European Utilities: Renewables offer selective value

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This research report has been prepared in whole or in part by equity research analysts based

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PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 150.

Equity Research

12 May 2021

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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

[email protected]

Barclays, UK

Peter Crampton

+44 (0)20 3555 0125

[email protected]

Barclays, UK

Jose Ruiz

+44 (0)20 3134 3140

[email protected]

Barclays, UK

Georgia Dawson

+44 (0)20 7773 2766

[email protected]

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

https://my.barcapint.com/BC/composite/GER_COMPANY?ticker=ECVG.DE

https://my.barcapint.com/BC/composite/GER_COMPANY?ticker=GREG.MC

https://my.barcapint.com/BC/composite/GER_COMPANY?ticker=IBE.MC

https://my.barcapint.com/BC/composite/GER_COMPANY?ticker=ORSTED.CO

https://my.barcapint.com/BC/composite/GER_COMPANY?ticker=RWEG.DE

https://my.barcapint.com/BC/composite/GER_COMPANY?ticker=SLRS.MC

https://my.barcapint.com/BC/composite/GER_COMPANY?ticker=SSE.L


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

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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


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


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Integrated Regulated Renewables Generators French Environment


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


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.

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Integrated Regulated Renewables Generators Waste


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-


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


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


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.


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

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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%


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


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.


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.


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


-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

% change in PT % upside valuation vs black sky


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


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


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


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


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


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



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



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


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




Europe GW renewables 573 1,500 4,000

increase GW 927 3,427



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


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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



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.


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

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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




0

5,000

10,000

15,000

20,000

25,000

2017 2022 2027 2032 2037 2042 2047


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


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

)


Low electrification


12 May 2021 25

OECD GW renewables and hydro 1,229 4,000 9,000




Europe GW renewables and hydro 573 1,500 4,000

increase GW 927 3,427



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



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


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

)


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


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


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.


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




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 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)




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 2 Renewables 3000

Italy

Italy Large-Scale Round 5 Renewables 700



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





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


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

https://www.offshorewind.biz/2020/11/24/uk-targets-12-gw-of-renewables-in-round-4-cfd-auction/


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


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


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%


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


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%


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


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


2) Sensitivities


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


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



12 May 2021 37

Solar is our preferred asset class


FIGURE 55

Our base case solar PV project DCF and assumptions


2) Sensitivities


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


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%


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


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.


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


0

5

10

15

20

25

30

35

40

LCOE $/MWh

LCOE $/MWh (low) LCOE $/MWh (high)

https://www.infolink-group.com/en/solar/analysis-trends/Supply-surplus-to-trigger-price-competition-in-2021

https://www.infolink-group.com/en/solar/analysis-trends/Supply-surplus-to-trigger-price-competition-in-2021


12 May 2021 40

Offshore wind: we see falling returns but an NPV positive pipeline


FIGURE 61

Our base case Offshore Wind project DCF and assumptions


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%


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%



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


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


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


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



12 May 2021 44

COUNTRY SUMMARIES France

Germany

Italy

Spain

UK


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)


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%


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


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)


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%


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%


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 TWh 536 999 1,359 1,795

% growth pa – 2.0% 3.0% 3.8%



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



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)


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%


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




Electricity consumed TWh 283 530 715 946

% growth pa 2.0% 2.9% 3.8%



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%




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%


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




Electricity consumed TWh 220 597 881 1,248

% growth pa 3.2% 4.4% 5.6%



Wind/solar GW 36 165 243 344


TWh pa growth 4.9% 6.1% 7.3%




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


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.


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)


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%


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.


