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3 December 2018 | 9:09PM GMT

Power Shift 2019: Nextgen Power Solar: Plummeting costs and the rise of the incumbents

Solar boom accelerating. The solar boom anticipated in our May 2018 report is being realised faster than expected owing to: (i) ongoing cost improvements (-20% YTD) coupled with rising wholesale power prices (+30% YTD); (ii) the rise of the incumbents, which have decisively begun to enter the space (eg, Enel); and (iii) the rising willingness by corporates to sign long-term contracts (corporate PPAs, or C-PPA). Spain remains the precursor on this theme: through May-November, the pipeline of solar projects more than doubled (to 55 GW) and is now equivalent to c.50% of the total installed base in the country.

Cost reduction exceeding expectations: solar 40%-50% cheaper than wholesale

prices. Continuous cost improvements – solar LCOE has fallen by >80% since 2010,

and by c.20% yoy – and the China-led oversupply in modules lead us to lower our

2018-30E European LCOE forecasts by c.10%. This, coupled with rising wholesale

power prices, implies that in 2019 solar will be significantly cheaper (c.50% discount

in Southern Europe, c.40% in Central Europe) than forward curves across Europe,

with the Nordic region the sole exception.

Power prices likely to drop by 25% vs peak (2030E). Cheaper costs and the ability

to lock in long-term contracts with corporates (which could save up to 40% vs

wholesale electricity prices) could enhance the dominance of renewables (RES) in

the energy mix.

Companies: scale and speed become imperative. We estimate that to offset the

decline in power prices in the home markets and maintain flat EBITDA, developers

would have to capture between 10% and 20% share of the new renewable

additions, and invest billions in the process. To protect net income, their share would

have to nearly double. Inaction doesn’t appear a viable option, as it would simply

expose legacy generation activities to falling power prices, without any offset from

the development of solar and wind. Winners will be those companies able to

(quickly) penetrate new markets; we see Enel as the best placed, as we estimate

that the company could develop 35-40 GW of RES globally, by 2030.

Alberto Gandolfi

+44(20)7552-2539 | alberto.gandolfi@gs.com Goldman Sachs International

Baptiste Cota

+44(20)7774-0042 | baptiste.x.cota@gs.com Goldman Sachs International

Ajay Patel

+44(20)7552-1168 | ajay.patel@gs.com Goldman Sachs International

Manuel Losa

+44(20)7774-8817 | manuel.losa@gs.com Goldman Sachs International

Matteo Rodolfo

+44(20)7051-8860 | matteo.rodolfo@gs.com Goldman Sachs International

Pragna Kataria, CFA

+1(212)934-6393 | pragna.kataria@gs.com Goldman Sachs India SPL

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

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Goldman Sachs

Table of Contents

Power Shift 2019: Nextgen Power

Executive Summary

4

 

 

Solar boom accelerating

9

 

 

The rise of the incumbents

11

 

 

Solar LCOE falling faster and deeper

16

 

 

The new energy mix: 2030 power prices could fall by 25% vs peak

20

 

 

Companies: Scale and speed become imperative

23

 

 

Technology could accelerate the “solar takeover”

27

 

 

Global solar perspective

31

 

 

The roadmap to maxing out power from renewables

37

 

 

Disclosure Appendix

40

 

 

3 December 2018

2

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Goldman Sachs

Power Shift 2019: Nextgen Power

3 December 2018

3

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Goldman Sachs

Executive Summary

Power Shift 2019: Nextgen Power

The cost reduction in renewables – solar in particular – has widely exceeded our expectations; falling costs and the expansion in the corporate PPA market have attracted the interest of large utilities, which are now targeting the space as a source of growth – Enel appears to be spearheading such process. As a result, we expect an acceleration in renewables investments by the incumbent utilities; for some, this will upgrade growth prospects. For others, this will be a mere way to stem the drop in power generation profits.

Solar boom accelerating

During 2008-17, solar capacity has been growing at a +44% CAGR. During the same timeframe, most commentators have been continuously revising upwards growth expectations. We believe this is set to continue owing to: (i) ongoing cost improvements, supported by an oversupply in modules and new technologies; (ii) the rise of the incumbents, which have decisively begun to enter the space (eg, Enel); and (iii) the rising willingness by corporates to sign long-term contracts (corporate PPAs, or C-PPA). Spain remains the precursor on this theme: through May-November, the pipeline of solar projects doubled (to 55 GW) and is now equivalent to c.50% of the total installed base in the country.

