The Low Carbon Economypg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/6/30/8eef... · Goldman, Sachs & Co....

June 30, 2016

The Low Carbon Economy

Equity Research

Part of the answer is blowing in the wind: returns, tax, tech & PPAs

The economics of wind development remain compelling…

Given a combination of tax credits, such as the Production Tax Credits (PTCs)

and bonus depreciation along with improved technology performance, we

estimate new wind projects could generate attractive mid-single digit (5%-7%)

unlevered IRRs. Levered returns appear much higher for project developers,

making economics attractive for at least the next 3-5 years and helping

facilitate a Low Carbon Economy.

…and these tax benefits and improved capacity factors also

imply low contract prices for new wind plants…

We estimate that new wind plants could run at capacity factors between 35%-

45% and generate mid-single digit (5%-7%) IRRs with contract prices in the

$20-$30/MWh range, which remains below both (1) the prices needed for

many other sources of new power generation capacity and (2) wholesale

prices in select regional power markets today.

…the end of tax benefits could present a minor headwind in

2020+, assuming no technology improvements…

Assuming tax credits expire in the 2020 timeframe, new plants would require

higher contract prices (closer to $35-$40/MWh) to deliver similar returns.

However, a modest improvement in capacity factors from expected new-build

levels of 40% currently to roughly 50%, or a 10% decline in capital costs, could

enable developers to still generate mid-single digit unlevered returns.

We raise our 2016-2020 wind development forecast…

We double our new wind development forecast from 20 GW to roughly 40

GWs of new capacity by 2020, given tax credit extensions and improved

economics, a 55% increase from YE2015 levels and representing a $70bn

capital investment opportunity in US wind plants.

…benefitting suppliers, wind and transmission developers,

but a headwind for baseload merchant power generators

Key beneficiaries include wind equipment suppliers VWS, NDXG, SIEGn, and

GE, and US wind developers like NEE. Greater wind capacity raises the

transmission opportunity set for transmission developers (AEP, EIX, PCG) but

remains a headwind for baseload generators (EXC, NRG, and FE).

Michael Lapides (212) 357-6307 [email protected] Goldman, Sachs & Co.

Brian Lee, CFA (917) 343-3110 [email protected] Goldman, Sachs & Co.

Joe Ritchie (212) 357-8914 [email protected] Goldman, Sachs & Co.

Daniela Costa +44(20)7774-8354 [email protected] Goldman Sachs International

Frank He +86(21)2401-8925 [email protected] Beijing Gao Hua Securities Company Limited

Manuel Losa +44(20)7774-8817 [email protected] Goldman Sachs International

David Fishman (917) 343-9030 [email protected] Goldman, Sachs & Co.

Hank Elder (212) 902-3099 [email protected] Goldman, Sachs & Co.

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

The Goldman Sachs Group, Inc. Global Investment Research

in numbers

MORE POWER

5% The levelized cost per megawatt

hour to produce wind energy, making

it the cheapest source of incremental

power…

TO THEIR CREDIT

Wind’s share of total electricity generation in the

US in 2015, up from 1% in 2010. Over the same

period, wind has comprised 30% of new generation

capacity. (p. 5)

$29

Headcount

$6.8bn

FAVORABLE CURRENTS

AT LOWER NEW-BUILD ECONOMICS…

2020

$5/MWh

The year wind tax credits are expected to expire,

after being extended in December 2015 and

declining each year through 2019. (p. 9)

The approximate amount power purchase

agreements (PPAs) will increase with

each decline in the tax credit. (p. 12)

The amount of new wind capacity that will be added between 2016 and 2020, bringing the total US installed

base to over 100GWs. (p. 7)

The average 2015 capacity factor

for 2014 vintage US wind capacity

additions, vs. only ~30% for 2012-

2013 wind projects. (p. 5)

38% $1,600-$1,800 Wind construction costs per kW of

capacity, down from over $2,200/kW in

2010, implying $65-$75bn of wind-

related capex between 2016 and 2020.

(pp. 5-7)

$10-20/MWh How low PPA prices could go while still

supporting attractive IRRs, assuming

developers realize the benefits of tax

credits, capacity factor improvements and

declining construction costs. (p. 10)

$38

$75

VS…

$83

for greenfield natural gas combined

cycle units…

for advanced nuclear generation

plants…

for natural gas peaking capacity. (p. 6)

40GWs

TO 100GWs AND BEYOND

June 30, 2016 The Low Carbon Economy

Goldman Sachs Global Investment Research 3

PM Summary: Windy cities and states – compelling economics for

US wind drive higher forecasts for development

US wind project developers could generate attractive unlevered returns given key tax

credit extensions as well as improvements in technology and costs. These positives drive

our increased forecasts for wind development through 2020. We now estimate

approximately 40 GWs of new wind capacity installations 2016–2020 which should

increase the installed wind base of 74 GWs at 2015 YE by 55% and support roughly $70bn

in spend on new US wind projects.

