italy’s player on the world green stage; initiate as neutral · upside in ibr, edpr and acciona....
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January 19, 2011
INITIATION Enel Green Power (EGPW.MI)
Neutral Equity Research
Italy’s player on the world green stage; initiate as Neutral
Investment view
Enel Green Power (EGP) is among the largest “green utilities”, and on
several measures the most profitable. Exposure to Italian wholesale
power generation gives it high sensitivity to rising power prices, while
ongoing legislative support for renewables, albeit at lower levels, should
allow EGP to benefit from opportunities to grow capacity. However, on
our estimates EGP offers less attractive growth than key renewables
peers (11% EBITDA CAGR 2010-14E vs. 17% for peers) and we see greater
upside in IBR, EDPR and Acciona. We initiate coverage of EGP with a
Neutral rating and €2 12-month target price (24% upside vs. sector 23%).
Core drivers of growth
With 70% of its production exposed to wholesale power prices, the
evolution of Italian (and Spanish) power prices will be a key driver of
EGP. We expect prices to rise in line with higher energy commodities and
believe structural factors will allow Italy to sustain a power price premium
to Europe. Capacity growth is another key driver and we believe EGP can
deliver its target capacity (9.2GW by 2014 from 5.7GW YE09; 10% CAGR).
Risks to the investment case
The evolution of power prices; regulatory developments in Italy (phasing
out of green certificates) and Spain (ongoing energy review); achieving
growth in installed capacity; seasonal production risk (hydro and wind).
Valuation
Our 12-month target price of €2 is based on equally weighted SOTP
(€2.1/share) and EV/EBITDA (€2/share) valuations. EGP trades on 8.4x/7.6x
2011/12E EV/EBITDA vs. 7.2x/6.8x for the utility space (EGP’s 2010-13E
EBITDA CAGR of 11% compares with an average 3.5% for utilities).
Industry context
We expect continued, if less generous support, for renewables in future.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Cautious
Mariano Alarco +44(20)7774-8817 [email protected] Goldman Sachs International
The Goldman Sachs Group, Inc. 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, see the end of the text. Other important disclosures follow the Reg AC certification, 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.
Deborah Wilkens +44(20)7552-2539 [email protected] Goldman Sachs InternationalAndrew Mead +44(20)7774-5735 [email protected] Goldman Sachs International Dario Carradori +44(20)7552-3977 [email protected] Goldman Sachs International
The Goldman Sachs Group, Inc. Global Investment Research
Growth
Returns *
Multiple
Volatility Volatility
Multiple
Returns *
Growth
Investment Profile
Low High
Percentile 20th 40th 60th 80th 100th
* Returns = Return on Capital For a complete description of the
investment profile measures please refer to
the disclosure section of this document.
Enel Green Power (EGPW.MI)
Europe Utilities Peer Group Average
Key data Current
Price (€) 1.61
12 month price target (€) 2.00
Upside/(downside) (%) 24
Market cap (€ mn) 8,040.0
Enterprise value (€ mn) 11,803.0
12/09 12/10E 12/11E 12/12E
Revenue (€ mn) 1,895.0 2,342.0 2,489.5 2,694.1
EBIT (€ mn) 791.0 806.1 861.2 950.5
EPS (€) 0.13 0.09 0.09 0.10
EV/EBITDA (X) NM 9.0 8.4 7.6
P/E (X) NM 17.4 18.1 16.5
Dividend yield (%) NM 1.4 1.7 1.8
FCF yield (%) NM (5.6) (1.8) (0.2)
CROCI (%) NM 7.2 6.8 7.0
CROCI/WACC (X) -- -- -- --
EV/GCI (X) NM 0.8 0.7 0.7
Price performance chart
1.50
1.52
1.54
1.56
1.58
1.60
1.62
1.64
1.66
1.68
1.70
Oct-10 Nov-10 Dec-10
330
335
340
345
350
355
360
365
370
375
380
Enel Green Power (L) FTSE World Europe (EUR) (R)
Share price performance (%) 3 month 6 month 12 monthAbsolute -- -- --
Rel. to FTSE World Europe (EUR) -- -- --
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 1/18/2011 close.
January 19, 2011 Enel Green Power (EGPW.MI)
Enel Green Power: Summary Financials
Analyst Contributors
Mariano Alarco
Deborah Wilkens
Andrew Mead
Dario Carradori
Fred Barasi
Goldman Sachs Global Investment Research 2
Profit model (€ mn) 12/09 12/10E 12/11E 12/12E Balance sheet (€ mn) 12/09 12/10E 12/11E 12/12E
Total revenue 1,895.0 2,342.0 2,489.5 2,694.1 Cash & equivalents 144.0 144.0 144.0 144.0
Operating costs (688.0) (1,025.2) (1,065.5) (1,132.7) Accounts receivable 512.0 655.8 684.6 754.3
R&D 0.0 0.0 0.0 0.0 Inventory 31.0 38.3 40.7 44.1
Lease payments 0.0 0.0 0.0 0.0 Other current assets 365.0 365.0 365.0 365.0
Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 1,052.0 1,203.1 1,234.4 1,307.4
EBITDA 1,207.0 1,316.8 1,424.1 1,561.4 Net PP&E 7,200.0 9,039.6 9,536.5 9,889.7
Depreciation & amortisation (416.0) (510.7) (562.9) (610.9) Net intangibles 791.0 1,716.0 1,716.0 1,716.0
EBIT 791.0 806.1 861.2 950.5 Total investments 296.0 621.0 690.4 768.1
Net interest income/(expense) (133.0) (107.7) (126.0) (157.1) Other long-term assets 155.0 305.0 305.0 305.0
Associates 0.0 5.0 19.4 27.7 Total assets 9,494.0 12,884.6 13,482.2 13,986.2
Profit/(loss) on disposals 0.0 0.0 0.0 0.0
Others (recurring) 0.0 0.0 0.0 0.0 Accounts payable 454.0 562.1 597.5 646.6
Pretax profits 658.0 703.5 754.6 821.1 Short-term debt 4,528.0 2,028.0 2,028.0 2,028.0
Income tax (219.0) (211.0) (256.6) (283.3) Other current liabilities 436.0 436.0 436.0 436.0
Tax rate (%) 33.3 30.0 34.0 34.5 Total current liabilities 5,418.0 3,026.1 3,061.5 3,110.6
Minorities (21.0) (29.8) (52.9) (49.8) Long-term debt 1,131.0 1,606.1 1,799.4 1,870.0
Preferred dividends 0.0 0.0 0.0 0.0 Other long-term liabilities 381.0 724.0 724.0 724.0
Net income (pre-exceptionals) 418.0 462.7 445.2 488.0 Total long-term liabilities 1,512.0 2,330.1 2,523.4 2,594.0
Other non-recurring items post tax 0.0 0.0 0.0 0.0 Total liabilities 6,930.0 5,356.2 5,584.9 5,704.6
Net income 418.0 462.7 445.2 488.0
EPS (underlying) (€) 0.13 0.09 0.09 0.10 Preferred shares 0.0 0.0 0.0 0.0
EPS (basic, reported) (€) 0.13 0.09 0.09 0.10 Total common equity 2,384.0 6,818.7 7,148.2 7,502.7
Weighted shares outstanding (mn) 3,160.0 5,000.0 5,000.0 5,000.0 Minority interest 180.0 709.8 749.2 779.0
Common dividends declared 0.0 115.7 133.6 146.4 Total liabilities & equity 9,494.0 12,884.6 13,482.2 13,986.2
DPS (€) 0.00 0.02 0.03 0.03 Capitalised leases 0.0 0.0 0.0 0.0
Dividend payout ratio (%) 0.0 25.0 30.0 30.0 Capital employed 8,223.0 11,162.6 11,724.8 12,179.7
