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June 30, 2016
The Low Carbon Economy
Equity Research
Part of the answer is blowing in the wind: returns, tax, tech & PPAs
The economics of wind development remain compelling…
Given a combination of tax credits, such as the Production Tax Credits (PTCs)
and bonus depreciation along with improved technology performance, we
estimate new wind projects could generate attractive mid-single digit (5%-7%)
unlevered IRRs. Levered returns appear much higher for project developers,
making economics attractive for at least the next 3-5 years and helping
facilitate a Low Carbon Economy.
…and these tax benefits and improved capacity factors also
imply low contract prices for new wind plants…
We estimate that new wind plants could run at capacity factors between 35%-
45% and generate mid-single digit (5%-7%) IRRs with contract prices in the
$20-$30/MWh range, which remains below both (1) the prices needed for
many other sources of new power generation capacity and (2) wholesale
prices in select regional power markets today.
…the end of tax benefits could present a minor headwind in
2020+, assuming no technology improvements…
Assuming tax credits expire in the 2020 timeframe, new plants would require
higher contract prices (closer to $35-$40/MWh) to deliver similar returns.
However, a modest improvement in capacity factors from expected new-build
levels of 40% currently to roughly 50%, or a 10% decline in capital costs, could
enable developers to still generate mid-single digit unlevered returns.
We raise our 2016-2020 wind development forecast…
We double our new wind development forecast from 20 GW to roughly 40
GWs of new capacity by 2020, given tax credit extensions and improved
economics, a 55% increase from YE2015 levels and representing a $70bn
capital investment opportunity in US wind plants.
…benefitting suppliers, wind and transmission developers,
but a headwind for baseload merchant power generators
Key beneficiaries include wind equipment suppliers VWS, NDXG, SIEGn, and
GE, and US wind developers like NEE. Greater wind capacity raises the
transmission opportunity set for transmission developers (AEP, EIX, PCG) but
remains a headwind for baseload generators (EXC, NRG, and FE).
Michael Lapides (212) 357-6307 [email protected] Goldman, Sachs & Co.
Brian Lee, CFA (917) 343-3110 [email protected] Goldman, Sachs & Co.
Joe Ritchie (212) 357-8914 [email protected] Goldman, Sachs & Co.
Daniela Costa +44(20)7774-8354 [email protected] Goldman Sachs International
Frank He +86(21)2401-8925 [email protected] Beijing Gao Hua Securities Company Limited
Manuel Losa +44(20)7774-8817 [email protected] Goldman Sachs International
David Fishman (917) 343-9030 [email protected] Goldman, Sachs & Co.
Hank Elder (212) 902-3099 [email protected] Goldman, Sachs & Co.
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and otherimportant disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research
in numbers
MORE POWER
5% The levelized cost per megawatt
hour to produce wind energy, making
it the cheapest source of incremental
power…
TO THEIR CREDIT
Wind’s share of total electricity generation in the
US in 2015, up from 1% in 2010. Over the same
period, wind has comprised 30% of new generation
capacity. (p. 5)
$29
Headcount
$6.8bn
FAVORABLE CURRENTS
AT LOWER NEW-BUILD ECONOMICS…
2020
$5/MWh
The year wind tax credits are expected to expire,
after being extended in December 2015 and
declining each year through 2019. (p. 9)
The approximate amount power purchase
agreements (PPAs) will increase with
each decline in the tax credit. (p. 12)
The amount of new wind capacity that will be added between 2016 and 2020, bringing the total US installed
base to over 100GWs. (p. 7)
The average 2015 capacity factor
for 2014 vintage US wind capacity
additions, vs. only ~30% for 2012-
2013 wind projects. (p. 5)
38% $1,600-$1,800 Wind construction costs per kW of
capacity, down from over $2,200/kW in
2010, implying $65-$75bn of wind-
related capex between 2016 and 2020.
(pp. 5-7)
$10-20/MWh How low PPA prices could go while still
supporting attractive IRRs, assuming
developers realize the benefits of tax
credits, capacity factor improvements and
declining construction costs. (p. 10)
$38
$75
VS…
$83
for greenfield natural gas combined
cycle units…
for advanced nuclear generation
plants…
for natural gas peaking capacity. (p. 6)
40GWs
TO 100GWs AND BEYOND
June 30, 2016 The Low Carbon Economy
Goldman Sachs Global Investment Research 3
PM Summary: Windy cities and states – compelling economics for
US wind drive higher forecasts for development
US wind project developers could generate attractive unlevered returns given key tax
credit extensions as well as improvements in technology and costs. These positives drive
our increased forecasts for wind development through 2020. We now estimate
approximately 40 GWs of new wind capacity installations 2016–2020 which should
increase the installed wind base of 74 GWs at 2015 YE by 55% and support roughly $70bn
in spend on new US wind projects.
