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

Cheaper costs and the ability to lock in long-term contracts with corporates (which could currently save up to 40% vs wholesale electricity prices) could accelerate the penetration (and enhance the dominance) of solar – and wind, though to a lesser degree

– in the European energy mix.

More than 50% of capacity is already renewables

For 2018, renewables (hydro, wind, solar, other) account for over 50% of the installed capacity in all major markets, as seen in Exhibit 24. At the same time, production from green sources still accounts for less than 30% of the total output produced in these regions.

Exhibit 23: Power generation mix in 2018 data in GW

Source: Goldman Sachs Global Investment Research

We estimate RES will become >70% of capacity by 2030

On our projections, the share of RES 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.

Exhibit 24: Power generation capacity mix will be dominated by solar/wind by 2030 data in GW

Source: Goldman Sachs Global Investment Research

Power prices could drop 25% from the peaks

As cheaper renewable sources keep displacing conventional thermal plants, we expect power prices across Europe to drift lower. Exhibit 26 shows that our 2030 power price forecasts imply a c.25% drop when compared with 2019.

Exhibit 25: 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)

2019 Fwd 2030E

Source: Goldman Sachs Global Investment Research

Our framework to establish solar PV take-up by country

We observe that the potential for solar PV development in Europe’s main power markets is driven by five key metrics: (1) irradiation levels; (2) regional power prices; (3) presence of spare/backup capacity; (4) grid status and ability to accommodate more renewables;

(5) energy policy support for renewables. This suggests Spain and Italy will be the first followed by France and Germany.

Exhibit 26: Spain and Italy rank highly thanks to favourable irradiation and high power prices

Major European power markets compared on key metrics for solar PV development

Source: Goldman Sachs Global Investment Research

For more on our framework methodology, see our May report Solar to transform Europe’s energy mix

Companies: Scale and speed become 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 the new renewable additions – and invest billions in the process. To keep net income flat, the market share in RES additions would have 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.

Share in RES additions in home markets at 10%-20% to protect EBITDA

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 the new renewable additions – and invest billions in the process. To keep net income flat, the market share would have to nearly double from those levels. To derive this, we have estimated the typical contribution to EBITDA and net income from any kW of RES installed; for our analysis, we have assumed returns at 5.75%-6.00%-7.00% (solar-wind onshore-wind offshore), which are consistent with current levels, incremented for some extra return from the corporate PPA market.

Exhibit 27: Estimating EBITDA/kW and net income/kW from RES additions data for 2020-30 (€ mn)

Source: Goldman Sachs Global Investment Research

Exhibit 28 shows the actual MW that the incumbents in Southern Europe – where we estimate the largest acceleration in solar capacity additions – would have to develop to protect EBITDA or net income.

Exhibit 28: Earnings impact from falling power prices (owing to RES), and RES additions needed to protect earnings

Earnings data in € million (2030)

Source: Goldman Sachs Global Investment Research

Exhibit 29: 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%

Source: Goldman Sachs Global Investment Research

RES additions in home markets could, at best, protect group EBITDA, but are unlikely to support the decline in net income triggered by falling power prices. Yet, global platforms

– such as those of Enel or Iberdrola – could grant future growth and continue to make renewable activities an attractive profit center. We show below what these companies could install over 2020-30 based on current run-rates presented at the latest CMDs.

Exhibit 30: Utilities would need to be early movers, and pursue scale in renewables, to offset the decline in power prices in home markets

Cumulative renewables additions during 2020-30 (GW)

Source: Goldman Sachs Global Investment Research

RES players need to go global to drive positive profit growth

Despite what we have just explained in the previous paragraph, we still regard RES activities as a major profit center for European Utilities. Indeed, looking at the projected RES additions until 2030 based on current run-rates presented at the latest CMDs (Exhibit 31), global businesses (Enel, Iberdrola) will still be able to drive earnings growth, despite the pressure in domestic power generation profits.

Source: Goldman Sachs Global Investment Research

On our estimates, during the next decade, Iberdrola and Enel will grow EBITDA by €2 bn and €3bn, respectively, thanks to renewable additions, based on conservative assumptions: 5.75%-6% pre-tax returns in onshore wind/solar, and of 7% in offshore wind.

This will allow Iberdrola and Enel to grow the bottom line, to more than offset the pressure in the Spanish and Italian power generation activities. For Endesa, the outlook appears less encouraging though; the lack of scale/global reach would not allow the company to recoup the profits lost from declining power prices, we estimate.