,393 9,649 11,650 24,692
Premium/discount to adjusted RCV
March 2022 23.6% 25.8% 14.2% 20.0%
Source: Prices as at close 10 May 2021. Bloomberg, Company data, Barclays estimates
Barclays | European Utilities
12 May 2021 128
FIGURE 181
National Grid Group continues to trade at a c.20% premium to RAB
Source: Bloomberg, Barclays Research estimates
FIGURE 182
The three listed UK water stocks are trading at a current 15% premium to RAB, in line with recent range following a
regulatory review
Source: Bloomberg, Barclays Research estimates
Renewables – tripling of net renewable output by 2030 expected
SSE currently operates 3.9GW of net renewables currently, of which 1.5GW is hydro, 1.9GW
onshore wind and 0.5GW offshore.
There is however an extensive pipeline of onshore and offshore wind, with up to 2.1GW of
offshore under construction, a further 4.1GW secured, and we estimate 5.6GW aspirational
by 2030. We detail their renewable fleet in the table below.
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
95 98 01 04 07 10 13 16 19 22
Premium to RCV (%)
UK premium to RCV NG Group premium to RCV
Regulatory reviews
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
1990 1994 1998 2002 2006 2010 2014 2018 2022
Pre
miu
m /
Dis
cou
nt
to R
AB
Barclays | European Utilities
12 May 2021 129
FIGURE 183
SSE may have only 3.9GW operating currently, but it has 21GW of gross projects, 17.2GW net potential (as at March 22)
Summary of projects Technology Geography
Project MW
Mar 2022
% SSE
March 22
Net
MW Status YE 22
Commissioning
date
Hydro Hydro Scotland 1,159 100% 1,159 Commissioned
Pumped hydro Hydro Scotland 300 100% 300 Commissioned
Wind onshore GB Onshore Scotland 825 100% 825 Commissioned
Wind onshore NI Onshore Northern Ireland 122 100% 122 Commissioned
Wind onshore Ireland Onshore Republic of Ireland 541 100% 541 Commissioned
Clyde windfarm Onshore Scotland 522 50% 262 Commissioned 2017
Stronelairg Wind Farm Onshore Scotland 228 50% 114 Commissioned 2019
Dunmaglass Wind Farm Onshore Scotland 94 50% 47 Commissioned 2017
Cloosh Valley Onshore Republic of Ireland 108 25% 27 Commissioned 2017
Onshore wind operating 2,440 1,937 Commissioned
Viking Onshore Scotland 443 100% 443 Under construction 2025
Gordonbush Ext Onshore Scotland 38 100% 38 Under construction 2025
Pipeline: under construction 481 481
Yellow River Onshore Republic of Ireland 105 100% 105 Consented 2025
Tangy Onshore Scotland 57 100% 57 Consented 2025
Lenalea Onshore Republic of Ireland 31 50% 16 Consented 2026
Strathy South Onshore Scotland 208 100% 208 Requiring consent 2028
Cloiche Onshore Scotland 155 100% 155 Requiring consent 2028
Doraville Onshore Northern Ireland 138 100% 138 Requiring consent 2028
Secured/consented 694 679
Other Onshore Various 300 100% 300 Aspirational 2030
Aspirational 300 300
Greater Gabbard Offshore England and Wales 504 50% 252 Commissioned 2012
Beatrice Offshore Scotland 588 40% 235 Commissioned 2020
Offshore wind operating 1,092 487
Seagreen Offshore Scotland 1,075 49% 527 Under construction 2024
Dogger Bank A&B Offshore England and Wales 2,400 40% 960 Under construction 2025
Dogger Bank C Offshore England and Wales 1,200 50% 600 FID 2027
Pipeline: under construction 4,675 2,087
Arklow Bank Offshore Republic of Ireland 520 100% 520 Consented 2026
Seagreen 1A Offshore Scotland 360 49% 176 Consented 2025
Berwick Bank (SG 2) Offshore Scotland 1,600 100% 1,600 Requiring consent 2029
Marr Bank (SG3) Offshore Scotland 1,600 100% 1,600 Requiring consent 2030
North Falls (GG extension) Offshore England and Wales 504 50% 252 Requiring consent 2031
Secured/consented 4,584 4,148
Braymore Offshore Republic of Ireland 800 100% 800 Early stage 2029
Celtic Seas Offshore Republic of Ireland 800 100% 800 Early stage 2030
Scotwind Offshore Scotland 3,000 100% 3,000 Aspirational 2032
Round 5+ Offshore England and Wales 1,000 100% 1,000 Aspirational 2033
Aspirational 5,600 5,600
other
Total UK and Ireland 21,325 17,178
Source: SSE, Barclays estimates
Barclays | European Utilities
12 May 2021 130
SSE has stated that it intends to sell down stakes in its offshore wind farms and has given
guidance that it intends to sell down stakes to the following levels (see Fig 178). Our base
case assumes this sell-down happens at FID and pre-capex.
FIGURE 184
SSE have provided guidance on their sell down position
Project
Capacity
(MW)
Current SSE
ownership (%)
Assumed SSE
ownership (%)
Seagreen 1,075 49% 49%
Dogger Bank A and B 2,400 40% 40%
Viking 443 100% 100%
Dogger bank C 1,200 50% 40%
Seagreen 1A 360 49% 49%
Berwick Bank 2,300 100% 40%
Marr Bank 1,850 100% 40%
North Falls 504 50% 50%
Arklow Bank 2 520 100% 50%
Source: SSE
The amount of net generation and output from SSE’s renewables are shown in the following
charts.
We estimate SSE will be overseeing a gross of 16.3W of renewable under construction by
2030, or 13.3GW March 22 net. This is 1.7GW/annum, versus c.500MW/annum in the
previous decade. After sell-down of their existing stakes the total net addition is c.8.1GW by
2033, including Round 5+ and Scotwind (under construction in 2030, but not commissioned
until >2030), meaning SSE will have 10GW of offshore wind net capacity by 2030.
FIGURE 185
We estimate SSE net capacity will reach 10GW by 2030 (after
sell-downs)
FIGURE 186
generating nearly 37TWh, or 12% of total UK demand from
renewables alone
Source: Barclays estimates Source: Barclays estimates
But balance sheet and dividend means SSE needs capital ‘recycling’
SSE has a high dividend payout – with DPS at 80p/share real and EPS at between 88-100p in
the coming years and with a high starting point net debt/EBITDA ratio, it has limited balance
sheet flexibility to invest in new assets.
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
20
19
20
20
20
21
20
22
20
23
20
24
20
25
20
26
20
27
20
28
20
29
20
30
20
31
20
32
20
33
MW
inst
alle
de
Hydro Onshore Offshore
-
10
20
30
40
50
60
20
19
20
20
20
21
20
22
20
23
20
24
20
25
20
26
20
27
20
28
20
29
20
30
20
31
20
32
20
33
TW
h g
en
era
ted
ne
t
Hydro Onshore Offshore
Barclays | European Utilities
12 May 2021 131
To develop NPV positive renewable projects, SSE is undertaking a capital recycling project
whereby it expects to dispose of over £2bn of assets to aid its capital programme of £7.5bn
over five years (2021-25).
Credit ratings are BBB+ stable from S&P and Baa1 negative from Moody’s. SSE is targeting a
net debt/EBITDA towards the lower end of 4.5-5.0x from 2022 to 2025. It is currently 5.7x
(2020a) based on SSE’s calculation. We believe that this calculation is inconsistent with other
utilities and generous to SSE. The true net debt/EBITDA is higher if either: i) the net debt for
JVs are either included in the denominator versus total proportional EBITDA, or ii) if highly
levered JVs EBITDA contribution (e.g. SGN) are discounted. We would not include dividends
from JVs in a net debt/EBITDA calculation for example.