Wind equipment suppliers (especially small cap stocks like Vestas and Nordex), the energy

divisions of large caps (such as GE and Siemens), and US wind project developers or

owners should benefit – including large cap NEE, the nation’s largest owner of wind

capacity. We view this as a continued multi-year headwind for base-load merchant

power generators, especially those in the non-urban areas (such as EXC, NRG and FE,

among others) as increased wind capacity weighs on off-peak power pricing.

Contract prices for new wind generation will likely remain low, but

returns should stay compelling

Improvements in wind technology buoying higher capacity factors (output levels) for new

wind plants coupled with the extensions of key federal tax credits (PTCs, bonus D&A)

should enable wind projects to deliver mid-single digit unlevered IRRs – with contracted

projects generating very attractive levered equity returns. Power purchase agreements

(PPA) pricing levels for plants running at 40% capacity factors should stay within the $20-

$30/MWh range which implies costs below new-build levels needed for most other forms

of new power generation supply, assuming similar transmission expenses.

The tax man giveth, the tax man may taketh away one day, but

continued technology improvements may mitigate this impact

In December 2015, the US Congress extended (1) tax credits for renewables, including the

key PTC for wind generation and (2) bonus depreciation, both of which improve cash flows.

We estimate (using recently disclosed Internal Revenue Service guidelines) the tax benefits

for PTCs should last until at least 2020, while bonus D&A should continue through 2019,

assuming no further extensions. Once tax credits roll off, project returns would potentially

decline unless either PPA prices rose to $35-$40/MWh (levels still competitive with other

forms of new power supply) or developers realize further improvements in capacity factors

or reduced capital costs, maintaining PPA pricing levels below $30/MWh. We note over the

past 10+ years, capital costs either declined or remained constant while capacity factors for

new wind plants rose.

We double our forecasts for new US wind development through

2020 and highlight industry and company specific beneficiaries

Our increased 40GW 2016-2020 US wind installation estimates provide a $65-$75bn

development opportunity, which appears an attractive opportunity for select manufacturers

with ample US wind exposure such as Vestas (Buy), Nordex (CL-Buy), GE (Neutral), and

Siemens (Buy) – all who sell equipment or turbines into the US wind markets. We also see

this as a multi-year positive for US wind developers or owners including NEE (CL Buy),

NEP (Buy), NYLD (Buy) and TERP (Neutral). Owners of large transmission networks such

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as AEP, ES and several California-based utilities (PCG, SRE, EIX) also could benefit as new

infrastructure investment opportunities could emerge. Headwinds may continue for base-

load merchant power generators, especially those in the non-urban areas (such as EXC,

NRG and FE), as low-cost wind power reduces both the need for baseload dispatch and the

realized gross power margin.

Exhibit 2: Wind economics continue to improve as developers realize 5%-7% unlevered

returns at $25-$30/MWh PPA prices, while only modest improvements to capacity factors

and construction costs could enable PPAs to move between $15-$25 given tax credits. Project returns in varying PTC qualification scenarios

Source: Goldman Sachs Global Investment Research.

Exhibit 3: We view a host of names as well positioned to benefit from our robust forecast for wind capacity investment GS wind development winners grid


PPA Price, $/MWh

Base Case

$0.018/kWh PTC

$0.014/kWh PTC

$0.009/kWh PTC

No PTC

Capacity Factor +10%

Construction Costs (10%)

Capacity Factor +10%; Construction Costs (10%)

Capacity Factor +10%, Construction Costs (10%), No PTC

Legend

Unlevered IRR < 3% b/w 3-5% b/w 5-7% b/w 7-9% >9%

$45-$50

Scen

ario

$15-$20 $20-$25 $25-$30 $30-$35 $35-$40 $40-$45

Best Positioned Names Exposure to Renewable Development

Siemens (Buy) 8% of 2015 sales are attributed to wind turbine with 33% market share of all turbines installed in the US in 2015.