Exhibit 1: IEA Solar capacity forecasts for 2030 have been revised upward more than ten-fold since 2006 data in GW

1,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual & 2017 forecasts

800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Source: IEA, data compiled by Goldman Sachs Global Investment Research

3 December 2018

4

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Goldman Sachs

Power Shift 2019: Nextgen Power

The rise of the incumbents

The reduction in costs and the evolving corporate PPA market have led to an acceleration in our “solar thesis”, expressed in our previous report; for instance, the pipeline of solar projects in Spain has risen from 24 GW in May 2018 to 55 GW in just over six months. Another novelty vs our previous research is the rising presence of incumbent utilities: recently, Enel/Endesa and Iberdrola – seen by most as the early movers in energy transition – have announced new investments in the solar space, under corporate PPA.

Exhibit 2: We estimate that a C-PPA from Solar in 2019 in Spain could lead to c.40% savings for corporates data in €/MWh

70

60

50

42%

 

discount

40

 

 

6.0

30

61.2

5.0

1.2

20

35.7

23.5

10

0

Solar LCOE (5.25% IRR)

Transmission

Backup

Extra mark-up

Solar C-PPA (5.25%

Fwd Curve 2019

 

 

 

 

return)

 

Source: Goldman Sachs Global Investment Research

Solar LCOE falling faster and deeper

We lower our 2018-30E European LCOE forecasts by 10% to reflect falling module prices in the region, driven by the oversupply of the Chinese solar market and the end of anti-dumping laws. This puts solar at a significant discount to forward curves in Spain and Italy in particular, as well as in France and Germany. For 2019, we estimate that generating electricity from solar across Southern Europe would be c.50% cheaper than the prevailing (merchant) forward curves. We currently factor in a gradual improvement in modules efficiency; a widespread switch to bifacial trackers could lower costs further (by 5%-20%), as we explain later in this note.

3 December 2018

5

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Goldman Sachs

Power Shift 2019: Nextgen Power

Exhibit 3: The spread between LCOEs and forwards suggests that Spain and Italy will be at the forefront of the rise in solar

Solar PV LCOEs vs 2020 forward prices in orange (€/MWh)

€ 65

 

 

 

 

 

 

 

€66

 

 

 

 

 

 

 

 

 

 

 

 

 

€67

 

 

 

 

 

 

 

€ 55

 

 

€61

 

 

 

 

 

 

 

 

 

€57

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

€52

 

 

€ 47 € 47

 

€ 48

€ 45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

€ 45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

€41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

€ 35

 

 

 

 

 

 

 

 

 

 

 

€ 35

 

 

 

 

 

 

€ 32

 

 

 

 

 

 

 

 

€ 33

 

 

€ 33

 

 

 

 

 

 

 

 

 

 

 

 

 

€ 31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

€ 27

 

€ 29 € 27

 

 

€ 25

 

 

 

 

 

 

 

 

 

 

 

€ 25

 

€ 24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

€ 22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

€ 22

 

 

€ 21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

€ 17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

€ 15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

€ 5

€ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-€ 5

 

2019E 2023E 2030E

 

2019E 2023E 2030E

 

2019E 2023E 2030E

 

2019E 2023E 2030E

 

2019E 2023E 2030E

 

2019E 2023E 2030E

 

 

 

 

Spain

 

 

Italy

 

 

France

 

 

Germany

 

 

UK

 

 

Nordic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Goldman Sachs Global Investment Research, Bloomberg

The new energy mix: 2030 power prices to fall by 25%

On our projections, the share of RES capacity in the power system could exceed 70% by 2030; this would imply marginally surpassing EU targets. By then, renewables production could meet 55%-60% of European power needs. When compared to 2018, we expect that Southern Europe will see a meaningful increase in solar PV, and a steady rise in wind. In Central Europe, we expect the development of wind/solar to be more balanced, while we anticipate the Nordic region will remain largely dominated by wind additions. We have detailed the optimal needs for wind/solar in More Lean More Green 2.0.