SSE also only report JV equity investments as part of their capital expenditure – meaning that
the off balance sheet capex and debt are not in adjusted numbers. Our analysis below
assumes 100% equity financing of their increasingly large number of JVs – which is consistent
if total proportional Group EBITDA is compared to proportional net debt (similar to Orsted’s
accounting). In reality SSE’s reported EBITDA and EPS will be the same as our estimates, but
capex and reported net debt would be lower.
We see limited underlying EPS growth in the medium term
Our base case EPS and net debt/EBITDA is based on sale of their gas distribution sales at the
end of FY March 2022, and also selling down stakes in their projects at FID – i.e. 3 years before
commissioning.
The following chart summarises our EPS and net debt/EBITDA estimates under our base case
scenario. Including Gas DX into our estimates would increase EPS by 2-3p/share, but would
also increase net debt/EBITDA ratios by a delta of c.0.4.
SSE also now report profit on sales of their wind developments as an underlying EPS. There
are a number of EPS numbers in SSE going forward, and one conclusion we have is that
consensus EPS is going to be a difficult number to contextualise.
On average we see asset sales adding about 30p/share EPS per annum out to 2030.
The impact of including development sales in adjusted EPS will also mean this metric will
become increasingly volatile depending on which assets are sold in which year.
FIGURE 187
We estimate an underlying EPS of 95p in 2022 with flat growth through to 2028, but EPS
will be a volatile once sales of developments are included in underlying EPS.
Source: SSE, Barclays estimates
0
20
40
60
80
100
120
140
160
180
2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E
EP
S (
p/
sha
re)
Adjusted EPS ex-Gas EPS pre-gains ex gas
Adjusted EPS with-Gas EPS pre-gains with-Gas
Barclays | European Utilities
12 May 2021 132
FIGURE 188
The sale of Gas Distribution should reduce net debt/EBITDA by c.0.4. Note – we take total
EBITDA as denominator and total proportional debt as numerator. SSE does not include
JV debt at all in the numerator and calculates a net EBITDA from the levered JV.
Source: Barclays estimates
The following Graph summarises SSE’s EPS and net debt/EBITDA based on the following
scenarios:
1) Full investment into offshore wind farms with current divi policy
2) Full investment into offshore wind farms with divi halved to 40p/share real
3) Divestment of stakes in offshore wind farm developments – our base case
a. Underlying pre-gain EPS
b. Adjusted EPS, including gains from asset sales
We believe there are a number of scenarios here that could change. SSE can boost short-term
EPS by selling down stakes, and this also allows the net debt/EBITDA to remain at
manageable levels. However, we see limited longer-term EPS growth in this scenario.
The second scenario is to finance the pipeline themselves – or swap stakes with other
equivalent developers. This increases longer term EPS growth, but debt ratios balloon.
The third option is to finance more of their pipeline, but to provide headroom through
reducing their dividend. We estimate this creates the highest EPS growth and maintains
leverage ratios. However, it will be at the expense of dividend and the role that plays in TSR.
The company are adamant they will keep the 80p real DPS out to 2023. We see after 2023 a
debate with their shareholders over this relationship between dividend, balance sheet and
EPS growth.
We estimate TSR could be increased by a reduction in SSE’s dividend as long as the extra
firepower is deployed into growing the wind business faster. Ultimately there is a trade-off
between crystallising a high on-off EPS in a development stake sale versus having cumulative
EPS accretion over the life of the asset. If we estimate c.30p/share EPS accretion for asset
sales per annum out to 2030, then this developer function is worth c.300p/share to SSE.
On valuing SSE using a PE, we estimate that the underlying EPS should be on a more typical
PE multiple and the development gains average nearly 30p/share to at least 2030.
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E
Ne
t d
eb
t/E
BIT
DA
Post Gas sale Pre-Gas sale
Barclays | European Utilities
12 May 2021 133
FIGURE 189
We see EPS accretion from pre-gains EPS if SSE were to stop their sell-downs/swap
stakes for other wind farm assets
Source: Barclays estimates
FIGURE 190
But financial leverage would rise
Source: Barclays estimates
0
20
40
60
80
100
120
140
160
180
2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E
EP
S (
p/
sha
re)
Full investment Full investment, DPS halved
Base case pre asset gains Base case
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E
Ne
t d
eb
t/E
BIT
DA
Full investment Full investment, DPS halved Base case
Barclays | European Utilities
12 May 2021 134
SSE is underpinned by operating and secured assets with limited
aspirational value needed to drive upside
Blue sky vs black sky scenarios
The following table summarises our valuation of SSE’s renewable fleet. We estimate a
proportional EV of £16.6bn, and once company debt and shareholder loans are removed the
equity value is £14.5bn.
We have split this valuation into four main building blocks:
1) Operating/under construction
2) Secured pipeline
3) Aspirational pipeline out to 2030 – our base case
4) Blue sky valuation
Barclays | European Utilities
12 May 2021 135
FIGURE 191
We value SSE’s renewable fleet at £16.6bn, 19.1x 2022e EBITDA
Summary of projects Technology Geography
% SSE
March 22 Net MW
EV
proportional
March 22
£mn/
MW
EV/EBITD
A / IRR
expected
Equity
value to SSE
Hydro Hydro Scotland 100% 1,159 3,023 2.61 14.8 3,023
Pumped hydro Hydro Scotland 100% 300 240 0.80 13.7 240
Wind onshore GB Onshore Scotland 100% 825 1,484 1.80 9.1 1,484
Wind onshore NI Onshore Northern ireland 100% 122 144 1.18 9.4 144
Wind onshore Ireland Onshore Republic of Ireland 100% 541 1,157 2.14 12.9 1,157
Clyde windfarm Onshore Scotland 50% 262 518 1.98 9.1 391
Stronelairg Wind Farm Onshore Scotland 50% 114 323 2.83 11.7 235
Dunmaglass Wind Farm Onshore Scotland 50% 47 148 3.14 11.5 101
Cloosh Valley Onshore Republic of Ireland 25% 27 53 1.96 13.1 20
Onshore wind operating 1,937 3,827 2.04 10.3 3,532
Viking Onshore Scotland 100% 443 419 0.94 7.2% 419
Gordonbush Ext Onshore Scotland 100% 38 32 0.85 7.3% 32
Pipeline: under construction 481 451 0.94 451
Yellow River Onshore Republic of Ireland 100% 105 80 0.76 8.1% 80
Tangy Onshore Scotland 100% 57 49 0.85 7.3% 49
Lenalea Onshore Republic of Ireland 50% 16 8 0.54 8.4% 8
Strathy South Onshore Scotland 100% 208 99 0.47 8.2% 99
Cloiche Onshore Scotland 100% 155 84 0.54 8.7% 84