Wind equipment suppliers (especially small cap stocks like Vestas and Nordex), the energy
divisions of large caps (such as GE and Siemens), and US wind project developers or
owners should benefit – including large cap NEE, the nation’s largest owner of wind
capacity. We view this as a continued multi-year headwind for base-load merchant
power generators, especially those in the non-urban areas (such as EXC, NRG and FE,
among others) as increased wind capacity weighs on off-peak power pricing.
Contract prices for new wind generation will likely remain low, but
returns should stay compelling
Improvements in wind technology buoying higher capacity factors (output levels) for new
wind plants coupled with the extensions of key federal tax credits (PTCs, bonus D&A)
should enable wind projects to deliver mid-single digit unlevered IRRs – with contracted
projects generating very attractive levered equity returns. Power purchase agreements
(PPA) pricing levels for plants running at 40% capacity factors should stay within the $20-
$30/MWh range which implies costs below new-build levels needed for most other forms
of new power generation supply, assuming similar transmission expenses.
The tax man giveth, the tax man may taketh away one day, but
continued technology improvements may mitigate this impact
In December 2015, the US Congress extended (1) tax credits for renewables, including the
key PTC for wind generation and (2) bonus depreciation, both of which improve cash flows.
We estimate (using recently disclosed Internal Revenue Service guidelines) the tax benefits
for PTCs should last until at least 2020, while bonus D&A should continue through 2019,
assuming no further extensions. Once tax credits roll off, project returns would potentially
decline unless either PPA prices rose to $35-$40/MWh (levels still competitive with other
forms of new power supply) or developers realize further improvements in capacity factors
or reduced capital costs, maintaining PPA pricing levels below $30/MWh. We note over the
past 10+ years, capital costs either declined or remained constant while capacity factors for
new wind plants rose.
We double our forecasts for new US wind development through
2020 and highlight industry and company specific beneficiaries
Our increased 40GW 2016-2020 US wind installation estimates provide a $65-$75bn
development opportunity, which appears an attractive opportunity for select manufacturers
with ample US wind exposure such as Vestas (Buy), Nordex (CL-Buy), GE (Neutral), and
Siemens (Buy) – all who sell equipment or turbines into the US wind markets. We also see
this as a multi-year positive for US wind developers or owners including NEE (CL Buy),
NEP (Buy), NYLD (Buy) and TERP (Neutral). Owners of large transmission networks such
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June 30, 2016 The Low Carbon Economy
Goldman Sachs Global Investment Research 4
as AEP, ES and several California-based utilities (PCG, SRE, EIX) also could benefit as new
infrastructure investment opportunities could emerge. Headwinds may continue for base-
load merchant power generators, especially those in the non-urban areas (such as EXC,
NRG and FE), as low-cost wind power reduces both the need for baseload dispatch and the
realized gross power margin.
Exhibit 2: Wind economics continue to improve as developers realize 5%-7% unlevered
returns at $25-$30/MWh PPA prices, while only modest improvements to capacity factors
and construction costs could enable PPAs to move between $15-$25 given tax credits. Project returns in varying PTC qualification scenarios
Source: Goldman Sachs Global Investment Research.
Exhibit 3: We view a host of names as well positioned to benefit from our robust forecast for wind capacity investment GS wind development winners grid
Source: Goldman Sachs Global Investment Research.
PPA Price, $/MWh
Base Case
$0.018/kWh PTC
$0.014/kWh PTC
$0.009/kWh PTC
No PTC
Capacity Factor +10%
Construction Costs (10%)
Capacity Factor +10%; Construction Costs (10%)
Capacity Factor +10%, Construction Costs (10%), No PTC
Legend
Unlevered IRR < 3% b/w 3-5% b/w 5-7% b/w 7-9% >9%
$45-$50
Scen
ario
$15-$20 $20-$25 $25-$30 $30-$35 $35-$40 $40-$45
Best Positioned Names Exposure to Renewable Development
Siemens (Buy) 8% of 2015 sales are attributed to wind turbine with 33% market share of all turbines installed in the US in 2015.
Vestas (Buy) Leading European Wind OEM, offers greatest exposure to the US market out of peers with 35%-40% US earnings exposure
Nordex (CL-Buy) Leading European Wind OEM, offers modest exposure to the US market with ~5% earnings generated from US sales
GE (Neutral) Industry leader in US turbine manufacturing, wind remains one of the fastest growest end markets for GE and comprises ~5% of sales
China High-Speed Transmission Equipment (Buy)
A Chinese wind OEM, CHST’s revenue from the US increased by 71% yoy, making up 20.4% of 2015 total revenue (14.5% in 2014)
NextEra Energy (CL-Buy) The largest US developer of wind capacity, we anticipate NEE growing rapidly, reaching almost 20GWs of merchant renewables by 2018
Iberdrola SA (Neutral) Iberdrola (through its American subsidiary Avangrid) is the second largest owner of existing wind capacity in the US.