Vestas (Buy) Leading European Wind OEM, offers greatest exposure to the US market out of peers with 35%-40% US earnings exposure

Nordex (CL-Buy) Leading European Wind OEM, offers modest exposure to the US market with ~5% earnings generated from US sales

GE (Neutral) Industry leader in US turbine manufacturing, wind remains one of the fastest growest end markets for GE and comprises ~5% of sales

China High-Speed Transmission Equipment (Buy)

A Chinese wind OEM, CHST’s revenue from the US increased by 71% yoy, making up 20.4% of 2015 total revenue (14.5% in 2014)

NextEra Energy (CL-Buy) The largest US developer of wind capacity, we anticipate NEE growing rapidly, reaching almost 20GWs of merchant renewables by 2018

Iberdrola SA (Neutral) Iberdrola (through its American subsidiary Avangrid) is the second largest owner of existing wind capacity in the US.

Sempra (Neutral) We view SRE's position as one of the leading CA renewable developers favorably, seeing upside to current renewable development guidance

NextEra Energy Partners (Buy) NEP stands to benefit from an increased development opportunity set from its GP (NEE), enabling the YieldCo to heighten growth visibility

NRG Yield (Buy) Given clarity around a rapid US wind capacity expansion through at least 2020, we expect NYLD to enter into accretive 3rd party transactions

TerraForm Power (Neutral) Roughly 1/2 of TerraForm's current capacity is wind, with roughly 1GW of operating wind sitting with its financial partners for future purchase.

American Electric Power (Neutral) A leading transmission developer, management's increasing focus on transmissiona drives its TransCo subsidiary's 30%+ growth 2015-2018

Edison International (Neutral)EIX's transmission rate base growth of ~7% 2015-2018 remains outsized, which we anticipate to continue based on CA renewable development

Pacific Gas & Electric (Buy) PCG's robust 12% transmission rate base growth 2015-2018 should remain strong beyond 2018 with exposure to CA renewable development

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Winding the way to a lower carbon economy in the US

Over the past decade, wind capacity increased by more than 8x and comprised about

20%+ of new US capacity installations, supported by legislative and economic

tailwinds. Wind generation comprised almost 5% of US power generation vs 1% a year

ago as greater output levels per vintage, falling construction costs since 2009, and tax

credits foster (1) development economics competitive with forward power prices in key

markets and (2) the lowest LCOE among potential new US generation installations.

Exhibit 4: Wind remained the greatest source of new

generation capacity in 2015, comprising 30% since 2010 Incremental wind capacity additions, 2000-2015

Exhibit 5: Wind accounted for 5% of total electricity

generation in 2015, up from 1% in 2010 and reaching 7%

by 2030… Net generation in TWhs, 2007-2015

Source: LBNL.

Source: EIA

Exhibit 6: …as new project demand continues driven by

tax credits, increasing capacity factors nationwide… Average 2015 capacity factor for projects placed in service

between 2000-2014

Exhibit 7: …and falling capital costs – since costs peaked

in 2009 Average capital cost, projects placed in service, 2000-2014

Source: SNL Financial.

Source: LBNL.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

2

4

6

8

10

12

14 Wind GW (LHS) % of incremental capacity (RHS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Coal Nat Gas Nuclear Wind

38%

23%

0%

5%

10%

15%

20%

25%

30%

35%

40%

20142013201220112010200920082007200620052004200320022001

2015

Cap

acit

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acto

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Wind Capacity Vintage Year

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$2,200

$2,400Capital cost of projects placed in service, $/kW



Exhibit 8: Wind PPAs, assuming different capacity factor levels across the US, could offer

competitive priced power for utilities that need to buy MWhs… Required PPA for 6% IRR vs. various wholesale power pricing

Source: Company data, Goldman Sachs Global Investment Research.

Exhibit 9: …and when compared to other incremental sources of power, wind provides the

lowest cost source of new capacity partially due to tax credits and improved technology LCOE, various generation sources


$0/MWh

$10/MWh

$20/MWh

$30/MWh

$40/MWh

$50/MWh

$60/MWh

$70/MWh

30% 35% 40% 45% 50% 55% 60%

Capacity Factor

$1,750/kW Construction Costs, 6% Firm IRR

PPA No Tax Benefits PPA Tax Benefits

ERCOT South ISO NE

CAISO SP15

$57

$124

$29

$83

$57

$38

$75 $75

$85 $87 $88

$127

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$20

$40

$60

$80

$100

$120

$140

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LCOE - Net after-tax capital cost ($/MWh) LCOE - Fixed O&M ($/MWh) LCOE - Variable O&M ($/MWh) LCOE - Fuel Cost ($/MWh)



Extensions of tax credits and continued technology improvements

drive increases in our wind development forecast

In conjunction with this report, we raise our US wind penetration forecasts through

2020 and now expect about 40GWs of new capacity installations from 2016-2020. We

increase our forecasts from almost 20GWs to nearly 40GWs of new US wind capacity 2016-

2020. Our roughly 8GWs per year of anticipated development should drive between $65-

$75bn of total or $12-$16bn of annual construction expenditures. By 2020, we expect more

than 100GWs of wind capacity installed in the US alone, doubling the amount of capacity in

under a decade.