Doraville Onshore Northern Ireland 100% 138 65 0.47 8.2% 65
Secured/consented 679 385 0.57 385
Other Onshore Various 100% 300 128 0.43 8.2% 128
Aspirational 300 128 0.43 128
Greater Gabbard Offshore England and Wales 50% 252 681 2.70 6.9 681
Beatrice Offshore Scotland 40% 235 1,165 4.95 8.6 142
Offshore wind operating 487 1,846 3.91 7.9 823
Seagreen Offshore Scotland 49% 527 833 1.58 6.3% 415
Seagreen 1A Offshore Scotland 49% 176 199 1.13 7.1% 136
Dogger Bank A&B Offshore England and Wales 40% 960 876 0.91 6.8% 585
Dogger Bank C Offshore England and Wales 50% 600 336 0.56 7.3% 336
Pipeline: under construction 2,263 2,244 0.99 1,472
Arklow Bank Offshore Republic of Ireland 100% 520 243 0.47 6.5% 243
Berwick Bank (SG 2) Offshore Scotland 100% 1,600 859 0.54 7.0% 859
Marr Bank (SG3) Offshore Scotland 100% 1,600 888 0.56 7.2% 888
North Falls (GG extension) Offshore England and Wales 50% 252 83 0.33 6.3% 83
Secured/consented 3,972 2,073 0.51 2,073
Braymore Offshore Republic of Ireland 100% 800 429 0.54 7.0% 429
Celtic Seas Offshore Republic of Ireland 100% 800 328 0.41 6.5% 328
Scotwind Offshore Scotland 100% 3,000 1,250 0.42 6.7% 1,250
Round 5+ Offshore England and Wales 100% 1,000 398 0.40 6.7% 398
Aspirational 5,600 2,405 0.43 2,405
other
Total UK and Ireland 17,178 16,621 0.97 19.1 14,532
Source: SSE, Barclays
Barclays | European Utilities
12 May 2021 136
FIGURE 192
We estimate SSE will operate 17.1GW of renewables by 2030 pre sell-downs
Region
Total GW
installed/under
construction 2030
% market
share SSE net GW
SSE
commissioned Already secured
Aspiration
addition
UK/Ireland 45 27% 12.3 2.8 4.0 5.6
Denmark 10 0% - -
Germany 20 0% - -
Other Europe 30 0% - -
North America 30 0% - -
Asia 50 0% - -
Global 180 12.3 2.8 4.0 5.6
Onshore MW/year MW 2021 MW 2030
Additional
aspirational
Build rate 2018 to 2021 112 2,418
New development rate 109 679 3,397 300
Source: Barclays
FIGURE 193
We have a ‘firm’ valuation of £11.6bn, with a secured pipeline of £2.5bn, meaning an aspirational pipeline of just £2.5bn
(240p/share)
Source: Barclays estimates
FIGURE 194
Our base case valuation is an EV of £16.6bn and equity value of £14.5bn
MW 100% MW net
EV
proportional
Dec 21
£mn/
MW
net EBITDA
2022 mn
EV/
EBITDA
Equity value to
SSE £mn
Total commissioned 10,507 6,628 11,631 1.8 869 13.4 9,541
Total secured 4,918 4,651 2,458 0.5 - 2,458
Total aspirational 5,900 5,900 2,533 0.4 - 2,533
Total 21,325 17,178 16,621 1.0 869 19.1 14,532
Source: Barclays
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
EV
£m
n
Onshore operating/under construction Offshore operating/under construction Pipeline secured Pipeline aspirational
Barclays | European Utilities
12 May 2021 137
A blue sky scenario could see a maximum 2585p/share valuation
The following chart summarises the total GW of offshore wind lined up to be developed in
the UK. It is already nearing 60GW (note this includes the c.10GW expected from Scotwind
later this year). We estimate SSE has 6.7GW of this already secured, and we estimate a further
3GW in the upcoming 10GW Scotwind auction. This is a c.16% market share of pre-sell down
assets in offshore wind and c.20% once onshore wind and hydro is included.
FIGURE 195
We estimate a blue sky valuation upside of a total of 60GW with an NPV of £8.7bn
Installed
capacity
Market
share
SSE
(GW)
Base case
capacity to
2030 Delta
Europe 500 10.0% 50.0 12.3 37.7
North America 100 0.0% - -
Asia 500 0.0% - -
Total 50.0 12.3 37.7
Build rate GW/year 1.6
SSE (GW)
onshore renewables GW 10 3.4 6.6
Build rate GW/year 0.3
Total renewables GW 60
Build rate GW/year 1.8
Value undiscounted Offshore 0.6 £ mn/MW
Onshore 0.2 £ mn/MW
Time value of money discount 0.4 x
Blue sky value Total 8.7 £bn
Source: Barclays
FIGURE 196
Our Black sky scenario is 1302p and Blue Sky 2585p valuation (this is renewables impact only – our 1100p downside case
includes regulated networks on a lower valuation as well)
Renewables
valuation
segment £mn
Renewables
valuation
cumulative £mn
sotp
adjustments
total equity
value £mn
number of
shares #
Equity value
per share
p/share
Basic value: commissioned/under construction 9,541 9,541 4,321 13,862 1,065 1,302
+ secured 2,458 11,999 4,321 16,320 1,065 1,532
+ baseline aspirational 2,533 14,532 4,321 18,853 1,065 1,770
+ blue sky 8,680 23,212 4,321 27,533 1,065 2,585
Source: Barclays
Barclays | European Utilities
12 May 2021 138
FIGURE 197
Sensitivities: we see every 1% change in WACC impact valuation by 30-40% and every
£10/MWh is 20-30% on valuation
Power price -£20/MWh -£10/MWh Baseline +£10/MWh +£20/MWh
WACC
-3% 4,156
-2% 3,159
-1% 2,381
Baseline 852 1316 1,770 2,229 2,688
+1% 1,287
+2% 901
+3% 590
Source: Barclays
FIGURE 198
Our estimates for SSE’s EBIT by division
EBITA (cons + share JVs) 2019 2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E
1) Electricity Transmission £mn 252.1 218.1 211.6 301.1 301.4 291.7 279.8 260.9 270.3 279.1
2) Electricity Distribution £mn 401.3 356.3 282.8 310.8 372.3 355.1 273.9 338.2 342.4 342.4
Networks total £mn 653.4 574.4 494.4 611.9 673.7 646.8 553.7 599.2 612.7 621.5
Scotia gas networks £mn 176.8 202.3 178.5 149.9
Networks total £mn 830.2 776.7 672.9 761.8 673.7 646.8 553.7 599.2 612.7 621.5
Renewables 455.9 567.3 757.0 747.1 715.1 747.1 1,758.5 1,812.2 1,050.3 1,833.3
Consolidated £mn 380.6 424.9 395.8 469.3 484.0 541.1 612.0 628.3 653.4 592.0
JVs £mn 75.3 142.4 145.3 156.4 160.6 206.0 305.0 341.9 396.9 411.1
Gains on asset sales £mn 215.9 121.3 70.4 - 841.5 842.0 - 830.1
Thermal -22.3 152.7 145.7 186.0 165.7 147.7 115.2 118.2 110.0 76.9
Consolidated £mn -51.3 102.5 107.2 125.5 115.7 105.9 71.7 73.2 63.4 65.1
JVs £mn 29.0 50.2 38.5 60.5 50.1 41.8 43.4 45.0 46.6 11.8
Gas storage £mn -5.7 3.7 -3.0 4.9 6.3 6.4 6.6 6.7 6.8 7.0
Business Energy £mn 51.6 9.2 - 25.7 15.5 15.4 15.8 16.6 17.3 18.0 18.7
Airtricity £mn 38.6 48.8 31.3 30.2 30.9 31.7 32.4 33.2 34.0 34.8
Enterprise £mn 31.8 8.1 - 12.2 -8.3 -8.4 4.3 4.4 4.5 4.6 4.7
Consolidated £mn 29.1 -5.8 -4.7 -4.9 -4.9 -5.6 -5.6 -5.6 -5.6 - 5.6
JVs £mn 2.7 13.9 -7.4 -3.3 -3.5 9.9 10.0 10.1 10.2 10.3
EPM £mn - 284.9 - 60.3 - 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0
Corporate/other £mn -6.5 - 17.8 - 60.0 -65.0 - 66.6 - 68.3 -70.0 - 71.7 -73.5 - 75.4
Group total £mn 1,088.7 1,488.4 1,496.1 1,682.2 1,542.0 1,541.6 2,427.4 2,529.5 1,772.8 2,531.4
Group ex gains on sales 1,088.7 1,488.4 1,280.2 1,560.9 1,471.5 1,541.6 1,585.9 1,687.5 1,772.8 1,701.3
Source: SSE, Barclays
Barclays | European Utilities
12 May 2021 139
FIGURE 199
The UK’s Offshore Wind pipeline is already on track to exceed the 40GW target by 2030
Source: BNEF, Barclays Research
FIGURE 200
SSE has the UK’s largest offshore wind pipeline, with c.16% market share (March 21)
Source: BNEF, as at March 2021