Sempra (Neutral) We view SRE's position as one of the leading CA renewable developers favorably, seeing upside to current renewable development guidance
NextEra Energy Partners (Buy) NEP stands to benefit from an increased development opportunity set from its GP (NEE), enabling the YieldCo to heighten growth visibility
NRG Yield (Buy) Given clarity around a rapid US wind capacity expansion through at least 2020, we expect NYLD to enter into accretive 3rd party transactions
TerraForm Power (Neutral) Roughly 1/2 of TerraForm's current capacity is wind, with roughly 1GW of operating wind sitting with its financial partners for future purchase.
American Electric Power (Neutral) A leading transmission developer, management's increasing focus on transmissiona drives its TransCo subsidiary's 30%+ growth 2015-2018
Edison International (Neutral)EIX's transmission rate base growth of ~7% 2015-2018 remains outsized, which we anticipate to continue based on CA renewable development
Pacific Gas & Electric (Buy) PCG's robust 12% transmission rate base growth 2015-2018 should remain strong beyond 2018 with exposure to CA renewable development
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June 30, 2016 The Low Carbon Economy
Goldman Sachs Global Investment Research 5
Winding the way to a lower carbon economy in the US
Over the past decade, wind capacity increased by more than 8x and comprised about
20%+ of new US capacity installations, supported by legislative and economic
tailwinds. Wind generation comprised almost 5% of US power generation vs 1% a year
ago as greater output levels per vintage, falling construction costs since 2009, and tax
credits foster (1) development economics competitive with forward power prices in key
markets and (2) the lowest LCOE among potential new US generation installations.
Exhibit 4: Wind remained the greatest source of new
generation capacity in 2015, comprising 30% since 2010 Incremental wind capacity additions, 2000-2015
Exhibit 5: Wind accounted for 5% of total electricity
generation in 2015, up from 1% in 2010 and reaching 7%
by 2030… Net generation in TWhs, 2007-2015
Source: LBNL.
Source: EIA
Exhibit 6: …as new project demand continues driven by
tax credits, increasing capacity factors nationwide… Average 2015 capacity factor for projects placed in service
between 2000-2014
Exhibit 7: …and falling capital costs – since costs peaked
in 2009 Average capital cost, projects placed in service, 2000-2014
Source: SNL Financial.
Source: LBNL.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
2
4
6
8
10
12
14 Wind GW (LHS) % of incremental capacity (RHS)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Coal Nat Gas Nuclear Wind
38%
23%
0%
5%
10%
15%
20%
25%
30%
35%
40%
20142013201220112010200920082007200620052004200320022001
2015
Cap
acit
y F
acto
rs
Wind Capacity Vintage Year
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
$2,200
$2,400Capital cost of projects placed in service, $/kW
June 30, 2016 The Low Carbon Economy
Goldman Sachs Global Investment Research 6
Exhibit 8: Wind PPAs, assuming different capacity factor levels across the US, could offer
competitive priced power for utilities that need to buy MWhs… Required PPA for 6% IRR vs. various wholesale power pricing
Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 9: …and when compared to other incremental sources of power, wind provides the
lowest cost source of new capacity partially due to tax credits and improved technology LCOE, various generation sources
Source: Company data, Goldman Sachs Global Investment Research.
$0/MWh
$10/MWh
$20/MWh
$30/MWh
$40/MWh
$50/MWh
$60/MWh
$70/MWh
30% 35% 40% 45% 50% 55% 60%
Capacity Factor
$1,750/kW Construction Costs, 6% Firm IRR
PPA No Tax Benefits PPA Tax Benefits
ERCOT South ISO NE
CAISO SP15
$57
$124
$29
$83
$57
$38
$75 $75
$85 $87 $88
$127
$-
$20
$40
$60
$80
$100
$120
$140
PV
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So
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Win
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Na
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Nu
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ost
($/
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LCOE - Net after-tax capital cost ($/MWh) LCOE - Fixed O&M ($/MWh) LCOE - Variable O&M ($/MWh) LCOE - Fuel Cost ($/MWh)
June 30, 2016 The Low Carbon Economy
Goldman Sachs Global Investment Research 7
Extensions of tax credits and continued technology improvements
drive increases in our wind development forecast
In conjunction with this report, we raise our US wind penetration forecasts through
2020 and now expect about 40GWs of new capacity installations from 2016-2020. We
increase our forecasts from almost 20GWs to nearly 40GWs of new US wind capacity 2016-
2020. Our roughly 8GWs per year of anticipated development should drive between $65-
$75bn of total or $12-$16bn of annual construction expenditures. By 2020, we expect more
than 100GWs of wind capacity installed in the US alone, doubling the amount of capacity in
under a decade.