Dividend cover (X) NM 4.0 3.3 3.3
Growth & margins (%) 12/09 12/10E 12/11E 12/12E Adj for unfunded pensions & GW 0.0 0.0 0.0 0.0
Revenue growth -- 23.6 6.3 8.2 Adj capital employed 8,223.0 11,162.6 11,724.8 12,179.7
EBITDA growth -- 9.1 8.1 9.6 Gross cash invested 11,665.0 15,937.6 17,062.7 18,128.5
EBIT growth -- 1.9 6.8 10.4
Net income growth -- 10.7 (3.8) 9.6 Ratios 12/09 12/10E 12/11E 12/12E
EPS growth -- (30.0) (3.8) 9.6 CROCI (%) NM 7.2 6.8 7.0
DPS growth -- -- 15.5 9.6 CROCI/WACC (X) -- -- -- --
EBITDA margin 63.7 56.2 57.2 58.0 ROIC (%) -- 7.1 6.3 6.5
EBIT margin 41.7 34.4 34.6 35.3 ROIC/WACC (X) -- -- -- --
ROA (%) NM 4.1 3.4 3.6
Cash flow statement (€ mn) 12/09 12/10E 12/11E 12/12E WACC (%) -- -- -- --
Net income 418.0 462.7 445.2 488.0 Inventory days 6.0 6.0 6.0 6.0
D&A add-back (incl. ESO) 416.0 510.7 562.9 610.9 Asset turnover (X) 0.3 0.3 0.3 0.3
Minority interest add-back 21.0 29.8 52.9 49.8 Net debt/equity (%) 215.1 46.4 46.6 45.3
Net (inc)/dec working capital (62.0) (43.0) 4.1 (24.0) EBITDA interest cover (X) 9.1 12.2 11.3 9.9
Other operating cash flow 104.0 (85.0) (19.4) (27.7)
Cash flow from operations 897.0 875.1 1,045.7 1,097.0 Valuation 12/09 12/10E 12/11E 12/12E
EV/sales (X) NM 5.0 4.8 4.4
Capital expenditures (793.6) (1,250.2) (1,109.8) (1,014.1) EV/EBITDAR (X) NM 9.0 8.4 7.6
Acquisitions 0.0 (1,300.0) 0.0 0.0 EV/EBITDA (X) NM 9.0 8.4 7.6
Divestitures 0.0 0.0 0.0 0.0 EV/EBIT (X) NM 14.6 13.8 12.5
Others 0.0 0.0 0.0 0.0 P/E (X) NM 17.4 18.1 16.5
Cash flow from investing (793.6) (2,550.2) (1,109.8) (1,014.1) Dividend yield (%) NM 1.4 1.7 1.8
FCF yield (%) NM (5.6) (1.8) (0.2)
Dividends paid (common & pref) 0.0 0.0 (129.1) (153.5) EV/GCI (X) NM 0.8 0.7 0.7
Inc/(dec) in debt 76.0 (2,024.9) 193.3 70.6 EV/adj. capital employed (X) NM 1.1 1.1 1.0
Other financing cash flows 0.0 3,700.0 0.0 0.0 Price/book (X) NM 1.1 1.0 1.0
Cash flow from financing 76.0 1,675.1 64.1 (82.9)
Total cash flow 0.4 0.0 0.0 0.0 Note: Ratios are adjusted for leases where appropriate. Only separately disclosed where significant and ongoing.
Capex/D&A (%) 190.8 244.8 197.2 166.0
Reinvestment rate (%) 82.8 136.2 106.6 90.5
Cash flow cover of dividends (X) NM 7.9 7.8 7.7 Note: Last actual year may include reported and estimated data.
Free cash flow cover of dividends (X) NM (3.9) (1.1) (0.1) Source: Company data, Goldman Sachs Research estimates.
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 3
Contents
Second renewable player worldwide, with power price exposure 4
Peer comparison: smaller than IBR, yet with higher returns 10
Valuation: €2/share using multiples & SOTP, in line with sector 18
Italian power prices remain linked to Brent 26
Focus on renewable capacity growth in selected regions 32
Italy and Iberia are key for growth, Europe and Americas follow 36
Risks: regulation, growth, prices and future level of feed in tariffs 45
Financials: double-digit growth rates 49
Company and management profile 55
Appendix 1: Italian generation market and EU power demand 57
Large capacity additions since 2002, some in construction 58
Appendix 2: Enel Green Power pipeline 60
Prices in this report are as of the close of January 14, 2011 unless otherwise stated.
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 4
Second renewable player worldwide, with power price exposure
With almost 70% of its generation exposed to power prices, Enel Green Power’s
earnings are among the most sensitive to a rise (or fall) in power prices in the
utilities sector. Reflecting the Italian power price premium (vs. the European
average) EGP enjoys higher EBITDA per MW and MWh than its closest peers. With
its strong balance sheet and a large, geographically and technologically diversified
pipeline, we believe that the company can sustain an average 11% EBITDA growth
rate through 2010-2014E. This is below the average rate we expect from its
renewables peers (17%). We initiate coverage of Enel Green Power with a Neutral
rating, and a 12-month €2 target price implying 25% potential upside (vs. a 23%
median potential upside for the sector).
Italian core, with world presence and diversified technologies
Having total production from renewable sources of 22TWh in 2010E, EGP ranks as the
second largest renewables “green utility” in the world after Iberdrola Renovables (IBR;
27TWh of production in 2010E). More than half of Enel Green Power’s assets are in Italy,
representing 55% of 2010E production. Iberia represents 15% of its 2010E production, and
Latin and North America 16% and 12% respectively. On a global basis, we expect 49% of
its 2010E production to come from hydro, 25% from geothermal, 23% from wind and 3%
from other (biomass, cogeneration and solar).
Diversified asset base: higher profitability yet low incentives
As a result of its strong presence in the attractive Italian renewables market, and the high
load factor of its technologies, Enel Green Power is able to achieve higher EBITDA per
MW and MWh than most of its renewable peers: we forecast in total €1.3 bn of EBITDA in
2010 from renewables (compared to €1.4 bn for IBR) despite the fact that, compared to its
closest and purest peers, IBR, EDP Renovaveis (EDPR) and EDF Energies Nouvelles (EDF
EN), it has the lowest percentage of incentivized production (36% in 2010E compared to
other green utilities at around 50%). In total, incentives (green certificates in Italy,
premium in Spain and tax breaks in the US) represented 32% of the EGP’s 2009 EBITDA.
Benefit from rising power prices; Italian power premium to stay
The main driver of Enel Green Power’s high profitability is its exposure to the Italian
power market. With almost 70% of its production is exposed to wholesale power price
changes, Enel Green Power should benefit from rising wholesale prices. We estimate that
each €10/MWh change (unhedged) in the wholesale power price would have an 11%
impact on EBITDA and a 22% impact on net income (2012E). We expect Italian power
prices to rise from 2012 on the back of rising European gas prices. Italian wholesale
power prices, currently trading at around a €20/MWh premium to northern European
prices, are unlikely to fall to German levels in our view (specific mix of the Italian
generation market, temporary green certificates costs, and high peaks and grid
bottlenecks), and we believe Italy should be able to sustain a €9-23/MWh premium to
Europe through to 2015, and a €2-12/MWh premium thereafter.