FIGURE 201
We see UK demand requirement of up to 150GW by 2050
without any hydrogen contribution
FIGURE 202
And this could rise to 230GW if green hydrogen were to take
off
Source: Barclays estimates Source: Barclays estimates
10.4 7.213.1
18.510.0
59.3
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Co
mis
sio
ne
d
Fin
an
cin
g
Se
cure
d/
Un
de
r
Co
nst
ruct
ion
An
no
un
ced
/P
lan
ni
ng
Be
gu
n
Pe
rmit
ted
Sco
tWin
d
To
tal
UK
Off
sho
re W
ind
Ca
pa
cit
y (
MW
)
7.9 7.67.0
4.5
3.7
2.1 2.11.5 1.5 1.5
0.7 0.7 0.6 0.5 0.4 0.3 0.2
6.3
0
1
2
3
4
5
6
7
8
GW
of
Ca
pa
city
Commissioned Financing secured/under construction Waiting for FID Announced/planning begun
0
50
100
150
200
2010 2020 2030 2040 2050 2060
inst
alle
d c
apac
ity
(GW
)
High electrification Medium electrification
Low electrification
0
50
100
150
200
250
2010 2020 2030 2040 2050 2060
inst
alle
d c
apac
ity
(GW
)
High electrification Medium electrification
Low electrification
Barclays | European Utilities
12 May 2021 140
The strategic value of these offshore wind farm assets and regulated assets
are high…
We see the decarbonisation of power as a strategic industry, and SSE has a good market share
within the UK and Irish markets. We see significant interest from corporates and funds to
invest in these assets. We see continued strong interest in the stakes they will be offering for
sale going forward, but also this should mean a floor on SSE’s valuation. If there becomes too
large a disconnect between share price and the asset values within SSE, we see the company
having the ability to sell further assets.
We estimate that BP/EnBW were prepared to pay up to £600mn/GW upfront to secure wind
farm acreage. However, we see the offshore wind industry maturing rapidly and if players are
not involved within the next 5 years, we see a risk they never will be. A £600mn/GW payment
for wind farm leases underpins the strategic value for SSE’s pipeline, in our view.
FIGURE 203
Leasing Round 4 saw a huge step up in upfront costs for offshore wind projects
Bidding Area Region/Location Successful bidder Proposed project
capacity (MW)
Option Fee Bid (GBP/
MW/annum)
Bidding Area 1 (Dogger Bank) Off the Yorkshire Coast, North
East of Scarborough RWE Renewables 1500 £76,203
Bidding Area 1 (Dogger Bank) Off the Yorkshire Coast, North
East of Scarborough RWE Renewables 1500 £88,900
Bidding Area 2 (Southern North
Sea region, the eastern parts of
the Wash and the East Anglia
region)
Off the Lincolnshire Coast,
East of the Humber Estuary
Green Investment Group -
Total 1500 £83,049
Bidding Area 4 (North Wales
region, the Irish Sea region, and
the northern part of the
Anglesey region)
Off the Northern Welsh Coast,
North East of Anglesey Consortium of EnBW and BP 1500 £154,000
Bidding Area 4 (North Wales
region, the Irish Sea region, and
the northern part of the
Anglesey region)
Off the Lancashire Coast,
West of Blackpool and South
West of Morecambe Bay
Offshore Wind Limited, a Joint
Venture between Cobra
Instalaciones y Servicios, S.A.
and Flotation Energy plc
480 £93,233
Bidding Area 4 (North Wales
region, the Irish Sea region, and
the northern part of the
Anglesey region)
Off the coast of Barrow-In-
Furness, West of Morecambe
Bay
Consortium of EnBW and BP 1500 £154,000
Source: Crown Estate
Developers that have limited secured acreage and operate on farm-down models will
struggle the most in this environment. In our view, developers and developer-owners that
need to sell down stakes in projects in order to finance their growth (e.g. Orsted, SSE) will
struggle in this environment. If larger utilities and oil and gas companies can aggressively bid
at these rising levels without an increase in cost being borne by consumers, we see this
significantly reducing the value of pipelines. The historical rule of thumb has been that every
£1 invested at 70% gearing equates to £1.40. Developers can sell down half of their stake and
self-finance without the need for equity. Now, we see that every £1 invested is still worth
£1.40 pre-government economic rent, but the government takes 30p of it. Consequently, this
is damaging to pipeline valuations which prop up a lot of the value investors place on
renewable companies.
Barclays | European Utilities
12 May 2021 141
We highlight the effects and sensitivities of the upfront costs from Leasing Round 4 for RWE
and BP.
FIGURE 204
With no change in CfD prices, projects would see IRRs between 3.6-4.9% and CfDs would need to rise to £50-£59/MWh in
order to maintain current IRRs of 7-8%
Scenario 3: No Change in CfD Prices Scenario 1: CfD Increase
Base Case RWE - Dogger BP - Dogger RWE - Dogger BP - Dogger
Upfront Costs
£/MW/Annum 0 88900 154000 88900 154000
CfD Strike price£/MWh 39.65 39.65 39.65 50.7 59
Unlevered Post-Tax IRR 7.5% 4.9% 3.6% 7.50% 7.50%
Source: Barclays Research estimates
…offset by Scottish secession risks
We have not taken into account a premium for the strategic value of SSE’s assets as we see
this value upside offset by political uncertainty. There may or may not be a referendum
following the Scottish elections. And there may or may not be another referendum after this
potential one too. But the debate refuses to go away, which could mean uncertainty on future
energy, renewable, currency, etc, policies.
The following uncertainties would need clarity, amongst others, for SSE to trade at similar
multiples to identical European or rUK assets:
The future of ROs. rUk is a captive market for Scottish renewables and significant
subsidies flow from rUK consumers to Scottish generators. The EU does not have access
to these subsidies – either the rUK will allow EU imports – positive for Ireland and
Scandinavia – or will close Scotland subsidies and these would need levying by Scottish
consumers/Government.
Network charging is currently spread around the whole UK. There may continue to be a
One-Island Great Britain market, similar to Ireland, but there may not. If not, Scottish
consumers would bear the brunt of increased balancing (e.g. wind curtailment), backup
and imbalance costs and this may reduce the growth of Scottish renewables if Scottish
consumers pay for this.
Ofgem and retail and network regulation would be under the control of the Scottish
Government. This may or may not alter the way regulation of networks, power markets
and retail is undertaken.
Currency and interest rate sensitivities. On day one SSE is predominantly a sterling asset
with sterling liabilities. There is no clarity to the currency that Scotland would adopt if it
were to secede.
Barclays | European Utilities
12 May 2021 142
Sum of the parts valuation: 1770p
We value SSE at a 1770p. At this valuation the implied 2022e EV/EBITDA is 13.6 and PE is
16.8x.