The extension of supportive federal tax credit policy as a component of the broader
“Omnibus” spending bill should spur robust wind development beyond prior
expectations. The passage of the December 2015 bill extends the PTC at its current level
through 2016 – subsequently stepping down at a predetermined rate through 2019 (Exhibit
19). Prior to this, tax credit extension expectations remained more tempered as many
assumed a more modest one-year, 2016 extension. We view the legislated three-year
extension as introducing crucial certainty into the renewable development landscape,
which we expect to translate into substantial upside to both volumes and targets through
2020 which we now incorporate into our estimates.
Exhibit 10: US development of wind capacity continues
to ramp rapidly and we expect nearly 8GWs per year of
new installations 2016-2020… US wind development and capacity 2001-2020E
Exhibit 11: …driving $12b-16b on annual spending on
new wind plants GS forecasted range of wind construction capex 2016-2020
Source: EIA, AWEA, Goldman Sachs Global Investment Research.
Source: Goldman Sachs Global Investment Research.
Turbine manufacturers such as GE, VWS, and NDX appear best positioned to benefit
from between $65-$75bn of US wind development capex 2016-2020. Given (1)
improving economics and (2) political tailwinds, we see wind development remaining
robust through the end of the decade generating approximately $12-$16bn of investment
opportunities. Industry leaders in the wind turbine supply chain stand to capitalize
significantly across the value chain and we highlight insights from our colleagues.
113,770
8,460
7,610
8,760
6,990
82,750
90,360
98,820
105,810
7,960
4,150 4,560 6,220 6,620 8,990
11,450
16,700
24,650
34,300 39,140
45,680
59,080 59,970
64,850
73,990
0
20,000
40,000
60,000
80,000
100,000
120,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
MW
Wind Installs
Wind Cumulative Capacity
~55% growth between 2015YE ‐ 2020
$14.4bn
$12.6bn
$14.0bn
$11.5bn
$13.1bn
$16.2bn
$14.1bn
$15.6bn
$12.9bn
$14.7bn
$10
$11
$12
$13
$14
$15
$16
$17
2016 2017 2018 2019 2020
Win
d C
on
str
uct
ion
Cap
ita
l E
xp
en
dit
ure
s ($
bn
)
$1,850 /kW $1,650 /kW
June 30, 2016 The Low Carbon Economy
Goldman Sachs Global Investment Research 8
- European Wind OEMs (Manuel Losa) appear well positioned to benefit from this
secular trend as Vestas (Buy) maintains roughly 35%-40% earnings exposure,
while, to a lesser extent, Nordex (CL-Buy) who maintains about 5%-10% earnings
exposure to our robust US wind development expectations.
- US turbine manufacturers (Joe Ritchie) such as GE stand to gain as wind
represents about approximately 6% of Industrial sales for GE and wind continues
to remain one of the fastest growing end markets for the company. GE is the
dominant player in the US market and we expect this to continue given new
products and a strong financing arm.
- China Wind OEM (Frank He) China High Speed appears well positioned to benefit
from increased wind capex in the US as CHST’s revenue from the US increased by
71% yoy in 2015, making up 21% of total revenue (vs 15% in 2014). The team
expects further export growth to the US in 2016 and the company already
indicated the average gearbox order size from GE would rise from 1.80MW in 2015
to 2.35MW in 2016, driving incremental revenue.
Wind up! Attractive returns in a variety of scenarios
Under the current tax regime, construction costs and PPA pricing, we estimate
unlevered IRRs in the 5%-7% range which equates to a levered equity return of nearly
20%. For illustrative purposes, we have created a dynamic project model and for the
purpose of this analysis set a base-case scenario under the assumptions below, flexing key
inputs in order to determine a range of potential returns under different sensitivities, as
depicted in Exhibits 12 through 15. We acknowledge a range of outcomes exist beyond
what we present. Under our generic example outlined in Exhibit 12, we calculate an
unlevered IRR of ~6%. Please see the Appendix for explanations of assumptions for our
base case.
Exhibit 12: Base case assumptions produce an unlevered IRR of ~6% with current PTCs
Source: Company data, Goldman Sachs Global Investment Research.