3 December 2018

6

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Goldman Sachs

Power Shift 2019: Nextgen Power

Exhibit 4: Power generation capacity mix will be dominated by solar/wind by 2030 (>70%) data in GW

Nordic

 

 

51

 

 

 

31

 

11 7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UK

4

 

41

 

 

29

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

France

 

26

 

 

44

 

 

 

 

 

47

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Germany

 

15

 

 

 

93

 

 

 

 

 

 

 

 

 

 

 

 

89

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Italy

 

22

 

22

 

 

 

53

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Spain

 

19

 

31

 

 

 

43

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

20

40

60

80

100

120

140

160

180

200

220

240

260

280

300

 

 

 

 

 

 

 

 

 

 

Hydro

 

 

Wind

 

Solar

 

Other RES

 

Nuclear

Gas

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Goldman Sachs Global Investment Research

As cheaper renewable sources keep displacing conventional thermal plants, we expect power prices across Europe to drift lower. Exhibit 5 shows that our 2030 power price forecasts imply a c.25% drop when compared with 2019.

Exhibit 5: Power prices could fall by 25% by 2030, owing to a larger share of RES in the energy mix

1-year forward curve vs 2030E (€/MWh)

80

 

 

 

 

 

 

67.7

 

 

 

 

 

 

 

70

 

 

 

66.4

 

 

 

 

 

 

 

 

 

 

 

 

 

61.2

 

 

57.3

 

 

60

 

 

 

 

 

 

 

 

 

 

 

 

52.2

 

 

 

50

 

 

 

45.8

44.8

 

46.7

 

 

 

 

 

 

 

 

41.4

 

 

 

39.8

 

 

40.0

 

40

 

 

 

 

 

 

 

 

 

 

 

 

 

34.8

 

 

 

 

 

 

 

 

30

 

 

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

0

 

 

 

 

 

 

 

 

 

 

Spain

Italy

Germany

France

UK

Nordic

 

 

 

2019 Fwd 2030E

Source: Goldman Sachs Global Investment Research

3 December 2018

7

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Goldman Sachs

Power Shift 2019: Nextgen Power

Solar thesis corroborates our digitalisation views

As explained in our recent report, Digitalisation and Utilities: More data, more profits, evolving technology brings a once-in-a-generation opportunity to transform the productivity of power grids, through digitalisation; this could attract nearly €300 bn investments just in medium/low voltage networks and lead to a c.15% reduction in operating costs. The acceleration of the solar deployment is likely to reinforce the need for more stable and resilient grids, able to respond in milliseconds to the volatility in frequency and tension, to avoid blackouts.

Companies: Scale and speed become an imperative

We estimate that to offset the power price decline in the home markets and maintain flat EBITDA, utilities would have to capture between 10% and 20% share of new renewable additions – and invest billions in the process. To keep net income flat, their share of new RES additions would have to reach 20%-35%.

This is why inaction doesn’t appear a viable option, as it would simply expose legacy generation activities to falling power prices, without any offset from the development of solar and wind. Winners will be those companies able to (quickly) penetrate new markets; we see Enel as the best placed, as we estimate that the company could develop 35-40 GW of RES globally by 2030 based on run-rate levels disclosed at the CMD.

Exhibit 6: Southern European Utilities would have to obtain a 10%-20% share in RES additions in home markets to protect EBITDA

Market share in RES additions to keep EBITDA /net income flat, considering the likely drop in power prices

40%

35%

 

 

 

 

35%

 

 

 

 

 

 

30%

 

 

 

28%

 

 

25%

 

 

 

 

 

 

 

 

 

 

19%

21%

20%

 

 

 

 

 

15%

 

 

 

15%

 

 

 

 

 

 

 

 

 

 

 

11%

10%

 

 

 

 

 

 

5%

 

 

 

 

 

 

0%

 

 

 

 

 

 

 

 

Endesa

IBE

 

Enel

 

 

 

 

 

 

 

RES mkt share in home country to keep flat EBITDA

 

RES mkt share in home country to keep flat NI

 

 

 

 

 

 

 

 

Source: Goldman Sachs Global Investment Research

3 December 2018

8