FIGURE 205
We value SSE using a sum-of-the-parts valuation of 1770p
March-2022 RAB (£mn) Value (£mn) Premium to RAB EV/EBITDA 2022 p/share
Southern Distribution 2,758 3,827 38.8% 12.4 359
Scottish-Hydro Distribution 1,280 1,790 39.8% 7.7 168
Scottish-Hydro Transmission 4,222 5,689 34.7% 14.3 534
Gas distribution (share at
33%) 2,051 2,666 30.0% 12.5 250
fair value debt adjustment - 210
Power systems total 10,310 13,762 33.5% 15.2 1,293
gas distribution total debt (incl shareholder loans) 1,898
Gas distribuition equity value 768
Total networks 11,864 1,114
Renewables Net MW
Equity valuation to
SSE (£mn) £mn/MW EV/EBITDA 2022 p/share
Hydro 1,159 3,023 2.6 14.8 284
Pumped hydro 300 240 0.8 13.7 23
Onshore wind operating 1,937 3,532 2.0 10.3 332
Pipeline: under construction 481 451 0.9 - 42
Secured/consented 679 385 0.6 - 36
Aspirational 300 128 0.4 - 12
Offshore wind operating 487 823 3.9 7.9 77
Pipeline: under construction 2,263 1,472 1.0 - 138
Secured/consented 3,972 2,073 0.5 - 195
Aspirational 5,600 2,405 0.4 - 226
Total 17,178 14,532 0.9 18.0 1,353
Thermal Net MW
Equity valuation to
SSE (£mn) £mn/MW EV/EBITDA 2022 p/share
CCGTs 5,772 954 0.2 3.6 90
Total 5,772 954 0.2 3.6 90
MCM
Valuation to SSE
(£mn) £mn/MCM EV/EBITDA 2022 p/share
Gas storage 770 96 0.13 16.8 9
Accounts
Valuation to SSE
(£mn) £/account EV/EBITDA 2022 p/share
Business energy 559,673 169 302 10.7 16
Airtricity 655,117 332 507 6.3 31
Total 1,214,790 501 412 7.3 47
Valuation to SSE
(£mn) EV/EBITDA 2022 p/share
Enterprise 51 2.1 5
Source: Barclays estimates
Barclays | European Utilities
12 May 2021 143
Valuation to SSE
(£mn) EV/EBITDA 2022 p/share
EPM 98 9.8 9
Total 28,096
Loans to JVs and OVO 692 65
Grand total 28,788 2,703
Net debt - 8,775 -824
Hybrid debt - 1,170 -110
Removal of Marchwood PPA lease/liquid funds 712 67
Net debt - 9,233 -869
Fair value debt at 2.5% - 299
Other liabilities
provisions - 402.6 -38
pension - -
Equity 18,853 1,770
Strategic value premium 0.0%
Number of shares 1,065
Equity value 1,770 p/share
Source: Barclays estimates
Barclays | European Utilities
12 May 2021 144
European Utilities Industry View: POSITIVE
SSE (SSE.L) Stock Rating: OVERWEIGHT
Income statement (£mn) 2020A 2021E 2022E 2023E CAGR Price (10-May-2021) GBp 1,479
Price Target GBp 1,770
Why Overweight? SSE is a restructuring story with
significant growth outlook. It has slimmed to a focus
on 2 major subsidiaries: 1) Regulated Networks, with
a RAB of c.£10.3bn, 2) a Generation fleet with
potential 17.2GW of renewables out to 2030 could be
worth £16.6bn. We believe that UK Regulated should
trade at a 30% premium to RAB.
Upside case GBp 2,585
Power prices rise by £10/MWh from current forward
curves, renewables priced in to 2050 pipeline and
WACC falling 1% from our c.4.5% required WACC for
renewables
Downside case GBp 1,100
A £10/MWh power price reduction and deflationary
power price environment - renewables factoring in
only secured piepline and regulated Networks valued
at RAB.
Upside/Downside scenarios
Revenue 12,551 11,824 14,520 14,401 4.7%
EBITDA (adj) 2,191 1,996 2,337 2,210 0.3%
EBIT (adj) 1,488 1,496 1,682 1,542 1.2%
Pre-tax income (adj) 1,023 1,105 1,336 1,343 9.5%
Net income (adj) 863 922 1,116 1,095 8.3%
EPS (adj) (GBp) 83.6 88.3 105.1 101.4 6.7%
Diluted shares (mn) 1,033 1,044 1,061 1,080 1.5%
DPS (GBp) 80.00 81.60 83.23 84.90 2.0%
Margin and return data Average
EBITDA (adj) margin (%) 17.5 16.9 16.1 15.3 16.4
EBIT (adj) margin (%) 11.9 12.7 11.6 10.7 11.7
Pre-tax (adj) margin (%) 8.2 9.3 9.2 9.3 9.0
Net (adj) margin (%) 6.9 7.8 7.7 7.6 7.5
ROIC (%) 5.1 5.4 6.1 5.4 5.5
ROA (%) 4.6 4.8 5.3 4.8 4.9
ROE (%) 16.1 16.0 16.5 15.5 16.0
Cash flow and balance sheet (£mn) CAGR
Cash flow from operations 1,300 1,554 1,699 1,704 9.4%
Capital expenditure -1,357 -1,094 -1,784 -2,028 N/A
Free cash flow -57 460 -85 -324 N/A
Net PP&E 12,815 12,866 13,885 14,521 4.3%
Total invested capital 16,999 16,951 17,914 18,489 2.8%
Shareholders' equity 4,920 6,585 6,959 7,218 13.6%
Net debt/(funds) 10,466 8,702 9,233 9,426 -3.4%
Valuation and leverage metrics Average
P/E (adj) (x) 17.7 16.8 14.1 14.6 15.8
EV/EBITDA (adj) (x) 13.1 13.5 12.0 12.5 12.8
EV/EBIT (adj) (x) 19.3 17.9 16.7 17.9 18.0
Equity FCF yield (%) -0.5 1.6 -1.3 -3.2 -0.8
P/BV (x) 3.1 2.4 2.3 2.2 2.5
EV/IC (x) 1.7 1.6 1.6 1.5 1.6
Dividend yield (%) 5.4 5.5 5.6 5.7 5.6
Net debt/EBITDA (adj) (x) 6.6 5.3 4.9 4.9 5.4
Selected operating metrics Average
RAB total (£mn) 9,030 9,276 10,310 8,999 9,404
Achieved RORE (%) 13.2 13.2 8.1 8.1 10.7
MW thermal 6,511.0 4,932.0 5,772.0 5,772.0 5,746.8
MW hydro 1,459.0 1,459.0 1,459.0 1,459.0 1,459.0
MW onshore wind 1,937.4 1,937.4 1,937.4 1,937.4 1,937.4
MW offshore wind 579.0 579.0 487.2 487.2 533.1
Number of customers (mn) 6.9 N/A N/A N/A 6.9
Source: Company data, Bloomberg, Barclays Research
Note: FY End Mar
Barclays | European Utilities
12 May 2021 145
European Utilities Industry View: POSITIVE
Encavis AG (ECVG.DE) Stock Rating: OVERWEIGHT
Income statement (€mn) 2020A 2021E 2022E 2023E CAGR Price (10-May-2021) EUR 14.92
Price Target EUR 18.00
Why Overweight? Our Overweight rating is based on
our view that the current Encavis share price
undervalues its sizeable renewables growth pipeline
and existing renewables assets. We also see a positive
impact from the 26 Sep 2021 German Federal
elections that should result in a likely involvement in
the next government, which would be a major
positive for Encavis.
Upside case EUR 25.00
Our upside case for Encavis reflects a significantly
higher valuation for the renewables growth pipeline
next to slightly higher achieved power prices for the
renewable assets once current feed-in-tariffs and PPA
contracts end.
Downside case EUR 11.00
Our downside case reflects a zero valuation for
Encavis' renewables growth pipeline.