Large pipeline, strong balance sheet allows for profitable growth
Enel Green Power expects to add 3.5GW of capacity by 2014, through €5.2 bn of capex,
increasing its installed base from 5.7GW currently to 9.2GW (+60% growth). We expect
less production growth (43%), as the planned investments in wind and solar have lower
load factors than existing geothermal and hydro. We expect two-thirds of capex to be
directed at wind. EGP should be able to fund its growth from internal cash flows and its
balance sheet (2.4x 2010E net debt/EBITDA, expected to fall to 1.9x by 2014E) and could
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 5
potentially double its growth rates if it decided to gear up to the level of other green
utilities. Compared to its closest peers, Iberdrola Renovables (IBR), EDP Renovaveis
(EDPR) and EDF EN, we expect Enel Green Power to report lower growth, with a 2010-
2014E EBITDA CAGR of 11.1% compared to the group average of 17%. In terms of net
income, we expect a 9.3% CAGR, compared to the green utilities’ average 22%.
Key risks: regulation, falling support for renewables, power prices
Our forecasts incorporate regulatory changes in Italy and Spain
As part of Enel Green Power’s production receives incentives, adverse regulatory changes
could affect its profitability. Italy has recently announced a change to its remuneration for
renewables, aiming to phase out the existing green certificates from 2013 for new projects,
and from 2016 for exiting assets. The green certificate system will be replaced by fixed
feed-in tariffs for different technologies, with the level of the tariffs as of yet undecided.
We expect green certificates to be supported by the government until 2015, and
conservatively assume that wind farms receive feed-in tariffs above pool prices from 2013
(at €110/MWh; wind currently receives c.€160/MWh), with no further support for new
hydro or geothermal. In Spain, we assume wind revenues is capped (at €77.5/MWh) from
2012.
We expect ongoing support for renewables, particularly in Europe, to continue
Overall, as Europe has already set its 2020 renewables targets through a binding directive
for member states, we expect support for renewables to continue, though this support is
likely to be less generous over time as technology improves and capital costs decline. A
faster than anticipated reduction of subsidies could pose a risk to EGP’s profitability.
Delivery of capacity growth targets is a further risk
EGP is aiming to increase installed capacity to 9.2GW (YE2014) from 5.7GW (YE2009, or
700MW pa). A failure to reach this target is a risk to our estimates. However, over the last
decade, Enel has added c.100MW of renewables pa in Italy and in the last two years, Enel
has also added 300MW pa internationally. Additionally, Endesa has made just over
300MW of annual additions since 2005 (all of Endesa’s renewable activities in Iberia have
been within Enel Green Power España since 2Q2010). As a result, we believe that 700MW
pa is an achievable target for the company going forward.
High exposure to power prices poses a risk in the event that prices fall
As a result of the relatively low weight of incentives or fixed-price tariffs (PPA or “feed-in
tariffs”), Enel Green Power is significantly exposed to wholesale power prices. Power
prices are in turn determined by the evolution of gas, coal and CO2 prices, as well as
supply and demand balances in respective markets. A fall in the prices of these
commodities could lead to a fall in Italian or Spanish wholesale power prices.
We value EGP at €2 per share, based on multiples and SOTP
Renewable peers to be key comparables
As a result of its size, profitability and diversified geographical presence, we believe that
IBR is the most direct comparable, followed by EDPR. To a lesser extent, EDF Energies
Nouvelles and Acciona are also good comparables. These green utilities currently trade
between 9.2x and 11.6x 2011E EV/EBITDA (average 10x) and between 7.9x and 10.3x
2012E EV/EBITDA (average 9.4x), with EGP trading at 8.2x and 7.5x in 2011E and 2012E.
We believe this discount reflects potentially slower EBITDA growth (EGP 11% vs. 17% for
peers) and uncertainty regarding the level of remuneration for renewables in Italy from
2013.
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 6
Exhibit 1: We see 25% potential upside for EGP vs. 23% for the utility sector as a whole – EGP trades at a slight
discount to peers due to slower growth and uncertainty regarding renewable remuneration in Italy, in our view Selected valuation metrics for Enel Green Power and other renewable utilities
All share prices in euro EV/EBITDA multiples calculated using period average net debt. Consequently, multiples are slightly lower than those shown on the front page.
Source: Goldman Sachs Research estimates. For important disclosures, please go to http://www.gs.com/research/hedge.html.
SOTP and multiples imply €2/share valuation; upside in line with sector
As for our broader utilities coverage, we combine short-term and longer-term valuations
in our Enel Green Power price target. Our short-term valuation is based on an EV/EBITDA
multiple, adjusted for forward-looking growth (this is how we value the renewable peers).
EGP’s multiple-based valuation is €2/share. Our long-term valuation of EGP is based on a
SOTP analysis (€2.1/share). The average of these valuations implies 25% potential upside,
vs. a utilities sector median of 23%.
Exhibit 2: Our SOTP analysis suggests a €2.1/share valuation: Hydro, wind and
geothermal are key assets Enel Green Power SOTP analysis
Source: Goldman Sachs Research estimates.
Current Potential EV/EBITDA 2011E 2012E P/E CROCI
Valuation Comparison Rating share price upside 2010E 2011E 2012E 2013E at target price 2010E 2011E 2012E 2013E 2010E 2011E 2012E 2013E
Acciona Buy 55.5 37% 10.0x 9.2x 7.9x 6.9x 10.3x 8.8x 22.3x 20.2x 12.8x 9.9x 5.8% 6.1% 6.8% 7.5%
EDF Energies Nouvelles Neutral 31.8 10% 13.3x 11.6x 10.3x 9.5x 11.9x 10.6x 21.8x 19.3x 15.8x 15.0x 7.1% 7.3% 7.7% 7.9%
EDP Renovaveis Buy 4.4 32% 11.2x 9.7x 8.5x 7.9x 11.0x 9.7x 48.4x 36.4x 22.9x 20.7x 5.0% 5.8% 6.6% 6.9%
Iberdrola Renovables Buy 2.6 29% 10.1x 9.3x 8.1x 7.1x 11.1x 9.6x 25.5x 21.9x 17.5x 14.5x 6.8% 6.7% 7.0% 7.2%
Enel Green Power Neutral 1.6 25% 9.5x 8.2x 7.5x 6.8x 9.4x 8.7x 17.3x 18.0x 16.4x 14.1x 6.8% 6.8% 7.0% 7.2%
Enel Green Power SOTP€ mnYE2011 € mn €/share € mn/MW CommentsHydro 5,173 1.0 2.0 In Italy, valuation until end of concessions in 2034, Italy 3,022 assuming all incentives end in 2015 and power price of €79 LatAm 1,614 thereafter. For LatAm, valuation until 2043. No residual Other 538 value for either assetGeothermal 2,763 0.6 3.6 In Italy valuation until end of concessions in 2024, Italy 2,657 assuming all incentives end in 2015 and power price of €79 Other 106 thereafter. Residual value of 33% of capexWind 3,901 0.8 1.3 Assumes 5 yr average age of wind farms. In Italy, assume Italy 724 green certificates until 2015, then fixed tariff of €110/MWhSpain 1,781 1.1 In Spain, assumes power price is capped at €77.5/MWhEurope 637 post 2012Other 759Solar 411 0.1 4.2 High value of solar farms in Italy, assumes €440 solar Italy 319 power remuneration (fixed tariff + pool), and capexOther 92 costs of €2.8/WpOther 226 2.0 Biomass & cogeneration assetsTotal EV Operating assets YE 2011 12,474 2.5
Pipeline & WIP (2012-2015E) 1,010 0.2 Includes NPV of pipeline & work in progress
Solar retail 294 0.1 Using 7x 2011E EV/EBITDA, in line with European SolarTotal Enterprise Value 13,777 2.8 Implied valuation of 9.7x 2011E EV/EBITDANet Debt, including tax liability (3,455) (0.7) Year end 2011 Net DebtMinorities & provisions (918) (0.2) Mostly Enel Green Power España & Fortuna hydro plantAssociates 913 0.2 Mostly wind, solar& waste; valued at 1.4x YE2011E bookRemaining Equity value 10,317Number of shares 5,000Value per share 2.1
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 7
World’s second largest green utility and most profitable
ENEL Green Power is the second largest “green utility” in the world (on our
estimate of 2010 production). Furthermore, it is the most diversified in terms of
geography and technology of operations. This diversification is, in our view, likely to
be further enhanced through the development of the planned pipeline which should
see significant growth, particularly in wind assets outside Italy. As shown in the
following section, as a result of high load factors at its hydro and geothermal plants,
and its exposure to the attractive Italian market, its EBITDA/MW is the highest
among green utilities.