The extension of supportive federal tax credit policy as a component of the broader

“Omnibus” spending bill should spur robust wind development beyond prior

expectations. The passage of the December 2015 bill extends the PTC at its current level

through 2016 – subsequently stepping down at a predetermined rate through 2019 (Exhibit

19). Prior to this, tax credit extension expectations remained more tempered as many

assumed a more modest one-year, 2016 extension. We view the legislated three-year

extension as introducing crucial certainty into the renewable development landscape,

which we expect to translate into substantial upside to both volumes and targets through

2020 which we now incorporate into our estimates.

Exhibit 10: US development of wind capacity continues

to ramp rapidly and we expect nearly 8GWs per year of

new installations 2016-2020… US wind development and capacity 2001-2020E

Exhibit 11: …driving $12b-16b on annual spending on

new wind plants GS forecasted range of wind construction capex 2016-2020

Source: EIA, AWEA, Goldman Sachs Global Investment Research.


Turbine manufacturers such as GE, VWS, and NDX appear best positioned to benefit

from between $65-$75bn of US wind development capex 2016-2020. Given (1)

improving economics and (2) political tailwinds, we see wind development remaining

robust through the end of the decade generating approximately $12-$16bn of investment

opportunities. Industry leaders in the wind turbine supply chain stand to capitalize

significantly across the value chain and we highlight insights from our colleagues.

113,770

8,460

7,610

8,760

6,990

82,750

90,360

98,820

105,810

7,960

4,150 4,560 6,220 6,620 8,990

11,450

16,700

24,650

34,300 39,140

45,680

59,080 59,970

64,850

73,990

0

20,000

40,000

60,000

80,000

100,000

120,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

MW

Wind Installs

Wind Cumulative Capacity

~55% growth between 2015YE ‐ 2020

$14.4bn

$12.6bn

$14.0bn

$11.5bn

$13.1bn

$16.2bn

$14.1bn

$15.6bn

$12.9bn

$14.7bn

$10

$11

$12

$13

$14

$15

$16

$17

2016 2017 2018 2019 2020

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$1,850 /kW $1,650 /kW



- European Wind OEMs (Manuel Losa) appear well positioned to benefit from this

secular trend as Vestas (Buy) maintains roughly 35%-40% earnings exposure,

while, to a lesser extent, Nordex (CL-Buy) who maintains about 5%-10% earnings

exposure to our robust US wind development expectations.

- US turbine manufacturers (Joe Ritchie) such as GE stand to gain as wind

represents about approximately 6% of Industrial sales for GE and wind continues

to remain one of the fastest growing end markets for the company. GE is the

dominant player in the US market and we expect this to continue given new

products and a strong financing arm.

- China Wind OEM (Frank He) China High Speed appears well positioned to benefit

from increased wind capex in the US as CHST’s revenue from the US increased by

71% yoy in 2015, making up 21% of total revenue (vs 15% in 2014). The team

expects further export growth to the US in 2016 and the company already

indicated the average gearbox order size from GE would rise from 1.80MW in 2015

to 2.35MW in 2016, driving incremental revenue.

Wind up! Attractive returns in a variety of scenarios

Under the current tax regime, construction costs and PPA pricing, we estimate

unlevered IRRs in the 5%-7% range which equates to a levered equity return of nearly

20%. For illustrative purposes, we have created a dynamic project model and for the

purpose of this analysis set a base-case scenario under the assumptions below, flexing key

inputs in order to determine a range of potential returns under different sensitivities, as

depicted in Exhibits 12 through 15. We acknowledge a range of outcomes exist beyond

what we present. Under our generic example outlined in Exhibit 12, we calculate an

unlevered IRR of ~6%. Please see the Appendix for explanations of assumptions for our

base case.