Upside/Downside scenarios
Revenue 292 322 351 380 9.1%
EBITDA (adj) 225 244 266 288 8.6%
EBIT (adj) 132 141 157 173 9.3%
Pre-tax income (adj) 76 75 92 106 11.6%
Net income (adj) 60 63 70 79 9.5%
EPS (adj) (€) 0.43 0.45 0.51 0.57 9.3%
Diluted shares (mn) 138 138 138 138 0.0%
DPS (€) 0.28 0.30 0.32 0.34 6.7%
Margin and return data Average
EBITDA (adj) margin (%) 76.9 75.7 75.8 75.8 76.0
EBIT (adj) margin (%) 45.2 43.9 44.7 45.4 44.8
Pre-tax (adj) margin (%) 26.2 23.3 26.3 27.9 25.9
Net (adj) margin (%) 20.5 19.5 20.0 20.7 20.2
ROIC (%) 3.7 4.0 4.3 4.6 4.1
ROA (%) 3.2 3.5 3.8 4.0 3.6
ROE (%) 10.6 10.6 11.7 12.5 11.3
Cash flow and balance sheet (€mn) CAGR
Cash flow from operations 213 215 230 247 5.1%
Capital expenditure -35 -174 -146 -146 N/A
Free cash flow 190 70 114 132 -11.4%
Net PP&E 1,902 1,992 2,076 2,154 4.2%
Total net assets 752 758 800 849 4.1%
Capital employed 2,626 2,692 2,845 3,003 4.6%
Shareholders' equity 596 601 627 658 3.4%
Net debt/(funds) 1,608 1,681 1,715 1,737 2.6%
Valuation and leverage metrics Average
P/E (adj) (x) 34.3 32.9 29.4 26.3 30.7
EV/EBITDA (adj) (x) 17.1 16.2 15.2 14.4 15.7
EV/EBIT (adj) (x) 29.0 28.0 25.8 24.0 26.7
Equity FCF yield (%) 9.9 10.0 10.8 11.6 10.6
P/BV (x) 3.5 3.4 3.3 3.1 3.3
Dividend yield (%) 1.9 2.0 2.1 2.3 2.1
Net debt/capital (%) 61.2 62.4 60.3 57.9 60.5
Net debt/EBITDA (adj) (x) 7.2 6.9 6.4 6.0 6.6
Selected operating metrics
Payout ratio (%) 64.4 66.1 63.0 59.9
Interest cover (x) 2.0 2.1 2.4 2.6
Spreads changes (%) N/A N/A N/A N/A
Renewables capacity, gross (MW) 1,770 1,810 2,210 2,610
Solar capacity, net (MW) 1,277.5 1,277.5 1,577.5 1,877.5
Wind capacity, net (MW) 359.0 379.0 429.1 479.2
Renewables output (GWh) 2,072.8 2,852.1 3,524.1 4,196.1
Aggregate renewables load factor (%) 18.8 18.0 18.2 18.4
Equity ratio (%) N/A N/A N/A N/A
Source: Company data, Bloomberg, Barclays Research
Note: FY End Dec
Barclays | European Utilities
12 May 2021 146
European Utilities Industry View: POSITIVE
Orsted (ORSTED.CO) Stock Rating: UNDERWEIGHT
Income statement (DKKmn) 2020A 2021E 2022E 2023E CAGR Price (10-May-2021) DKK 864.60
Price Target DKK 800.00
Why Underweight?
Upside case DKK 1,265.00
Downside case DKK 569.00
Upside/Downside scenarios
Revenue 52,601 80,992 68,484 70,155 10.1%
EBITDA (adj) 16,461 15,650 21,002 24,377 14.0%
EBIT (adj) 9,010 16,536 12,443 14,289 16.6%
Pre-tax income (adj) 17,324 14,236 10,120 12,502 -10.3%
Net income (adj) 15,548 11,816 8,400 10,376 -12.6%
EPS (adj) (DKK) 36.00 26.85 18.72 23.42 -13.3%
Diluted shares (mn) 420 420 420 420 0.0%
DPS (DKK) 11.50 12.08 12.68 13.31 5.0%
Margin and return data Average
EBITDA (adj) margin (%) 34.5 30.4 31.3 34.7 32.7
EBIT (adj) margin (%) 20.0 20.4 18.2 20.4 19.7
Pre-tax (adj) margin (%) 35.8 17.6 14.8 17.8 21.5
Net (adj) margin (%) 29.6 14.6 12.3 14.8 17.8
ROIC (%) N/A N/A N/A N/A N/A
ROA (%) N/A N/A N/A N/A N/A
ROE (%) N/A N/A N/A N/A N/A
Cash flow and balance sheet (DKKmn) CAGR
Cash flow from operations 16,466 27,000 25,797 20,464 7.5%
Capital expenditure -26,957 -32,560 -12,724 -22,259 N/A
Free cash flow -17,248 -17,376 4,674 -12,171 N/A
Net PP&E 121,610 146,247 149,962 162,133 10.1%
Total net assets 97,329 111,189 114,028 118,591 6.8%
Capital employed 91,606 101,578 96,651 108,556 5.8%
Shareholders' equity 76,542 82,748 85,283 89,530 5.4%
Net debt/(funds) 12,343 16,059 8,546 16,155 9.4%
Valuation and leverage metrics Average
P/E (adj) (x) 24.0 32.2 46.2 36.9 34.8
EV/EBITDA (adj) (x) 23.9 25.6 19.1 16.4 21.2
EV/EBIT (adj) (x) 43.6 24.2 32.2 28.0 32.0
Equity FCF yield (%) -0.6 -1.0 2.1 -2.1 -0.4
P/BV (x) 4.7 4.4 4.3 4.1 4.4
Dividend yield (%) 1.3 1.4 1.5 1.5 1.4
Net debt/capital (%) 13.5 15.8 8.8 14.9 13.3
Net debt/EBITDA (adj) (x) 0.7 0.7 0.4 0.7 0.6
Selected operating metrics
Payout ratio (%) 0.0 0.0 0.0 0.0
Interest cover (x) N/A N/A N/A N/A
Spreads changes (%) N/A N/A N/A N/A
Source: Company data, Bloomberg, Barclays Research
Note: FY End Dec
Barclays | European Utilities
12 May 2021 147
European Utilities Industry View: POSITIVE
RWE (RWEG.DE) Stock Rating: OVERWEIGHT
Income statement (€mn) 2020A 2021E 2022E 2023E CAGR Price (10-May-2021) EUR 31.58
Price Target EUR 42.00
Why Overweight? We believe investors are ignoring
the transformation of RWE into Europe's third-largest
renewables player, particularly relating to the
renewables growth pipeline. Visibility should improve
significantly this year, particularly now after the CMD
on 12 March 2020. RWE looks materially undervalued
vs peers (2021E EV / EBITDA excl. E.ON stake is only
~6x).
Upside case EUR 49.00
Our upside case assumes a higher valuation of RWE's
renewables operations in line with the top end of
renewables peers. It also reflects a major
improvement in German generation dynamics based
on significant nuclear and coal closures, and assumes
higher UK and Dutch power prices.
Downside case EUR 29.00
This assumes that investors will apply a low valuation
to RWE's renewables assets post the deal. It also
reflects a significant deterioration in power prices and
spreads of RWE's main power markets (Germany,
UK).
