Goldman Sachs has raised its view on EDP Renov veis (EDPR) to Buy and lifted parent EDP from Sell to Neutral, arguing that a combination of stronger electricity demand, reduced competitive intensity and higher equipment costs tied to re-shoring is producing a meaningful and sustained improvement in returns on U.S. renewable energy projects.
In a research note, analysts led by Alberto Gandolfi said current project returns for U.S. renewables are running at roughly 10-11%, the highest on record and a significant rebound from the trough of about 5-6% registered in 2018-20. Goldman attributes that improvement to several converging dynamics: power demand expanding at approximately 3% per year, oil majors and smaller developers stepping back from the U.S. market, and the inflationary impact of rules that encourage domestic sourcing of equipment.
Goldman singled out the sharp rise in U.S. power purchase agreement prices as a core factor. According to the note, PPA prices have moved from around $30 per megawatt-hour in 2020-21 to levels above $70 per megawatt-hour today. The bank also noted that capital expenditure requirements, especially in solar, have climbed materially; capex per megawatt has nearly tripled to about $2 million from roughly $0.8 million three years ago.
That divergence between replacement cost and recent secondary-market transactions is increasing the implicit value of existing operating portfolios, Goldman said. While new build costs have surged, operating assets continue to change hands at roughly $1-1.2 million per megawatt, well below the implied replacement cost.
Goldman observed that contracts signed in the 2012 to 2021 window were priced in the $20-45 per megawatt-hour range, roughly half current PPA levels. The analysts described this gap as a significant re-pricing opportunity that could materialize later in the decade. They added that the current set of conditions - higher demand growth, less competition, and cost inflation - could persist for at least 3-5 years and potentially longer depending on the pace of artificial intelligence adoption.
EDPR, which derives about 65% of its profits from U.S. operations, was given a new price target of 17.50, up from 15.
Goldman said its net profit forecasts for EDPR are roughly 20% above consensus by 2031, and it flagged an acceleration in organic capital expenditure in the latter part of the decade that could support near-term profit gains. The bank estimated that such an acceleration could lift net profit by about 90% over the 2028-31 period. It also cautioned that a capital raise to finance incremental U.S. growth could trigger a material re-rating for the company.
Goldman maintained a Buy rating on RWE and nudged its price target to 68.5 from 68.
For RWE, Goldman pointed out that U.S. renewables account for about 25-30% of EBITDA and that the guided U.S. capital expenditure range of 15-20 billion through 2031 could deliver returns above management's stated threshold of more than 8.5%, which supports potential earnings upgrades.
Goldman also identified Enel and Naturgy as plausible bidders for U.S. renewable assets, estimating balance sheet headroom for the two firms at about 25 billion and 10 billion, respectively, by 2030.
Summary
Goldman Sachs upgraded EDPR to Buy and raised EDP to Neutral on what it characterizes as a secular improvement in U.S. renewables returns. Key drivers include higher PPA prices, demand growth, retreating competition and rising domestic equipment costs, with the bank projecting elevated conditions could persist for multiple years.
Key points
- Project returns in U.S. renewables are about 10-11%, up from 5-6% in the 2018-20 trough, driven by roughly 3% annual power demand growth and less competition.
- PPA prices in the U.S. have risen from around $30/MWh in 2020-21 to above $70/MWh currently, creating potential re-pricing opportunities for older contracts priced at $20-45/MWh.
- Rising capex - particularly in solar where capex/MW has surged to about $2 million from $0.8 million three years ago - increases the value gap between replacement cost and recent transaction prices of $1-1.2 million/MW.
Risks and uncertainties
- The outlook depends on the persistence of the current drivers; Goldman's view allows for a 3-5 year horizon but notes the duration could change with AI adoption rates.
- A capital raise by EDPR to support U.S. expansion could materially alter valuation dynamics if undertaken.
- Changes in competition, demand growth or equipment cost trends would affect project returns and the re-pricing opportunity for legacy contracts.
Tags: renewables, energy, utilities, solar, M&A