Technology Wind Post tax IRR to project (%) 6%
Capital cost ($/kW): 1,750 Post tax IRR to equity (%) MAX 19%
Wind PTC 2016, $0.23/kWh Teminal value Yes
Year of installation 2016 Power price post-PPA ($/MWh) $20.00
Size of project (kW): 100,000 Sale yield 12.0%
Load/Capacity Factor: 40.0% Taxable Entity YesEquivalent hours/year 3,504
Degradation factor (pa): 0.5%PPA price (US $/MWh) 25.00
Bonus depreciation YesO&M costs ($ per kW/Year): 25
Bonus depreciation in yr 1 50.0%Contract life: 20
Tax rate: 35.0%Tax depreciation MACRS (yrs): 5
Escalator/inflation (pa): 0.5%
Key assumptions (*IRRs rounded)
June 30, 2016 The Low Carbon Economy
Goldman Sachs Global Investment Research 9
Exhibit 13: If construction costs decline 10%, the same
project would realize a ~7% unlevered IRR… Project unlevered IRRs (base case in grey), varying
construction costs
Exhibit 14: …while without PTCs, the base case project’s
IRR offers a negative return, all else equal Project unlevered IRRs, varying construction costs
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
Given that select regions offer more compelling capacity factors, we view PPAs as
low as $15/MWh as feasible. Under the current assumptions, if we assume a 50%
capacity factor, we believe that projects could support a $15/MWh PPA price and still
deliver more than 5% unlevered IRRs under the current tax regime. Conversely, a 30%
capacity factor in a lesser resource area would require a PPA above $35/MWh to produce
the same return.
Exhibit 15: Project return remains sensitive to both the capacity factor and the PPA price,
as a 13% change in the capacity factor impacts the unlevered IRR by roughly 200bps Unlevered project IRR, PPA price vs. Capacity factor, gray inputs are the base case
Source: Company data, Goldman Sachs Global Investment Research.
Wind down – wind PPA prices may decline, but developers could
maintain similar returns
We could see PPA prices reach as low as $10/MWh - $20/MWh in select regions if
they secure a full PTC. We view this decline in PPA prices as feasible while still
supporting attractive IRRs, assuming developers realize a combination of (1) advancements
in turbine technology (improving capacity factors) and (2) incremental declines in
construction costs. While $10-$20/MWh power from new wind is not our base case, we
7.6%
6.6%
5.8%
5.1%
4.4%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
$1,550 $1,650 $1,750 $1,850 $1,950Construction cost ($/kW)
5.8%
4.4%
3.1%
1.8%
‐0.7%
‐2.0%
‐1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
$0.023 $0.018 $0.014 $0.009 $0.000PTC (cents/kWh)
Assuming a $25/MWh PPA
$15 $20 $25 $30 $3530% -3.0% -0.8% 1.1% 2.8% 4.3%35% -0.5% 1.7% 3.6% 5.3% 6.9%40% 1.7% 3.9% 5.8% 7.6% 9.3%45% 3.6% 5.8% 7.9% 9.7% 11.4%50% 5.4% 7.7% 9.8% 11.7% 13.5%
Capacity Factor
PPA price ($/MWh)Unlevered IRR
June 30, 2016 The Low Carbon Economy
Goldman Sachs Global Investment Research 10
recognize continued performance improvements make this potentially feasible in the
coming 5-15 years. To determine this, we reverse engineer what capacity factors,
construction costs and PPAs could support similar unlevered IRRs at roughly 6% in the
exhibits below. Our calculations show a 10% decline in construction costs or a 10%
increase in capacity factors equates to roughly a 10% decline in PPA prices, holding the
developer unlevered IRR from Exhibit 12 constant at 5.8% (rounded to 6%).
Exhibit 16: If construction costs decline by 15%-20% back
to early 2000s levels, sub-$20/MWh PPAs could still
support 6% IRRs… $/MWh, 6% unlevered IRR with PTC
Exhibit 17: …while a 13% increase in capacity factor
could also support sub $20/MWh PPAs, all else equal $/MWh, 6% unlevered IRR with PTC
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 18: If costs decline and capacity factors increase in tandem, we view 6% unlevered
IRRs at $10-$20/MWh PPAs as possible under multiple scenarios $/MWh PPA, varying capital cost and capacity factors
Source: Company data, Goldman Sachs Global Investment Research.