Exhibit 3: EGP has a wide geographical presence and is run as three divisions: Italy & Europe, Iberia and Latin America
and North America 2009 pro-forma data
Source: Company data, Goldman Sachs Research estimates.
Acquisition of Endesa’s renewables in 1H10 has increased presence in Iberia
The inclusion of Endesa's renewable assets since March 2010 (60% owned) has increased
the group’s exposure to the Iberian market: using pro-forma data (assuming the inclusion
of Endesa’s renewable assets from January 1, 2009) rather than actual (from March 2010)
Italy’s share of sales would fall from 62% to 56%. Iberia’s share would increase from 5%
to 15%.
Enel Green Power’s production in 2009 was 18.9TWh, or 20.9TWh using pro-forma data.
In 1H 2010, Enel Green Power’s production was 10.8TWh, all from renewable sources, of
which 59% was from Italy and 11% from Iberia (the Iberian assets only started
contributing from April 2010). Likewise, the acquisition of Endesa’s renewables activity
has increased the weight of wind from 15% in 2009 to 21% (2009 pro-forma). In 1H 2010
wind production was 20% of the total.
Enel Green Power
Operating 5,761 MWProduction 20.9 TWh
In execution 1.2 GW
Pipeline 29.9 GW
Italy and Europe
Operating 2,897 MWProduction 12.0 TWh
In execution 0.4 GW
Pipeline 5.8 GW
Iberia and Latin America
Operating 2,076 MWProduction 6.4 TWh
In execution 0.5 GW
Pipeline 15.6 GW
North America
Operating 788 MW
Production 2.4 TWh
In execution 0.3 GW
Pipeline 8.3 GW
EGP presence
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 8
Exhibit 4: Italy represents just over half of revenues…
Revenue by division, 2009PF, €2,109 mn
Exhibit 5: ... but generates two-thirds of EBITDA
EBITDA by division, 2009PF, €1,331 mn
Source: Company data.
Source: Company data.
Exhibit 6: Production diversified by geography, with Italy
dominant… Electricity production by geography (2009PF, TWh); total
pro-forma production 20.9TWh
Exhibit 7: …and by technology
Electricity production by technology (TWh, 2009PF)
Source: Company data.
Source: Company data.
Economic stake in c.340MW of associates
Enel Green Power has several stakes in associates (30%-48%), with a gross capacity of
970MW at the end of 2009, particularly in wind in Portugal and Spain and geothermal in El
Salvador. In Portugal, Enel Green Power participates with a 30% stake in ENEOP (in which
EDPR also participates with 40%), which is developing 1,200MW of wind capacity
following the award of the 2005-2006 concession tender. ENEOP will be split in 2013,
upon completion of the projects, and Enel will start fully consolidating c.360MW. In El
Salvador, Enel owns 36.2% of La Geo SA de CV, which owns 204MW of geothermal plants
and has a net cash position. In Spain it has stakes in several wind farms and one waste
company.
Italy
56%
R of Eur
2%
Iberia
15%
Latam
12%
N.
America
7%
Retail
8%
Italy
65%R of Eur
2%
Iberia
16%
Latam
9%
N.
America
7%
Retail
1%
North America
12%
Iberia14%
Latam17%
Italy56%
R of Eur1%
Hydro51%
Geothermal
25%
Wind21%
Other3%
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 9
High load factors at Enel Green Power’s renewable plants set it apart
Production is more diversified than capacity as a result of the high load factor of
geothermal generation (load factors exceed 80%), with a median load factor of 88% since
2002. Italian hydro plants also have quite high load factors (c.46%), as the hydro plants
are run of river plants. Load factor at the Latin American hydro plants is even higher at
60% on average (with an almost 70% load factor in its largest hydro plant, the 300MW
Fortuna plant, in Panama). The average load factor of 41% for 2010E makes Enel Green
Power stand out versus other European green utilities, as explained in the following
section.
Exhibit 8: Italy dominates capacity… Installed base by geography, (MW, 2009PF); total installed
base was 5,667MW
Exhibit 9: …as does hydro by technology
Installed base by technology, (MW, 1H2010)
Source: Company data.
Source: Company data.
Retail activities high in revenues, small in EBITDA
Enel Green Power also operates renewable equipment retail activity through Enel.Si,
which operates as a franchise. The group’s retail activities are predominantly in Italy and
involve selling solar panels and other renewable products (e.g. mini-wind) to domestic
and business customers. While these activities generated €178 mn of revenue in 2009, or
9.4% of the group total, they provided only €7 mn (0.6%) of the group’s EBITDA.
Furthermore, EGP has started a joint venture (with Sharp and STM with 33% each) to
manufacture thin film modules in Italy through a 160MW solar fabrication plant. This is
due to start operating by end-2011. In a separate 50/50 joint venture with Sharp, EGP aims
to develop solar farms in the EMEA region (where the company expects 500MW of
projects to be developed by 2016). EGP has recently invested c.€200 mn in these JVs (post
1H2010).
North America
14%
Iberia18%
Latam18%
Italy46%
Rest of Europe
4%
Hydro44%
Geothermal
13%
Wind41%
Other2%
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 10
Peer comparison: smaller than IBR, yet with higher returns
We expect Enel Green Power to report lower growth than its peers. However, it has
a more diversified asset base and pipeline and a stronger balance sheet.
Iberdrola Renovables and EDP Renovaveis best comparables
As a result of its size, profitability and diversified geographical presence, Enel Green
Power is most comparable to “green utilities” such as Iberdrola Renovables and EDP
Renovaveis. EDF Energies Nouvelles and, to a lesser extent Acciona, are also good
comparables. In the case of Acciona, it is worth noting that it has a higher weight of
non-energy assets in its mix (currently around 30% of its EBITDA), and that it has a
different shareholder structure (all the other peers have a utility as a parent company,
which can allow for easier access to financing).
Broad comparison also possible with global players
On a global basis, as a result of the large weight of hydro within Enel Green Power, the
company could be also broadly compared to other hydro players such as Rushydro (6.8x
2011E EBITDA) or Brazilian hydro generators such as CESP, AES Tiete or Tractebel, which
currently trade between 8.2x and 6.9x 2011E EBITDA. However, as the bulk of these
company’s exposures are to different markets and different regulation (particularly in
Russia), we believe that such comparison should be only on a broad basis.
Renewables often compared on capacity, but EGP has higher load
factors
Exhibit 10: Relatively low installed capacity... Installed capacity, MW 2010E
Exhibit 11: ...but with the highest load factors Load factor, % 2010E
Source: Goldman Sachs Research estimates.