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




Electricity consumed TWh 300 400 579 863

% growth pa 0.9% 2.2% 3.4%


Wind/solar/hydro TWh 69.8 280 418 604

Wind/solar/hydro GW 33.2 80 119 172


TWh pa growth 2.4% 4.1% 5.3%



Wind/solar/hydro TWh 69.8 400 579 863

Wind/solar/hydro GW 33.2 114 170 246


TWh pa growth 3.9% 5.2% 6.5%

Other electricity TWh 230 - - -

Source: BEIS, Barclays Research estimates


12 May 2021 59

COMPANY SUMMARIES Encavis

Grenergy

Iberdrola

Orsted

RWE

Solaria

SSE


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%


https://live.barcap.com/go/publications/link?contentPubID=FC2514610













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


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


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



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).


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

https://www.bloomberg.com/news/articles/2021-04-30/how-germany-s-greens-moved-from-fringe-to-contenders-quicktake


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



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.











Vigeo Eiris

Further Reading


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.


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?


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%


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







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%


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


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


FIGURE 99

End 2024E peak in capacity under construction (575MW)


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


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


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


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


FIGURE 107

End 2022E peak in capacity under construction (614MW)


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

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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

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AES

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)


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

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20

10

20

11

20

12

20

13

20

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15

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16

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18

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8

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102 50 33

187

448

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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


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.


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


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%



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%



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


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



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

https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=GREG.MC


12 May 2021 80

ESG OVERVIEW: IBERDROLA (IBE.MC)


1) decarbonisation of electricity, 2) bad debt and 3) electrification of the economy.











Vigeo Eiris

Further Reading

Green stimulus provides

significant renewable vaccine




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’.



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?


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


Iberdrola Sa

E

S

G









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


+30.8%


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%


value RAB 2021E

o/w services 3,693


value zero

UK Supply 2,416 6.0 400 DCF @6.9% WACC

UK Transmission & Distribution 11,216 11.2 1,001


value RAB 2021E



value RAB 2021E

o/w services 581


value zero

US Network 18,639 13.6 1,371


value RAB 2021E



value RAB 2021E

o/w services 488


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


value RAB 2021E


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


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.


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%


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.


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%



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


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



12 May 2021 86


Iberdrola (IBE.MC) Stock Rating: OVERWEIGHT



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.






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.


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%



EBIT (adj) margin (%) 16.7 18.6 18.6 18.7 18.1


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 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%


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


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


Note: FY End Dec

https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=IBE.MC


12 May 2021 87

ESG OVERVIEW: ORSTED (RWE DC)


1) Growing installed renewable capacity; 2) Decreasing percentage of coal-based thermal

power in the generation mix; 3) Development of renewable hydrogen projects.











Vigeo Eiris

Further Reading




2020




2020



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.


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?


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















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


-

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


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%


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


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%


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


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.


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



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


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).


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)


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


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



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 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


Round 3 TBA 3,500


Round 4 TBA 3,500


Round 5 TBA 3,500


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



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



12 May 2021 99

FIGURE 140

We value Orsted’s expected offshore wind pipeline to 2030 at DKK79.6bn (€11bn)


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


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


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



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


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


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


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.


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


Total renewables GW 190


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


FIGURE 146

Worldwide offshore wind capacity potential



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


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


-

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


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


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%


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


-

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


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


FIGURE 155

Net debt/EBITDA is manageable, in our view, even without any more asset sell-downs


-

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


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


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



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



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


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.


12 May 2021 109

FINANCIAL SUMMARIES


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.











Vigeo Eiris

Further Reading




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.



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?


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


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







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


+9.5%


12 May 2021 112

FIGURE 161


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


12 May 2021 113

FIGURE 163

Our base case for Solaria’s solar PV project DCF and assumptions


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


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


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.



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


0

5

10

15

20

25

30

35

40

2021E Medium term Long term

EUR/MWh

Fixed cost All-in balancing costs


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


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


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.


12 May 2021 118

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%


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


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%


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


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



12 May 2021 120


Solaria Energia y Medio Ambiente (SLRS.MC) Stock Rating: EQUAL WEIGHT



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.






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.