Exhibit 12: Base case assumptions produce an unlevered IRR of ~6% with current PTCs


Technology Wind Post tax IRR to project (%) 6%

Capital cost ($/kW): 1,750 Post tax IRR to equity (%) MAX 19%

Wind PTC 2016, $0.23/kWh Teminal value Yes

Year of installation 2016 Power price post-PPA ($/MWh) $20.00

Size of project (kW): 100,000 Sale yield 12.0%

Load/Capacity Factor: 40.0% Taxable Entity YesEquivalent hours/year 3,504

Degradation factor (pa): 0.5%PPA price (US $/MWh) 25.00

Bonus depreciation YesO&M costs ($ per kW/Year): 25

Bonus depreciation in yr 1 50.0%Contract life: 20

Tax rate: 35.0%Tax depreciation MACRS (yrs): 5

Escalator/inflation (pa): 0.5%

Key assumptions (*IRRs rounded)



Exhibit 13: If construction costs decline 10%, the same

project would realize a ~7% unlevered IRR… Project unlevered IRRs (base case in grey), varying

construction costs

Exhibit 14: …while without PTCs, the base case project’s

IRR offers a negative return, all else equal Project unlevered IRRs, varying construction costs



Given that select regions offer more compelling capacity factors, we view PPAs as

low as $15/MWh as feasible. Under the current assumptions, if we assume a 50%

capacity factor, we believe that projects could support a $15/MWh PPA price and still

deliver more than 5% unlevered IRRs under the current tax regime. Conversely, a 30%

capacity factor in a lesser resource area would require a PPA above $35/MWh to produce

the same return.

Exhibit 15: Project return remains sensitive to both the capacity factor and the PPA price,

as a 13% change in the capacity factor impacts the unlevered IRR by roughly 200bps Unlevered project IRR, PPA price vs. Capacity factor, gray inputs are the base case


Wind down – wind PPA prices may decline, but developers could

maintain similar returns

We could see PPA prices reach as low as $10/MWh - $20/MWh in select regions if

they secure a full PTC. We view this decline in PPA prices as feasible while still

supporting attractive IRRs, assuming developers realize a combination of (1) advancements

in turbine technology (improving capacity factors) and (2) incremental declines in

construction costs. While $10-$20/MWh power from new wind is not our base case, we

7.6%

6.6%

5.8%

5.1%

4.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

$1,550 $1,650 $1,750 $1,850 $1,950Construction cost ($/kW)

5.8%

4.4%

3.1%

1.8%

‐0.7%

‐2.0%

‐1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

$0.023 $0.018 $0.014 $0.009 $0.000PTC (cents/kWh)

Assuming a $25/MWh PPA

$15 $20 $25 $30 $3530% -3.0% -0.8% 1.1% 2.8% 4.3%35% -0.5% 1.7% 3.6% 5.3% 6.9%40% 1.7% 3.9% 5.8% 7.6% 9.3%45% 3.6% 5.8% 7.9% 9.7% 11.4%50% 5.4% 7.7% 9.8% 11.7% 13.5%

Capacity Factor

PPA price ($/MWh)Unlevered IRR



recognize continued performance improvements make this potentially feasible in the

coming 5-15 years. To determine this, we reverse engineer what capacity factors,

construction costs and PPAs could support similar unlevered IRRs at roughly 6% in the

exhibits below. Our calculations show a 10% decline in construction costs or a 10%

increase in capacity factors equates to roughly a 10% decline in PPA prices, holding the

developer unlevered IRR from Exhibit 12 constant at 5.8% (rounded to 6%).

Exhibit 16: If construction costs decline by 15%-20% back

to early 2000s levels, sub-$20/MWh PPAs could still

support 6% IRRs… $/MWh, 6% unlevered IRR with PTC

Exhibit 17: …while a 13% increase in capacity factor

could also support sub $20/MWh PPAs, all else equal $/MWh, 6% unlevered IRR with PTC



Exhibit 18: If costs decline and capacity factors increase in tandem, we view 6% unlevered

IRRs at $10-$20/MWh PPAs as possible under multiple scenarios $/MWh PPA, varying capital cost and capacity factors


$0

$5

$10

$15

$20

$25

$30

$1,450 $1,600 $1,750 $1,900

$/MWh, preserving a 6% unlevered IRR w/ full PTC

Capital Cost ($/kW)

0

5

10

15

20

25

30

35

40

45

50

30% 35% 40% 45% 50%


Capacity factor

$0

$5

$10

$15

$20

$25

$30

$35

$40

$1,450 $1,600 $1,750 $1,900

35% CF

40% CF

45% CF

50% CF


Capital Cost ($/kW)