Source: Goldman Sachs Research estimates.
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
EGP IBR EDPR EEN Acciona
Installed capacity, end 2010E
10%
15%
20%
25%
30%
35%
40%
45%
EGP IBR EDPR EEN Acciona
Load
factor, 2010E
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 11
We believe Enel Green Power is best compared on production
(reflecting its high load factors) or EBITDA (higher profitability)
Exhibit 12: Enel Green Power has the second highest
production among green utilities 2010E
Exhibit 13: ...and its EBITDA from renewables is close to
Iberdrola Renovables’ EBITDA (excludes EBITDA from non-renewable activities or
traditional thermal generation); 2010E
Source: Goldman Sachs Research estimates.
Source: Goldman Sachs Research estimates.
Technological mix is more diversified, its exposure more to Italy,
peers are more exposed to Iberia and the US...
Exhibit 14: More hydro and geothermal for EGP
Output by technology, 2010E, rebased to 100
Exhibit 15: Less US exposure for EGP 2010E EBITDA by region, rebased to 100. *For Acciona,
which has no UK, the UK color represents Australia
Source: Company data, Goldman Sachs Research estimates.
Source: Company data, Goldman Sachs Research estimates.
...and a lower percentage of its production is reliant on subsidies
As a result of its greater hydro and geothermal production in Italy, both EGP’s percentage
of production and its percentage of EBITDA derived from incentives is lower than green
utility peers. Although the current review of green certificates in Italy (to be phased out
over 2013-2015) highlights some regulatory uncertainty.
0
5,000
10,000
15,000
20,000
25,000
30,000
EGP IBR EDPR EEN Acciona
Production in
2010E, GWh
0
200
400
600
800
1000
1200
1400
1600
EGP IBR EDPR EEN Acciona
EUR m
n
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
EGP IBR EDPR Acciona EEN
Other
Solar
Wind
Geothermal
Hydro
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
EGP IBR EDPR Acciona EEN
Non‐renewable
Latam
North America
UK*
Rest of Europe
Iberia
Italy
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 12
Exhibit 16: EGP has both the lowest percentage of
production which is incentivized ... Percentage of production which is incentivized
Exhibit 17: ... and also the lowest portion of EBITDA
explained by incentives Percentage of EBITDA explained by subsidies (for Acciona
percentage of energy EBITDA only, for IBR we exclude non-
renewable EBITDA)
Source: EGP data for EGP 2009, Goldman Sachs Research estimates for rest.
Source: Goldman Sachs Research estimates.
Lower growth, reflecting more conservative targets in our view
Exhibit 18: Growth rates are lower than at peers... Capacity growth, MW
Exhibit 19: …also in production terms
Production growth, GWh
Source: Goldman Sachs Research estimates.
Source: Goldman Sachs Research estimates.
...while profitability per MW is highest at EGP
As a result of high load factors, a large exposure to Italy (where returns for renewables
are higher), and lower exposure to the US (where returns tend to be lower), Enel Green
Power has the highest EBITDA profitability per MW among its peers. On a per GWh basis
(1,000MWh =1GWh), Enel Green Power’s profitability comes second behind EDF EN,
which has a large weight of solar.
32%
98% 100% 100%93%
51%
92% 91% 94% 91%
0%
20%
40%
60%
80%
100%
120%
EGP IBR EDPR EDF EN Acciona
2009E
2014E
36%
52%49%
55%
62%
0%
10%
20%
30%
40%
50%
60%
70%
EGP IBR EDPR EDF EN Acciona
2010E
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2010E 2011E 2012E 2013E 2014E
Annual capacity additions, M
W
EGP
IBR
EDPR
EEN
Acciona
0
1,000
2,000
3,000
4,000
5,000
6,000
2010E 2011E 2012E 2013E 2014E
Annual production growth, G
Wh
EGP
IBR
EDPR
EEN
Acciona
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 13
Exhibit 20: Enel Green Power should maintain the
highest profitability (EBITDA) per MW For Acciona we only include renewable business EBITDA, for
others we include total group EBITDA/renewable production
Exhibit 21: ... and EBITDA per GWh produced Total EBITDA for the group per GWh of renewable
production (for Acciona we only include the renewable
business); € mn
Source: Goldman Sachs Research estimates.
Source: Goldman Sachs Research estimates.
Scope to exceed business plan targets thanks to pipeline and
balance sheet
Enel Green Power’s pipeline (netted to reflect the company’s view of the probability of
success) is 1.8x its planned capacity increase as per its business plan to 2014. As 1.6GW
of capacity is already under construction or in execution (as of 9M2010), there is scope for
capacity growth to exceed forecasts in our view.
Furthermore there is a significant amount of planned investment beyond 2014. As a result
of the availability of its pipeline and its technological diversification, we believe that the
company could deliver its targeted unleveraged IRR of 9%-12%. However, we highlight
that the introduction of feed-in tariffs for renewables in Italy (moving away from the
current system of green certificates) creates uncertainty as the level of feed-in tariffs for
new renewable plants from 2013 will be set by auctions, with a minimum, as of yet
undetermined level of returns. In our estimates we assume new hydro and geothermal
plants get tariffs no higher than pool prices from 2013 (implying IRRs of 9%-11%) as these
two technologies are more mature and lower cost. We assume that Italian wind farms get
€110/MWh, consistent with IRRs for 7.5%, equal to returns we factor in Spain. EGPs strong
balance sheet, in our view, provides scope to deliver additional growth if incentives for
new renewables remain attractive.
30GW of pipeline – distributed across the continent with an overweight in wind
The pipeline for planned development to 2014 is greatest for Iberia (Spain and Portugal),
followed by North America and Latin America. While wind represents the largest part of
the pipeline, we would also expect it to see the lowest conversion rates.
More than one-third of the expected growth already in execution
In this growth context, EGP expects to increase its generation capacity by 3.5GW to
9.2GW (from 5.7GW pro-forma at end 2009). Of this total, 1.6GW is in execution, covering
46% of the total expected installation over the 2010-2014 period.
0.050
0.070
0.090
0.110
0.130
0.150
0.170
0.190
0.210
0.230
0.250
2010E 2011E 2012E 2013E
EUR m
n EBITDA/M
W
EGP IBR (renewables) EDPR EEN Acciona (renewables)
0.040
0.045
0.050
0.055
0.060
0.065
0.070
0.075
0.080
0.085
0.090
2010E 2011E 2012E 2013E
EUR m
n EBITDA/G
Wh
EGP IBR (renewables) EDPR EEN Acciona (renewables)
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 14
Exhibit 22: We expect EGP to reach its 9.2GW of capacity target in 2014, as one-third of
the total is already in execution and the pipeline is significant… Expected MW additions (in MW)
Source: EGP data (2009PF, in execution, EGP target 2014), Goldman Sachs Research estimates (other development, GS 2014).
Our estimate for capacity growth is broadly in line with company targets, with
comparable capex spend (€5.2 bn + €300 mn in associates)
Exhibit 23: ... by spending c.€5.3 bn in capex (€300 mn in associates) largely in line with
EGP’s guidance Expected capex 2009-2014 (€ mn); €300 mn represents financial investments in associates
Source: EGP data (Total EGP estimate of €5.2 bn and €0.3bn), Goldman Sachs research estimates (Hydro, Geothermal, Wind, Solar, Total).