Upside/Downside scenarios
Revenue 13,805 14,586 15,116 15,468 3.9%
EBITDA (adj) 3,235 2,903 3,306 3,152 -0.9%
EBIT (adj) 1,771 1,406 1,739 1,557 -4.2%
Pre-tax income (adj) 1,317 1,253 1,592 1,415 2.4%
Net income (adj) 1,213 960 1,211 1,056 -4.5%
EPS (adj) (€) 1.92 1.42 1.79 1.56 -6.7%
Diluted shares (mn) 631.3 676.2 676.2 676.2 2.3%
DPS (€) 0.85 0.90 0.95 1.00 5.6%
Margin and return data Average
EBITDA (adj) margin (%) 23.4 19.9 21.9 20.4 21.4
EBIT (adj) margin (%) 12.8 9.6 11.5 10.1 11.0
Pre-tax (adj) margin (%) 9.5 8.6 10.5 9.1 9.5
Net (adj) margin (%) 8.8 6.6 8.0 6.8 7.6
ROIC (%) 4.5 3.4 4.2 3.7 4.0
ROA (%) 2.3 1.9 2.4 2.0 2.2
ROE (%) 6.9 5.3 6.5 5.5 6.1
Cash flow and balance sheet (€mn) CAGR
Change in working capital -13 253 -102 4 N/A
Cash flow from operations 4,175 2,977 2,624 2,599 -14.6%
Capital expenditure -2,285 -2,271 -2,509 -2,556 N/A
Free cash flow 672 674 435 367 -18.3%
Net PP&E 17,902 18,677 19,618 20,579 4.8%
Total net assets 17,970 18,322 18,890 19,269 2.4%
Shareholders' equity 17,970 18,322 18,890 19,269 2.4%
Net debt/(funds) -6,569 -6,592 -5,965 -5,929 N/A
Valuation and leverage metrics Average
P/E (adj) (x) 16.4 22.2 17.6 20.2 19.1
EV/EBITDA (adj) (x) 7.4 8.4 7.5 7.8 7.7
EV/NOPAT (x) 15.9 20.3 16.7 18.5 17.9
Equity FCF yield (%) 18.4 11.7 10.0 10.0 12.5
P/BV (x) 1.1 1.2 1.1 1.1 1.1
Dividend yield (%) 2.7 2.8 3.0 3.2 2.9
Net debt/EBITDA (adj) (x) -2.0 -2.3 -1.8 -1.9 -2.0
Selected operating metrics
Wind & solar inst. capacity (pro rata) (GW) 9.5 10.6 13.3 15.6
Offshore wind adj. EBITDA (€mn) 1,069 1,159 1,373 1,454
Outright position hedge margin (€/MWh)
(€)
27.0 32.0 32.0 26.0
Coal installed capacity (pro rata) (GW) 12.4 11.5 9.9 9.9
Economic net debt (€mn) 4,432 3,961 4,130 3,697
Leverage factor (eco net debt / adj. EBITDA)
(x)
1.6 1.8 1.5 1.2
Source: Company data, Bloomberg, Barclays Research
Note: FY End Dec
Barclays | European Utilities
12 May 2021 148
Valuation Methodology and Risks
European Utilities
Encavis AG (ECV GY / ECVG.DE)
Valuation Methodology: Our PT for Encavis is based on a sum-of-the-parts valuation using a group WACC of 4.8%. Our WACC assumes a cost
of equity of 8.0%, a post-tax cost of debt of1.6% and assumed long-term gearing of 50% (net debt / EBITDA). The main component of our
SOTP valuation (more than 60% of EV) are Encavis' existing solar parks, where we have reflected the contracted nature of these assets. We
model a significant step-down in the achieved power price once the feed-in tariffs end. The second largest component of our SOTP valuation
(more than 20% of EV) is the renewables growth pipeline, where we reflect ten years of growth investment. We do not see an issue achieving
this growth given the superior project pipeline of the group.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Based on the contracted nature of its existing
renewables assets the main risk for Encavis is that its significant growth ambitions in renewables until 2025 (~12% CAGR of installed capacity
between 2019-25) is not realised. This could be a result of increased market competition from other renewables players, although this risk is
limited given that Encavis' project pipeline is almost double the 1.6 GW that is needed until 2025 to hit these targets. A key value driver for
Encavis is its attractive cost of capital. Although we do not see this changing a potential sharp and fast rise in risk-free rates represents a risk
factor for the group. With an average duration of Encavis feed-in-tariffs and PPA agreements of 13 years there is the possibility that future
achieved power prices once the contracts end will be significantly lower than expected. We see this risk as limited given the competitive nature
of renewables (no real variable cost) and the continued government push for decarbonization in Europe.
Grenergy Renovables (GRE SQ / GREG.MC)
Valuation Methodology: The renewable energies division dominates our sum-of-the-parts valuation for Grenergy. We value renewable power
generation assets at standard EV/MW ratios derived from a DCF methodology of individual power plants for each market. We add a value of the
renewables pipeline based on secured capacity in the pipeline and apply a ratio of 0.4-0.5x NPV over capex to be invested. We also add a value of
the renewables pipeline based on aspirational projects in the pipeline and apply a ratio of 0.4-0.5x NPV over capex to be invested.
We use a blended Wacc of 6.8% (including high Waccs for volatile currency markets like Argentina and Colombia) and zero long-term growth.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Downside risks to our price target include
lower achieved power prices or plant load factors than initially forecast. The upside risks to our price target include an acceleration in the pace of
renewable projects being secured and an overall update to the project pipeline on the upside, including aspirational pipeline. Our price target is
also based on assumptions for different FX, in particular the Euro/US dollar and Euro/Chilean Peso exchange rates, which may fluctuate.
Iberdrola (IBE SM / IBE.MC)
Valuation Methodology: The regulated networks dominate our sum-of-the-parts valuation for Iberdrola. Our DCF-based values imply higher
EV/EBITDA multiples, as they reflect long-term assumptions related to allowed returns remaining above the cost of capital. In power generation
activities, we apply DCF per technology in order to reflect the current market price for clean spark spreads and lower load factors for thermal
capacity.
We include part of the value of the renewable asset pipeline and set an estimated overall execution rate for assets under construction of just
below 50%.
We use a blended WACC of 5.2% and assume zero long-term growth.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: The downside risks to our price target include
lower Iberian wholesale power prices or plant load factors than initially forecast. The upside risks to our price target include an upgrade of the
project pipeline and/or an upward revision to the cost cutting plan. Our price target also reflects various FX rates, in particular the Euro versus
the US dollar, the Euro versus the British pound and the Euro versus the Brazilian real exchange rates, which may fluctuate.
Orsted (ORSTED DC / ORSTED.CO)
Valuation Methodology: We use a 3 step method to value commissioned/under construction assets, secured pipeline and aspirational pipeline
to 2030. This is DCF driven per asset and then cross references with IRRs and NPV/capex. New projects should have an IRR of 6-7% for a 30 year
life. We also highlight a 'black-sky' scenario of just operating and secured piepline and a 'blue-sky' scenario out to 2050.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Orsted may secure more or less projects than
we anticipate. These may achieve higher or lower returns versus our expectations. Power prices and interest rates and currencies may move
from our base assumptions.
RWE (RWE GY / RWEG.DE)
Valuation Methodology: We base our price target on a sum-of-the-parts valuation. It reflects the formalized agreement to carve up innogy. This
means that our SOTP includes innogy's sizeable renewable activities (excl. 20% Rampion stake). Our DCF valuations of the key divisions use
projected 2021-25E free cash flows, taking into account a terminal value based on normalized cash flows. We use a WACC of 6.5%. In the case
of the conventional power generation assets we, however, model these activities until the end of their respective asset lives without a terminal
value. We also include a valuation allowance for the future renewables growth pipeline of RWE, which will be the company's main focus in the
future.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: A key risk factor relates to the impact of
Germany's planned exit from coal, which might impact RWE more negatively than expected despite having reached an agreement with the
government on compensation. An inability to compete successfully in RWE's markets may harm its business. This could be a result of many
factors, which may include geographic mix and introduction of improved products or services from competitors. RWE's operations may be
materially affected by global economic conditions including conditions in financial markets. The company is exposed to market risks, such as
changes in interest rates, foreign exchange rates and input prices
Barclays | European Utilities
12 May 2021 149
Valuation Methodology and Risks
Solaria Energia y Medio Ambiente (SLR SM / SLRS.MC)
Valuation Methodology: The renewable energies division dominates our sum-of-the-parts valuation for Solaria. We value renewable power
generation assets at standard EV/MW ratios derived from a DCF methodology of individual power plants for each market. We add a value of the
renewables pipeline based on secured capacity in the pipeline and apply a ratio of 0.4-0.5x NPV over capex to be invested. We also add a value of
the renewables pipeline based on aspirational projects in the pipeline and apply a ratio of 0.4-0.5x NPV over capex to be invested.