Revenue 53 97 179 261 69.9%

EBITDA (adj) 49 68 140 222 65.6%

EBIT (adj) 33 41 100 173 73.1%


Net income (adj) 30 20 61 112 54.2%

EPS (adj) (€) 0.24 0.16 0.49 0.89 54.2%


DPS (€) 0.00 0.00 0.00 0.00 N/A



EBIT (adj) margin (%) 62.8 42.0 56.0 66.4 56.8


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 from operations 47 47 101 160 50.2%


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%


Net debt/(funds) 339 852 1,058 1,196 52.3%


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



Payout ratio (%) 0.0 0.0 0.0 0.0




Note: FY End Dec

https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=SLRS.MC


12 May 2021 121

ESG OVERVIEW: SSE (SSE LN)


1) Electrification of the economy increasing demand for power infrastructure, and 2)

Renewable generation.











Vigeo Eiris

Further Reading




2020




2020



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.


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?


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


Sse Plc

E

S

G














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%.


12 May 2021 123

FIGURE 173

Over 90% of SSE is regulated networks and renewables (21 Mar 2021)


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


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.


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.


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.


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%


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


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


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


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


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

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22

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TW

h g

en

era

ted

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Hydro Onshore Offshore


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


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.


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


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


FIGURE 190

But financial leverage would rise


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


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


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


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)


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 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


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


SSE (GW)

onshore renewables GW 10 3.4 6.6


Total renewables GW 60


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


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


12 May 2021 139

FIGURE 199

The UK’s Offshore Wind pipeline is already on track to exceed the 40GW target by 2030


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


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

)


Low electrification

0

50

100

150

200

250

2010 2020 2030 2040 2050 2060

inst

alle

d c

apac

ity

(GW

)


Low electrification


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




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




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.


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%


…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.


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



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



12 May 2021 144


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.


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%


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%



EBIT (adj) margin (%) 11.9 12.7 11.6 10.7 11.7


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



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%


Net debt/(funds) 10,466 8,702 9,233 9,426 -3.4%


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


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


Note: FY End Mar

https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=SSE.L


12 May 2021 145


Encavis AG (ECVG.DE) Stock Rating: OVERWEIGHT



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.


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.


Our downside case reflects a zero valuation for

Encavis' renewables growth pipeline.


Revenue 292 322 351 380 9.1%

EBITDA (adj) 225 244 266 288 8.6%

EBIT (adj) 132 141 157 173 9.3%


Net income (adj) 60 63 70 79 9.5%

EPS (adj) (€) 0.43 0.45 0.51 0.57 9.3%


DPS (€) 0.28 0.30 0.32 0.34 6.7%



EBIT (adj) margin (%) 45.2 43.9 44.7 45.4 44.8


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 from operations 213 215 230 247 5.1%


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%



Net debt/(funds) 1,608 1,681 1,715 1,737 2.6%


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



Payout ratio (%) 64.4 66.1 63.0 59.9



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


Note: FY End Dec

https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=ECVG.DE


12 May 2021 146


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


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%


DPS (DKK) 11.50 12.08 12.68 13.31 5.0%



EBIT (adj) margin (%) 20.0 20.4 18.2 20.4 19.7


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



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%



Net debt/(funds) 12,343 16,059 8,546 16,155 9.4%


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



Payout ratio (%) 0.0 0.0 0.0 0.0

Interest cover (x) N/A N/A N/A N/A



Note: FY End Dec

https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=ORSTED.CO


12 May 2021 147


RWE (RWEG.DE) Stock Rating: OVERWEIGHT



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).


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.


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).


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%


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%



EBIT (adj) margin (%) 12.8 9.6 11.5 10.1 11.0


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


Change in working capital -13 253 -102 4 N/A

Cash flow from operations 4,175 2,977 2,624 2,599 -14.6%


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%


Net debt/(funds) -6,569 -6,592 -5,965 -5,929 N/A


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


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


Note: FY End Dec

https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=RWEG.DE


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


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.


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

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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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12 May 2021 151


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12 May 2021 152


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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.

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Firm.

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Firm.

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Disclosure of other investment recommendations produced by Barclays Equity Research:


12 May 2021 153


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