We believe that EGP is highly likely to deliver its stated plan for two key reasons. First, its
targeted 3.5GW of incremental capacity (2009PF-2014) is backed up by 1.6GW of projects
already in execution (202MW expected commercial operation date 4Q2010, 548MW under
construction and 811MW ready to build as of 9M2010, includes ENEOP). Secondly, EGP’s
pipeline of projects is significant relative to its expected capacity build out.
5,667
9,173 9,200
1,273
2,233
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2009PF in execution other development GS 2014 EGP target 2014
MW
469
5,298 5200
663
300 300
3,740
420
0
1,000
2,000
3,000
4,000
5,000
6,000
Hydro Geothermal Wind Solar Total Total EGP estimate
Eu
ro m
n
+ 5mn of others
Financial investments
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 15
Track record supportive of 700MW of annual additions
While part of Enel Green Power’s pipeline has been built through acquisitions in recent
years, we believe the company has a good track record developing assets, taking into
account Endesa’s expertise. Over the last decade, Enel has been adding c.100MW of
renewables pa in Italy, split among hydro, geothermal and wind. In the last two years,
Enel has also added some 300MW pa internationally, while additionally, Endesa has made
just over 300MW of annual additions since 2005 (all of Endesa’s renewable activities in
Iberia have been within Enel Green Power España since 2Q2010). As a result, we believe
that 700MW pa is an achievable target for the company going forward.
Exhibit 24: EGP’s pipeline is supportive of our capacity addition estimates GS forecasts of net capacity additions (2010-2014) vs. EGP’s risk-weighted execution pipeline
and gross execution pipeline (2010-2014E)
EG
EGPs risk weighted pipeline is its gross pipeline weighted by probability of success. As defined by EGP: Highly
confident (90% success) on 5% of pipeline, Likely (50% success) on 19% of pipeline, Potential (20% success) on 76%
of pipeline
Source: Goldman Sachs Research estimates for GS forecast net capacity additions, EGP data for EGP Risk weighted execution pipeline & Gross execution pipeline.
Risk-weighted pipeline 1.8x business target; total pipeline 4.2x 2014 target
Exhibit 24 highlights our forecast of capacity additions by year, against EGP’s risk-
weighted pipeline development rollout (which amounts to 6.4GW over the 2010-2014
period) and its gross pipeline development rollout (which amounts to 14.7GW, including
1.6GW in execution already).
For the risk-weighted estimates, EGP has applied a probability of success to each project
within its pipeline. EGP defines the risk-weighted pipeline as the gross pipeline of all
projects multiplied by a probability of success (90% for highly confident projects, 50% for
likely projects and 20% for potential projects).
We can see that our expected capacity increase of 3.5GW in 2009-2014 (broadly in line
with the company’s target) is supported by a 1.8x risk-weighted pipeline and a 4.2x gross
pipeline.
369 571 724 1,075 767
3,506
4001,100
1,5002,100
1,300
6,400
400
1,400
2,700
5,4004,800
14,700
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2010E 2011E 2012E 2013E 2014E Period 2009PF-2014
MW
GS forecast net capacity additions
EGP Risk weighted execution pipeline
Gross execution pipeline
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 16
EGP has the highest ratio of pipeline to targeted growth
Exhibit 25: Enel Green Power has the third largest pipeline versus comps but it has the
highest ratio of total pipeline to targeted annual MW growth Implied years to fully develop pipeline (total pipeline over annualized business plan additions)
Source: Goldman Sachs Research estimates.
Wide geographical and technological diversification
Relative to its peers (with the exception of EDF Energies Nouvelles, which also has more
than 3GW of non-wind pipeline), Enel Green Power’s pipeline is more diversified (both by
technologies and by geography), with more than 3GW from non-wind technologies.
However, in wind, Enel Green Power also has a widespread geographical presence, in
terms of its pipeline and existing assets (the company operates or is building wind farms
in eleven countries).
Exhibit 26: Iberia, North America and Latam have the
largest pipelines Breakdown of pipeline by geography (MW, 1H 2010)
Exhibit 27: Wind the main technology focus for new
capacity; 3GW of solar, hydro and geothermal pipeline Breakdown of pipeline by technology (MW, 1H 2010)
Source: Company data.
Source: Company data.
39
33
29
36
31
0
5
10
15
20
25
30
35
40
45
EGP IBR EDPR EDF EN Acciona
3118
2655
10709
4893
8340150
29865
Italy Europe Iberia Latam North
America
New
Markets
Total
0
5000
10000
15000
20000
25000
30000
35000
Win
d
So
lar
Hyd
ro
Geo
therm
al
Bio
mas
s
Oth
er
To
tal
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 17
Net debt/EBITDA at 2.4x leaves more net income than at peers
Enel Green Power has the lowest net debt/EBITDA among the green utilities and its
leverage is also lower than the average of the broader utilities sector. Combined, its high
EBITDA per MW and its low net debt/EBITDA allow Enel Green Power to report the
highest net income among green utilities.
Exhibit 28: Strongest balance sheet among its peers Average net debt/EBITDA; Enel Green Power 2010E data
adjusted for the €3.7 bn loan capitalization by Enel Spa in
March 2010
Exhibit 29: ...leading to the highest net income among
green utilities
2010E net income
Source: Company data, Goldman Sachs Research estimates.
Source: Company data, Goldman Sachs Research estimates.
Unlike peers, EGP is FCF broadly neutral post capex over 2010-14E
Exhibit 30: EGP is FCF positive post capex over 2010-2014E, unlike peers
FCF for green utilities, post capex, pre dividends and changes in scope of consolidation
Source: Goldman Sachs Research estimates.
1
2
3
4
5
6
7
8
2010E 2011E 2012E 2013E 2014E
EGP IBR EDPR EEN
Acciona Sector average Enel (parent) Iberdrola (parent)
EDP (parent) EDF (parent)
0
50
100
150
200
250
300
350
400
450
500
EGP IBR Acciona EDPR EEN2010E net income, EU
R m
n
FCF (€ bn), pre div 2010E 2011E 2012E 2013E 2014E Cumulative
EGP ‐0.4 ‐0.1 0.1 0.1 0.3 0.1
Acciona ‐0.7 ‐0.2 0.2 0.1 0.3 ‐0.3
IBR ‐0.9 ‐0.5 ‐0.4 ‐0.2 0.1 ‐1.9
EDPR ‐1.0 ‐0.6 ‐0.2 ‐0.1 ‐0.1 ‐2.0
EEN ‐0.6 ‐0.7 ‐0.8 ‐0.7 ‐0.5 ‐3.3
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 18
Exhibit 31: Summary data: peer comparison
Source: Company data, Goldman Sachs Research estimates.
Valuation: €2/share using multiples & SOTP, in line with sector
In “Opportunities from stock picking: Buy low, sell high; Terna added to Conviction Sell
List”, September 14, 2010, we introduced a new valuation methodology for the utilities.
We combine a short-term valuation based on multiples and a long-term valuation based
on a SOTP or DCF. For Enel Green Power, these valuations combined (50% each) lead to
our 12-month price target of €2, implying 25% potential upside, marginally above the
median of the sector (23%).
Exhibit 32: EGPs 25% potential upside to our €2 12-month target price is close to the
sector median of 23%, and below renewable peers IBR, EDPR & Acciona Potential upside to European utilities sector price targets
Source: Goldman Sachs Research estimates.