Base case



…but what the tax man giveth, the tax man may taketh away one

day, unless technology improvements continue to raise output

The recent extensions of both the Production Tax Credit (PTC) and bonus D&A

continue to support wind development economics. The current multi-year PTC

extension at its current rate through 2016, then stepping down at a predetermined rate

through 2019 (Exhibit 19), came as positive surprise for the industry in December 2015 as a

part of the Omnibus spending bill. Coupled with improved visibility into which projects

qualify for what levels of tax incentives from the IRS, if a developer spends 5% of project’s

cost in a year, then the project qualifies to receive the corresponding level of PTC – this

appears a bullish indication for development 1-2 years beyond 2019. Similarly, but to a

lesser extent, the bonus D&A extension results in a sizable depreciation tax shield,

effectively improving early years’ operating cash flows. All else equal, we estimate the 50%

bonus D&A allowance as worth roughly $1/MWh or 4% of our base case PPA while

maintaining the same 6% return.

Assuming tax credits expire in the 2020 timeframe, new plants would require higher

contract prices, capacity factors, or lower construction costs to deliver similar IRRs.

Given a tax credit expiration, all else equal, PPAs must rise to around $35-$40/MWh in

order to deliver similar IRRs or unlevered returns. However, either a modest improvement

in capacity factors, from expected levels of 40% currently for new plants to roughly 50% or

a 10% decline in capital costs, could enable developers generate comparable returns.

Exhibit 19: Uncertainty around tax legislation and the

PTC extensions drove volatility in new wind

development PTC and bonus D&A step down schedule, 2016 - 2020

Exhibit 20: The PTC and bonus D&A extensions step

down over the next four years, improving overall

visibility into the development pipeline PTC and bonus D&A step down schedule, 2016 - 2020

Source: Federal Government, IRS.

Source: LBNL.

Beyond tax credit extensions, wind capacity factors continue to tick higher while

construction costs trend lower. SNL data shows 2014 US wind capacity additions

generating power at a 38% average capacity factor nationwide in 2015, compared to low

30% for 2012-2013 vintage projects – a testament to new turbine technology from OEMs

such as GE, Siemens. In select regions (i.e., the Midwest), 2014 project capacity factors

reached 41% per LBNL data. Wind construction costs continue to demonstrate a similar

positive trend for developers, as construction costs stabilize in-between $1,600-$1,800 per

kW of capacity down from $2,200+/kW in 2010 (Exhibit 7).

0

2

4

6

8

10

12

14GW installs ITC uncertainty/ expiration $23

$18

$14

$9

$00%

10%

20%

30%

40%

50%

60%

$0

$5

$10

$15

$20

$25

2016 2017 2018 2019 2020

PTC $/MWh (LHS)

Bonus depreciation (RHS)



Exhibit 21: The value of each PTC step appears to equate

to a roughly $5/MWh change in the PPA all else equal… GS forecasted PPA price without PTC, 6% firm IRR

Exhibit 22: …to offset this, either capacity factors

improve or costs come down GS forecasted PPA price without PTC, 6% firm IRR



Exhibit 23: We believe lower project unlevered IRRs, below 5%-7%, would weigh on the

appetite for developers to seek new projects Project returns in varying PTC qualification scenarios

Source: Company data, Goldman Sachs Global Investment Research

$25

$29

$33$36

$44

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

$0.023 $0.018 $0.014 $0.009 $0.000PTC (cents/kWh)

$/MWh PPA, preserving a 6% unlevered IRR$44/MWh

$38/MWh$35/MWh $36/MWh

$30/MWh

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

Base case ‐20% cost,$1,450/kW

50% CF (+20%) +10% CF,(10%) cost

+20% CF,(20%) cost

$/MWh PPA, preserving a 6% unlevered IRR

PPA Price, $/MWh

Base Case

$0.018/kWh PTC

$0.014/kWh PTC

$0.009/kWh PTC

No PTC

Capacity Factor +10%

Construction Costs (10%)

Capacity Factor +10%; Construction Costs (10%)

Capacity Factor +10%, Construction Costs (10%), No PTC

Legend

Unlevered IRR < 3% b/w 3-5% b/w 5-7% b/w 7-9% >9%

$45-$50

Scenario

$15-$20 $20-$25 $25-$30 $30-$35 $35-$40 $40-$45



OEMs and wind developers poised to benefit from capital spending

We see select names across our US and European coverage with meaningful

exposure to this robust secular trend

Exhibit 24: We see select OEMs of wind turbines and transmission equipment as beneficiaries of capital spending, while

diversified utilities such as NextEra, SRE and Iberdrola may have opportunities to grow earnings through increased

development GS wind development winners grid


Appendix: Project assumptions and additional scenarios

Below are detailed explanations of assumptions for the base case.