$0
$5
$10
$15
$20
$25
$30
$1,450 $1,600 $1,750 $1,900
$/MWh, preserving a 6% unlevered IRR w/ full PTC
Capital Cost ($/kW)
0
5
10
15
20
25
30
35
40
45
50
30% 35% 40% 45% 50%
$/MWh, preserving a 6% unlevered IRR w/ full PTC
Capacity factor
$0
$5
$10
$15
$20
$25
$30
$35
$40
$1,450 $1,600 $1,750 $1,900
35% CF
40% CF
45% CF
50% CF
$/MWh, preserving a 6% unlevered IRR w/ full PTC
Capital Cost ($/kW)
Base case
June 30, 2016 The Low Carbon Economy
Goldman Sachs Global Investment Research 11
…but what the tax man giveth, the tax man may taketh away one
day, unless technology improvements continue to raise output
The recent extensions of both the Production Tax Credit (PTC) and bonus D&A
continue to support wind development economics. The current multi-year PTC
extension at its current rate through 2016, then stepping down at a predetermined rate
through 2019 (Exhibit 19), came as positive surprise for the industry in December 2015 as a
part of the Omnibus spending bill. Coupled with improved visibility into which projects
qualify for what levels of tax incentives from the IRS, if a developer spends 5% of project’s
cost in a year, then the project qualifies to receive the corresponding level of PTC – this
appears a bullish indication for development 1-2 years beyond 2019. Similarly, but to a
lesser extent, the bonus D&A extension results in a sizable depreciation tax shield,
effectively improving early years’ operating cash flows. All else equal, we estimate the 50%
bonus D&A allowance as worth roughly $1/MWh or 4% of our base case PPA while
maintaining the same 6% return.
Assuming tax credits expire in the 2020 timeframe, new plants would require higher
contract prices, capacity factors, or lower construction costs to deliver similar IRRs.
Given a tax credit expiration, all else equal, PPAs must rise to around $35-$40/MWh in
order to deliver similar IRRs or unlevered returns. However, either a modest improvement
in capacity factors, from expected levels of 40% currently for new plants to roughly 50% or
a 10% decline in capital costs, could enable developers generate comparable returns.
Exhibit 19: Uncertainty around tax legislation and the
PTC extensions drove volatility in new wind
development PTC and bonus D&A step down schedule, 2016 - 2020
Exhibit 20: The PTC and bonus D&A extensions step
down over the next four years, improving overall
visibility into the development pipeline PTC and bonus D&A step down schedule, 2016 - 2020
Source: Federal Government, IRS.
Source: LBNL.
Beyond tax credit extensions, wind capacity factors continue to tick higher while
construction costs trend lower. SNL data shows 2014 US wind capacity additions
generating power at a 38% average capacity factor nationwide in 2015, compared to low
30% for 2012-2013 vintage projects – a testament to new turbine technology from OEMs
such as GE, Siemens. In select regions (i.e., the Midwest), 2014 project capacity factors
reached 41% per LBNL data. Wind construction costs continue to demonstrate a similar
positive trend for developers, as construction costs stabilize in-between $1,600-$1,800 per
kW of capacity down from $2,200+/kW in 2010 (Exhibit 7).
0
2
4
6
8
10
12
14GW installs ITC uncertainty/ expiration $23
$18
$14
$9
$00%
10%
20%
30%
40%
50%
60%
$0
$5
$10
$15
$20
$25
2016 2017 2018 2019 2020
PTC $/MWh (LHS)
Bonus depreciation (RHS)
June 30, 2016 The Low Carbon Economy
Goldman Sachs Global Investment Research 12
Exhibit 21: The value of each PTC step appears to equate
to a roughly $5/MWh change in the PPA all else equal… GS forecasted PPA price without PTC, 6% firm IRR
Exhibit 22: …to offset this, either capacity factors
improve or costs come down GS forecasted PPA price without PTC, 6% firm IRR
Source: Goldman Sachs Global Investment Research.
Source: Goldman Sachs Global Investment Research.
Exhibit 23: We believe lower project unlevered IRRs, below 5%-7%, would weigh on the
appetite for developers to seek new projects Project returns in varying PTC qualification scenarios
Source: Company data, Goldman Sachs Global Investment Research
$25
$29
$33$36
$44
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
$0.023 $0.018 $0.014 $0.009 $0.000PTC (cents/kWh)
$/MWh PPA, preserving a 6% unlevered IRR$44/MWh
$38/MWh$35/MWh $36/MWh
$30/MWh
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
Base case ‐20% cost,$1,450/kW
50% CF (+20%) +10% CF,(10%) cost
+20% CF,(20%) cost
$/MWh PPA, preserving a 6% unlevered IRR
PPA Price, $/MWh
Base Case
$0.018/kWh PTC
$0.014/kWh PTC
$0.009/kWh PTC
No PTC
Capacity Factor +10%
Construction Costs (10%)
Capacity Factor +10%; Construction Costs (10%)
Capacity Factor +10%, Construction Costs (10%), No PTC
Legend
Unlevered IRR < 3% b/w 3-5% b/w 5-7% b/w 7-9% >9%
$45-$50
Scenario
$15-$20 $20-$25 $25-$30 $30-$35 $35-$40 $40-$45
June 30, 2016 The Low Carbon Economy
Goldman Sachs Global Investment Research 13
OEMs and wind developers poised to benefit from capital spending
We see select names across our US and European coverage with meaningful
exposure to this robust secular trend
Exhibit 24: We see select OEMs of wind turbines and transmission equipment as beneficiaries of capital spending, while
diversified utilities such as NextEra, SRE and Iberdrola may have opportunities to grow earnings through increased
development GS wind development winners grid
Source: Company data, Goldman Sachs Global Investment Research.