EGP IBR EDPR EEN Acciona Average
MW 2010E 6,036 12,516 6,566 2,682 6,723 6,905
MW cagr 2010‐2014E 11% 10% 11% 20% 7% 12%
GWh 2010E 21,597 26,330 14,009 6,020 16,266 16,844
GWh growth 2010‐2014E 8% 14% 15% 21% 8% 13%
Average load 2010E 41% 26% 27% 28% 28% 30%
Renewables EBITDA 2010E, € mn 1,283 1,423 694 388 815 921
EBITDA/MW 2011E 0.21 0.12 0.12 0.15 0.13 0.15
EBITDA/GWh 2011E 0.061 0.054 0.051 0.070 0.055 0.058
Net debt/EBITDA 2010E 2.5 3.4 5.8 7.5 7.1 5.2
WIP (in MW) as of 1H2010 612 1,464 1,317 463 635 898
WIP as % of 2010E installed capacity 10.1% 11.7% 20.1% 17.3% 9.4% 13.0%
Pipeline, MW, 1H 2010 29,865 61,400 32,267 18,378 24,181 33,218
Pipeline to growth (years) 39 33 29 36 31 34
79%
46%
39%37%36%36%35%
32%32%31%31%29%29%
27%26%
20%
28%25%
23%22%22%18%
17%16%14%
10%10%
5%
10%
2%
0%-2%
-8%-12%
-16%
-40%
-20%
0%
20%
40%
60%
80%
100%
ED
F
RE
E
CN
A
AN
A
En
agas
Ed
iso
n
PG
E
ED
P
ED
PR
VE
Gas
Nat
Su
ezE
nv
IBR
PP
C
Sh
anks
En
el
EG
P
En
des
a
Dra
x
E.O
N
Fo
rtu
m
NW
G
CE
Z
Ver
b
IBE
UU
EE
N
SV
T
PN
N
A2A NG
SR
G
Ter
na
SS
E
RW
E
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 19
Renewable utilities’ short-term valuations to reflect structural growth
For the renewable utilities, we have adopted a short-term valuation approach based upon
EV/EBITDA multiples and 1-year growth in EBITDA.
Using P/E multiples for renewables may be misleading because of high and varied
depreciation policies on essentially relatively new long-lived assets. Therefore, we use
EV/EBITDA to avoid some of these accounting distortions. We also consider the
short-term (1-year) growth in profit (EBITDA) to reflect relatively high growth rates that
are less likely to be cyclical as a result of growth in the renewables market.
We have considered other high-growth utilities historically when setting target EV/EBITDA
multiples in the context of growth. There is no historical precedent for the renewable
utilities as a result of their short-term listing history (or in Acciona’s case, the short time
period that it has been focused on renewables).
Exhibit 33 shows the relationship between the EV/EBITDA multiple and EBITDA growth for
utilities that have consistently grown EBITDA at a minimum of 10% annually. The
correlation implies the growth multiple should be 8.5x EV/EBITDA plus the growth rate *
10 (e.g. a stock with 20% growth should trade on an EV/EBITDA on 10.5x). Exhibit 34
illustrates the calculated multiples for the five renewable utilities in our coverage,
including EGP, and upside to the “multiples-derived” valuations. Acciona’s base
EV/EBITDA is adjusted downwards as about 25% of its EBITDA does not come from
renewables (and may not have the same sustainable structural growth as renewables).
Exhibit 33: EV/EBITDA vs. 1-year EBITDA growth provides a guide for suitable valuation
multiples for the high-growth renewable utilities EV/EBITDA versus 1-year EBITDA growth for utilities with consistent EBITDA growth of over
10% for 2004-08
Source: Goldman Sachs Research estimates.
y = 9.7919x + 8.5394R² = 0.21
0
5
10
15
20
25
‐10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00%
EV/EBITDA
EBITDA growth (year + 1)
2004‐2008 (high growth stocks only)
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 20
Exhibit 34: Appropriate EV/EBITDA multiples for renewable utilities range from
9.5x-11.1x, depending upon short-term growth EV/EBITDA multiple component for renewables’ price targets
Source: Goldman Sachs Research estimates.
SOTP analysis gives €2.1/share valuation
Our SOTP is based on a DCF of each of the different technologies. In EGP’s case, Italian
hydro and geothermal and Spanish wind are the key contributors to valuation. For EGP’s
Italian hydro assets we have assumed all incentives (14% of hydro production in Italy was
incentivized in 2009) expire at end-2015, as suggested by the new draft legislation. We
assume pool prices stay flat at our 2015 estimate of €79 thereafter until the hydro
concessions expire in 2034. Our load factor assumption is 45% with €50k/MW of
opex/maintenance capex. We discount cash flows at 7.5% and assume no terminal value.
For the Italian geothermal business, we assume the same power price and incentive
development as in hydro. We assume load factors of 85% and opex/maintenance capex of
€130k/MW. We assume the plants run until concessions end in 2024. Given EGP’s
significant experience and knowledge in exploiting these geothermal reserves, in our
view it is likely that they will continue to operate these concessions in future. Therefore,
we assume some terminal value for them, equal to our estimate of the NPV of building a
geothermal facility in 2025 or c.33% of capex (€1 mn of NPV for a €3 mn investment).
Exhibit 35: Our SOTP analysis suggests a €2.1/share valuation, with hydro, wind and
geothermal driving the valuation Enel Green Power SOTP analysis
Source: Goldman Sachs Research estimates.
Base EBITDA Target 2011E
EV/EBITDA growth 2012E EV/EBITDA EV/EBITDA
Acciona 8.0x 18% 9.8x 9.2x 24%
EDF Energies Nouvelles 8.5x 26% 11.1x 11.6x ‐11%
EDP Renovaveis 8.5x 19% 10.4x 9.7x 18%
Iberdrola Renovables 8.5x 19% 10.4x 9.3x 19%
Enel Green Power 8.5x 10% 9.5x 8.2x 25%
Upside to current price
based on EV/EBITDA valuation
Enel Green Power SOTP€ mnYE2011 € mn €/share € mn/MW CommentsHydro 5,173 1.0 2.0 In Italy, valuation until end of concessions in 2034, Italy 3,022 assuming all incentives end in 2015 and power price of €79 LatAm 1,614 thereafter. For LatAm, valuation until 2043. No residual Other 538 value for either assetGeothermal 2,763 0.6 3.6 In Italy valuation until end of concessions in 2024, Italy 2,657 assuming all incentives end in 2015 and power price of €79 Other 106 thereafter. Residual value of 33% of capexWind 3,901 0.8 1.3 Assumes 5 yr average age of wind farms. In Italy, assume Italy 724 green certificates until 2015, then fixed tariff of €110/MWhSpain 1,781 1.1 In Spain, assumes power price is capped at €77.5/MWhEurope 637 post 2012Other 759Solar 411 0.1 4.2 High value of solar farms in Italy, assumes €440 solar Italy 319 power remuneration (fixed tariff + pool), and capexOther 92 costs of €2.8/WpOther 226 2.0 Biomass & cogeneration assetsTotal EV Operating assets YE 2011 12,474 2.5
Pipeline & WIP (2012-2015E) 1,010 0.2 Includes NPV of pipeline & work in progress
Solar retail 294 0.1 Using 7x 2011E EV/EBITDA, in line with European SolarTotal Enterprise Value 13,777 2.8 Implied valuation of 9.7x 2011E EV/EBITDANet Debt, including tax liability (3,455) (0.7) Year end 2011 Net DebtMinorities & provisions (918) (0.2) Mostly Enel Green Power España & Fortuna hydro plantAssociates 913 0.2 Mostly wind, solar& waste; valued at 1.4x YE2011E bookRemaining Equity value 10,317Number of shares 5,000Value per share 2.1
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 21
For the wind assets, we use the same valuation as for our Iberian renewable coverage
(where Spanish wind farms are remunerated at €77.5/MWh from 2012), without allowing
for upside from higher power prices as we assume some re-regulation in the sector might
occur if power prices start rising, as we forecast. This is despite the Spanish government
recently approving a Royal Decree which reduced wind farm remuneration for two years
(by c.30%), but allows for power price upside in 2013. We are more conservative,
believing rising pool prices are likely to increase pressure on the government to keep
control of costs to consumers. We assume a 5-year average age for existing wind farms
and a terminal value of 15% of initial capex.