Size: 100MW.

Capital Cost: We model a $1,750/kW construction cost, similar to sampled data

from a Lawrence Berkeley National Laboratory (LBNL) dataset and discussions

with industry participants.

Tax benefits: We assume the developer is a taxable entity with tax liabilities large

enough to absorb all benefits that include the current production tax credit of

$23/MWh for 10 years, increasing at the rate of inflation and bonus depreciation

allowing 50% of depreciation to be realized in year 1.

Tax rate: a 35% statutory tax rate.

Best Positioned Names Exposure to Renewable Development

Siemens (Buy) 8% of 2015 sales are attributed to wind turbine with 33% market share of all turbines installed in the US in 2015.

Vestas (Buy) Leading European Wind OEM, offers greatest exposure to the US market out of peers with 35%-40% US earnings exposure

Nordex (CL-Buy) Leading European Wind OEM, offers modest exposure to the US market with ~5% earnings generated from US sales

GE (Neutral) Industry leader in US turbine manufacturing, wind remains one of the fastest growest end markets for GE and comprises ~5% of sales

China High-Speed Transmission Equipment (Buy)

A Chinese wind OEM, CHST’s revenue from the US increased by 71% yoy, making up 20.4% of 2015 total revenue (14.5% in 2014)

NextEra Energy (CL-Buy) The largest US developer of wind capacity, we anticipate NEE growing rapidly, reaching almost 20GWs of merchant renewables by 2018

Iberdrola SA (Neutral) Iberdrola (through its American subsidiary Avangrid) is the second largest owner of existing wind capacity in the US.

Sempra (Neutral) We view SRE's position as one of the leading CA renewable developers favorably, seeing upside to current renewable development guidance

NextEra Energy Partners (Buy) NEP stands to benefit from an increased development opportunity set from its GP (NEE), enabling the YieldCo to heighten growth visibility

NRG Yield (Buy) Given clarity around a rapid US wind capacity expansion through at least 2020, we expect NYLD to enter into accretive 3rd party transactions

TerraForm Power (Neutral) Roughly 1/2 of TerraForm's current capacity is wind, with roughly 1GW of operating wind sitting with its financial partners for future purchase.

American Electric Power (Neutral) A leading transmission developer, management's increasing focus on transmissiona drives its TransCo subsidiary's 30%+ growth 2015-2018

Edison International (Neutral)EIX's transmission rate base growth of ~7% 2015-2018 remains outsized, which we anticipate to continue based on CA renewable development

Pacific Gas & Electric (Buy) PCG's robust 12% transmission rate base growth 2015-2018 should remain strong beyond 2018 with exposure to CA renewable development

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Capacity factor: 40%, consistent with the 41% average capacity factor for 2014

projects in the Mid-West and above the 2014 national average of 34% according to

a LBNL dataset.

PPA price: $25/MWh, consistent with utility commentary and in-line with PPAs

signed in 2014-2015 according to the LBNL.

O&M cost: $25/kW of generation capacity annually, equivalent to roughly a 70%

EBITDA margin after only O&M costs.

Escalator/degradation: We assume a 0.5% escalator on contract, O&M and PTCs

and apply a 0.5% degradation factor to expected production based aged wind

farms not producing at their initial rate today.

Rating and pricing information

American Electric Power (N/N, $68.64), China High Speed Transmission (B/N, HK$6.25),

Edison International (N/N, $76.04), General Electric Co. (N/N, $29.94), Iberdrola SA (N/N,

€5.71), NextEra Energy Inc. (B/N, $128.46), NextEra Energy Partners (B/A, $29.28), Nordex

SE (B/N, €24.82), NRG Yield Inc. (B/A, $14.62), PG&E Corp. (B/N, $62.40), Sempra Energy

(N/N, $110.44), Siemens AG (B/N, €89.19), TerraForm Power Inc. (N/N, $8.75) and Vestas

Wind Systems A/S (B/N, Dkr429.80)



Disclosure Appendix

Reg AC

We, Michael Lapides, Brian Lee, CFA, Joe Ritchie, Daniela Costa, Frank He, Manuel Losa, David Fishman and Hank Elder, hereby certify that all of the

views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also

certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this

report.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.