Appendix: Project assumptions and additional scenarios
Below are detailed explanations of assumptions for the base case.
Size: 100MW.
Capital Cost: We model a $1,750/kW construction cost, similar to sampled data
from a Lawrence Berkeley National Laboratory (LBNL) dataset and discussions
with industry participants.
Tax benefits: We assume the developer is a taxable entity with tax liabilities large
enough to absorb all benefits that include the current production tax credit of
$23/MWh for 10 years, increasing at the rate of inflation and bonus depreciation
allowing 50% of depreciation to be realized in year 1.
Tax rate: a 35% statutory tax rate.
Best Positioned Names Exposure to Renewable Development
Siemens (Buy) 8% of 2015 sales are attributed to wind turbine with 33% market share of all turbines installed in the US in 2015.
Vestas (Buy) Leading European Wind OEM, offers greatest exposure to the US market out of peers with 35%-40% US earnings exposure
Nordex (CL-Buy) Leading European Wind OEM, offers modest exposure to the US market with ~5% earnings generated from US sales
GE (Neutral) Industry leader in US turbine manufacturing, wind remains one of the fastest growest end markets for GE and comprises ~5% of sales
China High-Speed Transmission Equipment (Buy)
A Chinese wind OEM, CHST’s revenue from the US increased by 71% yoy, making up 20.4% of 2015 total revenue (14.5% in 2014)
NextEra Energy (CL-Buy) The largest US developer of wind capacity, we anticipate NEE growing rapidly, reaching almost 20GWs of merchant renewables by 2018
Iberdrola SA (Neutral) Iberdrola (through its American subsidiary Avangrid) is the second largest owner of existing wind capacity in the US.
Sempra (Neutral) We view SRE's position as one of the leading CA renewable developers favorably, seeing upside to current renewable development guidance
NextEra Energy Partners (Buy) NEP stands to benefit from an increased development opportunity set from its GP (NEE), enabling the YieldCo to heighten growth visibility
NRG Yield (Buy) Given clarity around a rapid US wind capacity expansion through at least 2020, we expect NYLD to enter into accretive 3rd party transactions
TerraForm Power (Neutral) Roughly 1/2 of TerraForm's current capacity is wind, with roughly 1GW of operating wind sitting with its financial partners for future purchase.
American Electric Power (Neutral) A leading transmission developer, management's increasing focus on transmissiona drives its TransCo subsidiary's 30%+ growth 2015-2018
Edison International (Neutral)EIX's transmission rate base growth of ~7% 2015-2018 remains outsized, which we anticipate to continue based on CA renewable development
Pacific Gas & Electric (Buy) PCG's robust 12% transmission rate base growth 2015-2018 should remain strong beyond 2018 with exposure to CA renewable development
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June 30, 2016 The Low Carbon Economy
Goldman Sachs Global Investment Research 14
Capacity factor: 40%, consistent with the 41% average capacity factor for 2014
projects in the Mid-West and above the 2014 national average of 34% according to
a LBNL dataset.
PPA price: $25/MWh, consistent with utility commentary and in-line with PPAs
signed in 2014-2015 according to the LBNL.
O&M cost: $25/kW of generation capacity annually, equivalent to roughly a 70%
EBITDA margin after only O&M costs.
Escalator/degradation: We assume a 0.5% escalator on contract, O&M and PTCs
and apply a 0.5% degradation factor to expected production based aged wind
farms not producing at their initial rate today.
Rating and pricing information
American Electric Power (N/N, $68.64), China High Speed Transmission (B/N, HK$6.25),
Edison International (N/N, $76.04), General Electric Co. (N/N, $29.94), Iberdrola SA (N/N,
€5.71), NextEra Energy Inc. (B/N, $128.46), NextEra Energy Partners (B/A, $29.28), Nordex
SE (B/N, €24.82), NRG Yield Inc. (B/A, $14.62), PG&E Corp. (B/N, $62.40), Sempra Energy
(N/N, $110.44), Siemens AG (B/N, €89.19), TerraForm Power Inc. (N/N, $8.75) and Vestas
Wind Systems A/S (B/N, Dkr429.80)
June 30, 2016 The Low Carbon Economy
Goldman Sachs Global Investment Research 15
Disclosure Appendix
Reg AC
We, Michael Lapides, Brian Lee, CFA, Joe Ritchie, Daniela Costa, Frank He, Manuel Losa, David Fishman and Hank Elder, hereby certify that all of the
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certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this
report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.