We use a blended Wacc of 6.2% and zero long-term growth.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Downside risks to our price target include
lower achieved power prices or plant load factors than initially forecast. The upside risks to our price target include an acceleration in the pace of
renewable projects being secured and an overall update to the project pipeline on the upside, including aspirational pipeline.
SSE (SSE LN / SSE.L)
Valuation Methodology: We use a DCF-based sum-of-the-parts valuation methodology which cross reference to asset-backed multiples.
In Regulated Networks we use a DCF out to the end of the next RIIO2 review period, 2026, and assume a 4.8% base-line real return (CPIH) with
some regulatory outperformance - reaching 9% equity nominal returns. Our cost of capital, at 4.0% WACC assumes a cost of equity of 6.8%
nominal, but we also assume a terminal value of 15% premium to RAB. The implied premium to RAB is c.30%, higher than the UK water sector.
In Power Generation we have taken our UK power and carbon price forecasts. We have cross-referenced our DCF-based valuations with asset
and EBITDA multiples.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: SSE is subject to a number of regulatory and
political pressures. Residential retail has recently been sold but they still run a substantial Business retail division.
We believe that the current proposed 4.55% real (CPIH) allowed return could rise to 8.5% nominal. The CMA review may increase returns from
the 4.3% real RORE baseline from Ofgem.
SSE is also sensitive to power prices and volumes. On our estimates, every £5/MWh change in power prices (c12%) impacts EPS by 6p/share
and valuation by 90p/share (c.6%).
Source: Barclays Research.
Barclays | European Utilities
12 May 2021 150
ANALYST(S) CERTIFICATION(S):
We, Dominic Nash, Peter Crampton and Jose Ruiz, hereby certify (1) that the views expressed in this research report accurately reflect our personal
views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this research report.
IMPORTANT DISCLOSURES
Barclays Research is produced by the Investment Bank of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays"). All
authors contributing to this research report are Research Analysts unless otherwise indicated. The publication date at the top of the report reflects
the local time where the report was produced and may differ from the release date provided in GMT.
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Primary Stocks (Ticker, Date, Price)
Encavis AG (ECVG.DE, 10-May-2021, EUR 14.92), Overweight/Positive, CD/FA/J
Grenergy Renovables (GREG.MC, 10-May-2021, EUR 24.70), Overweight/Positive, A/CD/D/J/L
Iberdrola (IBE.MC, 10-May-2021, EUR 11.47), Overweight/Positive, A/CD/D/E/J/K/L/M/N
Orsted (ORSTED.CO, 10-May-2021, DKK 864.60), Underweight/Positive, A/CD/D/E/J/K/L/M
RWE (RWEG.DE, 10-May-2021, EUR 31.58), Overweight/Positive, A/CD/D/J/K/L/M/N
Solaria Energia y Medio Ambiente (SLRS.MC, 10-May-2021, EUR 15.24), Equal Weight/Positive, CD/FA/J
SSE (SSE.L, 10-May-2021, GBp 1479), Overweight/Positive, A/CD/D/E/J/K/L/M/N
Materially Mentioned Stocks (Ticker, Date, Price)
E.ON (EONGn.DE, 10-May-2021, EUR 10.66), Overweight/Positive, A/CD/D/J/K/L/M/N
Enel (ENEI.MI, 10-May-2021, EUR 8.27), Overweight/Positive, A/CD/D/E/J/K/L/M/N
Other Material Conflicts: Barclays Bank Plc and/or an affiliate is providing Investment Banking services to Macquarie Infrastructure & Real Assets
in relation to the sale of the share capital of Open Fiber S.p.A. to Macquarie Infrastructure & Real Assets from Enel S.p.A. The rating, price target
and estimates (as applicable) on Enel S.p.A as issued by the Firm’s Research Department do not incorporate any such potential transaction
Engie (ENGIE.PA, 10-May-2021, EUR 12.65), Overweight/Positive, A/CD/D/E/FA/FB/J/K/L/M/N
Unless otherwise indicated, prices are sourced from Bloomberg and reflect the closing price in the relevant trading market, which may not be the
last available price at the time of publication.
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Barclays | European Utilities
12 May 2021 151
IMPORTANT DISCLOSURES
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Guide to the Barclays Fundamental Equity Research Rating System:
Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below)
relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the "industry coverage
universe").
In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral or Negative
(see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully
read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.
Stock Rating
Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month
investment horizon.
Barclays | European Utilities
12 May 2021 152
IMPORTANT DISCLOSURES
Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the industry coverage universe over a 12-
month investment horizon.
Underweight - The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month
investment horizon.
Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to
comply with applicable regulations and/or firm policies in certain circumstances including where the Investment Bank of Barclays Bank PLC is
acting in an advisory capacity in a merger or strategic transaction involving the company.
Industry View
Positive - industry coverage universe fundamentals/valuations are improving.
Neutral - industry coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.
Negative - industry coverage universe fundamentals/valuations are deteriorating.
Below is the list of companies that constitute the "industry coverage universe":
European Utilities
Acciona (ANA.MC) Centrica (CNA.L) Drax (DRX.L)
E.ON (EONGn.DE) EDP Renovaveis (EDPR.LS) Electricite de France (EDF.PA)
Enagas (ENAG.MC) Encavis AG (ECVG.DE) Endesa (ELE.MC)
Enel (ENEI.MI) Energias de Portugal (EDP.LS) Engie (ENGIE.PA)
EVN (EVNV.VI) Fortum (FORTUM.HE) Grenergy Renovables (GREG.MC)
Iberdrola (IBE.MC) Italgas (IG.MI) National Grid (NG.L)
Naturgy Energy (NTGY.MC) Orsted (ORSTED.CO) Pennon Group (PNN.L)
Red Electrica (REE.MC) RWE (RWEG.DE) Severn Trent (SVT.L)
Smart Metering Systems Plc (SMSS.L) Snam (SRG.MI) Solaria Energia y Medio Ambiente (SLRS.MC)
SSE (SSE.L) Suez (SEVI.PA) Terna (TRN.MI)
Uniper (UN01.DE) United Utilities (UU.L) Veolia (VIE.PA)
Verbund (VERB.VI)
Distribution of Ratings:
Barclays Equity Research has 1670 companies under coverage.
48% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 51% of
companies with this rating are investment banking clients of the Firm; 73% of the issuers with this rating have received financial services from the
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36% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 45% of
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Firm.
13% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 35% of
companies with this rating are investment banking clients of the Firm; 61% of the issuers with this rating have received financial services from the
Firm.
Guide to the Barclays Research Price Target:
Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will
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Top Picks:
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To see a list of companies that comprise a particular industry coverage universe, please go to https://publicresearch.barclays.com.
Types of investment recommendations produced by Barclays Equity Research:
In addition to any ratings assigned under Barclays’ formal rating systems, this publication may contain investment recommendations in the form
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Disclosure of other investment recommendations produced by Barclays Equity Research:
Barclays | European Utilities
12 May 2021 153
IMPORTANT DISCLOSURES
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