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Disclosures

Coverage group(s) of stocks by primary analyst(s)

Michael Lapides: America-Diversified Utilities, America-Independent Power Producers, America-Regulated Utilities. Brian Lee, CFA: America-Clean

Energy, America-Solar Energy. Joe Ritchie: America-Capital Goods: Multi-Industry. Daniela Costa: Europe-Machinery & Elec Equip. Frank He: Asia

Pacific Conglomerates, China Clean Energy. Manuel Losa: Europe-Utilities.

America-Capital Goods: Multi-Industry: 3M Co., Allegion Plc, Colfax Corp., Dover Corp., Eaton Corp., Emerson Electric Co., Flowserve Corp., General

Electric Co., Graco Inc., HD Supply Holdings, Honeywell International Inc., Illinois Tool Works, Ingersoll-Rand Plc, ITT Inc., Parker Hannifin Corp.,

Pentair Plc, Rockwell Automation Inc., Roper Technologies Inc., Stanley Black & Decker Inc., Tyco International Plc, W.W. Grainger Inc..

America-Clean Energy: Acuity Brands Inc., Cree Inc., Silver Spring Networks Inc., TerraVia Holdings, Universal Display Corp., Veeco Instruments Inc..

America-Diversified Utilities: Centerpoint Energy Inc., Dominion Resources Inc., Entergy Corp., Exelon Corp., FirstEnergy Corp., NextEra Energy Inc.,

Public Service Enterprise Group, Sempra Energy.

America-Independent Power Producers: Calpine Corp., Dynegy Inc., NextEra Energy Partners, NRG Energy Inc., NRG Yield Inc..

America-Regulated Utilities: Ameren Corp., American Electric Power, American Water Works, Consolidated Edison Inc., Duke Energy Corp., Edison

International, Eversource Energy, Great Plains Energy Inc., PG&E Corp., Pinnacle West Capital Corp., Portland General Electric Co., PPL Corp., SCANA

Corp., Southern Co., WEC Energy Group Inc., Westar Energy Inc..

America-Solar Energy: 8point3 Energy Partners, First Solar Inc., SolarCity Corp., SolarEdge Technologies Inc., SunPower Corp., Sunrun Inc.,

TerraForm Global Inc., TerraForm Power Inc., Vivint Solar Inc..

Asia Pacific Conglomerates: Beijing Enterprises Holdings, Cheung Kong Infrastructure, China Gas Holdings, China Merchants Holdings, China

Resources Gas Group, China Suntien Green Energy, CITIC Ltd., CK Hutchison Holdings, COSCO Pacific, ENN Energy Holdings, Fosun International,

Galaxy Entertainment Group, Hutchison Port Holdings Trust, Jardine Matheson, Kunlun Energy Co., Legend Holdings, Melco Crown Entertainment

(ADR), Melco International Development, MGM China, MTR Corp., Sands China, Shanghai Industrial, Sinopec Kantons, SJM Holdings, Summit

Ascent Holdings, Swire Pacific, Tianhe Chemicals Group, Towngas China, Wharf Holdings, Wheelock and Co., Wynn Macau.

China Clean Energy: Canadian Solar Inc., China High Speed Transmission, GCL-Poly Energy Holdings, JinkoSolar Holding Co., Longi Silicon Materials,

Shenzhen Clou Electronics Co., Singyes Solar, Sungrow Power Supply Co., Trina Solar, Xinjiang Goldwind (A), Xinjiang Goldwind (H), Xinyi Solar

Holdings.

Europe-Machinery & Elec Equip: ABB Ltd., Alfa Laval, Alstom, Assa Abloy B, Atlas Copco, Fincantieri SpA, FLSmidth & Co. A/S, Geberit Holding,

KONE Corp., Legrand, Metso OYJ, Nexans, Outotec, Philips, Prysmian, Sandvik, Schindler Holding, Schneider Electric, Siemens AG, SKF, Wartsila,

Weir Group.

Europe-Utilities: A2a SpA, Acciona SA, Centrica, E.ON, EDF, EDP Renovaveis SA, Enagas, Endesa SA, Enel SpA, Energias de Portugal, Engie, Gamesa

Corporacion Tecnologica SA, Gas Natural, Hera SpA, Iberdrola SA, Nordex SE, Red Electrica de Espana, REN, RWE, Snam SpA, Suez Environnement,

Terna, Veolia Environnement, Vestas Wind Systems A/S.

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