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Disclosures
Coverage group(s) of stocks by primary analyst(s)
Michael Lapides: America-Diversified Utilities, America-Independent Power Producers, America-Regulated Utilities. Brian Lee, CFA: America-Clean
Energy, America-Solar Energy. Joe Ritchie: America-Capital Goods: Multi-Industry. Daniela Costa: Europe-Machinery & Elec Equip. Frank He: Asia
Pacific Conglomerates, China Clean Energy. Manuel Losa: Europe-Utilities.
America-Capital Goods: Multi-Industry: 3M Co., Allegion Plc, Colfax Corp., Dover Corp., Eaton Corp., Emerson Electric Co., Flowserve Corp., General
Electric Co., Graco Inc., HD Supply Holdings, Honeywell International Inc., Illinois Tool Works, Ingersoll-Rand Plc, ITT Inc., Parker Hannifin Corp.,
Pentair Plc, Rockwell Automation Inc., Roper Technologies Inc., Stanley Black & Decker Inc., Tyco International Plc, W.W. Grainger Inc..
America-Clean Energy: Acuity Brands Inc., Cree Inc., Silver Spring Networks Inc., TerraVia Holdings, Universal Display Corp., Veeco Instruments Inc..
America-Diversified Utilities: Centerpoint Energy Inc., Dominion Resources Inc., Entergy Corp., Exelon Corp., FirstEnergy Corp., NextEra Energy Inc.,
Public Service Enterprise Group, Sempra Energy.
America-Independent Power Producers: Calpine Corp., Dynegy Inc., NextEra Energy Partners, NRG Energy Inc., NRG Yield Inc..
America-Regulated Utilities: Ameren Corp., American Electric Power, American Water Works, Consolidated Edison Inc., Duke Energy Corp., Edison
International, Eversource Energy, Great Plains Energy Inc., PG&E Corp., Pinnacle West Capital Corp., Portland General Electric Co., PPL Corp., SCANA
Corp., Southern Co., WEC Energy Group Inc., Westar Energy Inc..
America-Solar Energy: 8point3 Energy Partners, First Solar Inc., SolarCity Corp., SolarEdge Technologies Inc., SunPower Corp., Sunrun Inc.,
TerraForm Global Inc., TerraForm Power Inc., Vivint Solar Inc..
Asia Pacific Conglomerates: Beijing Enterprises Holdings, Cheung Kong Infrastructure, China Gas Holdings, China Merchants Holdings, China
Resources Gas Group, China Suntien Green Energy, CITIC Ltd., CK Hutchison Holdings, COSCO Pacific, ENN Energy Holdings, Fosun International,
Galaxy Entertainment Group, Hutchison Port Holdings Trust, Jardine Matheson, Kunlun Energy Co., Legend Holdings, Melco Crown Entertainment
(ADR), Melco International Development, MGM China, MTR Corp., Sands China, Shanghai Industrial, Sinopec Kantons, SJM Holdings, Summit
Ascent Holdings, Swire Pacific, Tianhe Chemicals Group, Towngas China, Wharf Holdings, Wheelock and Co., Wynn Macau.
China Clean Energy: Canadian Solar Inc., China High Speed Transmission, GCL-Poly Energy Holdings, JinkoSolar Holding Co., Longi Silicon Materials,
Shenzhen Clou Electronics Co., Singyes Solar, Sungrow Power Supply Co., Trina Solar, Xinjiang Goldwind (A), Xinjiang Goldwind (H), Xinyi Solar
Holdings.
Europe-Machinery & Elec Equip: ABB Ltd., Alfa Laval, Alstom, Assa Abloy B, Atlas Copco, Fincantieri SpA, FLSmidth & Co. A/S, Geberit Holding,
KONE Corp., Legrand, Metso OYJ, Nexans, Outotec, Philips, Prysmian, Sandvik, Schindler Holding, Schneider Electric, Siemens AG, SKF, Wartsila,
Weir Group.
Europe-Utilities: A2a SpA, Acciona SA, Centrica, E.ON, EDF, EDP Renovaveis SA, Enagas, Endesa SA, Enel SpA, Energias de Portugal, Engie, Gamesa
Corporacion Tecnologica SA, Gas Natural, Hera SpA, Iberdrola SA, Nordex SE, Red Electrica de Espana, REN, RWE, Snam SpA, Suez Environnement,
Terna, Veolia Environnement, Vestas Wind Systems A/S.
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compendium can be found in the latest relevant published research
June 30, 2016 The Low Carbon Economy
Goldman Sachs Global Investment Research 16
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Buy Hold Sell Buy Hold Sell
Global 32% 53% 15% 65% 58% 51%
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