Our valuation of the pipeline and work in progress is consistent with our treatment of
growth capital for peers (where we assume growth to 2015, discounting the value created
through investment every year, and then discounting work in progress values from 2015).
Associates and minorities
When valuing Enel Green Power, we need to take into account the value of associates and
also the value of minorities.
Exhibit 36: Associates form a material part of the company’s value
Book value of associates as of 1H2010; €417 mn
Source: Company data.
We believe any valuation of Enel Green Power should consider the value of its associates
in isolation, rather than as part of the group. Exhibit 36 shows the last reported book
values of Enel Green Power’s associates. In our view, some of these associates could
have a value above their reported book value. For example, the book value of the
geothermal generator La Geo de CV (El Salvador, rated BB by S&P) implies a 2009
EV/EBITDA of only 2.6x, compared to the 5x-8x typical of Latin American utilities. Empresa
do Vale do Minho’s book value also looks low at 6.7x implied 2009 EBITDA, while
Companias Eolica tierra Alta’s implied EV/EBITDA book value implies only 3.3x EBITDA.
Conversely, two associates (Tirme, a waste-to-energy company operating on the Balearic
islands, and ENEOP) have high implied EV/EBITDA multiples. Enel Green Power has
stated that it received an unsolicited offer for Tirme of €80 mn, implying 18x 2009 EBITDA,
while in the case of ENEOP, it has several wind farms currently under construction or
which were completed only during 2009, and therefore its EBITDA was not representative
of is potential underlying cash flow generation in our view.
We value EGP’s associates at €913 mn at YE2011E, or 1.4x YE211E book value. Valuing
minorities based on multiples (10x 2011E EV/EBITDA for EGP España, 12x 2011E P/E for
the Fortuna hydro plant in Panama) implies a c.€750 mn valuation, in line with our
balance sheet figure.
Year to December Country Stake BS value Tech. Capacity Net Debt EBITDA 2009
Asset break down % € mn MW MW, net € mn € mn, net € mn € mn, net
Operating companiesLA Geo SA de CV El Salvador 36% 86 Geo 204 73 (52) (19) 71 26Empr. Eólicos de Alvadia, Lda Portugal 48% 21 Wind 23 11 6 3 4 2Empr. Eólicos de Vale do Minho Portugal 38% 20 Wind 250 95 243 92 44 17Compañia Eólica Tierra Altas, SA Spain 36% 12 Wind 99 36 22 8 17 6Empr. Eólicos de Espiga, SA Portugal 38% 11 Wind 42 16 21 8 7 3
Tirme,SA Spain 40% 18 Waste 30 12 336 134 23 9Eólicas Portugal (ENEOP) Portugal 30% 12 Wind 322 97 281 84 9 3Other minor companies 60 0 0 0 0 0 0Total 240 970 340 857 311 175 65
Developing companies
Elica Greece 30% 137Geronimo USA 25% 22Tradewind USA 41% 18Total including development 417
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 22
Exhibit 37: Minorities in Iberia and Panama should also be taken into account Enel Green Power’s major minority stakes (as of 1H2010, the book value of minorities was
€692 mn. Enel Green Power España has c.€150 mn of associates (book value))
Source: Company data.
Tax equity partnership already treated as debt at Enel Green Power
As of 1H2010, Enel Green Power had €204 mn of US tax equity partnership, which it treats
as third-party debt in its accounts. When using EV/EBITDA in our valuation of Enel Green
Power (and Iberdrola Renovables and EDP Renovaveis) we adjust EV for associates,
minorities, provisions and US tax equity liabilities (for Iberdrola Renovables and EDP
Renovaveis).
Low deferred taxes as €0.5 bn of substitute tax was paid in 2009
Enel Green Power has a low level of deferred taxes relative to its most comparable peers
(Iberdrola Renovables and EDP Renovaveis). Its deferred taxes originate from 2005, when
Enel Green Power’s assets were revalued for fiscal purposes, leading to higher
depreciation charges at EGP (but not at Enel consolidated levels) and to a tax benefit in
the form of deferred taxes. During 2008, Enel Green Power paid a substitute tax (with cash
outflow during 2009) of €517 mn to release €1,039 mn of deferred tax liabilities. This led
to a €522 mn one-off gain in the P&L in 2008 from the release of the deferred tax
provision fund, which we have excluded from our P&L above as it is exceptional.
Enel Green Power’s 2010-2013E EBITDA and net income growth is
lower than green utilities, but higher than the sector average
Exhibit 38: Enel Green power has slower EBITDA growth than renewable utilities ...
EBITDA growth 2010-2013E CAGR for European utility sector
Source: Goldman Sachs Research estimates.
Company Country Asset type and capacity2009 EBITDA
(pro‐forma)Net debt, € mn Minority stake
Enel Green Power EspañaSpain and
Portugal
1.41GW, of which 1.25GW wind, plus
equity stakes (mostly Portugal)180 900 40%
Fortuna Panama 300MW hydro plant 96mn US$ 40mn US$ 49.9%
‐31%
‐12%
‐4%‐4%
‐1%
0% 1% 1% 1%
4% 4% 4% 4% 4% 4% 4% 5% 6% 6% 6% 6% 6% 7% 7% 7% 8% 8%9% 9%
10%10%11%11%
16%16%
21%
24%
‐40%
‐30%
‐20%
‐10%
0%
10%
20%
30%
Drax
PPC
CEZ
RWE
Endesa
International Power
E.ON
Enel
Terna
Severn Trent
EDP
Iberdrola
Snam
RG
National Grid
Verbund
Edison
United Utilities
EDF
A2A
Gas Natural
Pennon
Veolia Environnement
Northumbrian
Water
Centrica
GDF SU
EZ
Enagas
Suez Environnement
REE
Shanks
Fortum
Scottish &
Southern
Polska Grupa Energetyczna
ENEL GREEN POWER
Acciona
Iberdrola Renovables
EDP Renovaveis
EDF Energies Nouvelles
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 23
Exhibit 39: ... and has median EPS growth relative to the sector until 2013E EPS growth 2010-2013E CAGR for European utility sector
Source: Goldman Sachs Research estimates.
Exhibit 40: We see 25% potential upside to EGP vs. 23% for the utility sector as a whole – EGP trades at a slight
discount to peers due to slower growth and uncertainty regarding renewable remuneration in Italy, in our view Selected valuation metrics for Enel Green Power and other renewable utilities
All share prices in euro
Source: Goldman Sachs Research estimates. For important disclosures, please go to http://www.gs.com/research/hedge.html.
We do not view EV/MW as an appropriate valuation methodology as a result of
significantly different levels of profitability. We view EV/MWh as a potentially better peer
comparison methodology. We expect Enel Green Power’s profitability per MW and per
MWh to remain above those of IBR and EDPR throughout our forecast period (see
Exhibits 20 and 21).
‐35%
‐19%
‐11%
‐6%‐6%‐4%
‐2%‐2%‐2%‐1%
2% 3% 3% 3%
6% 7% 7%9%10%10%11%11%
11%12%13%13%13%14%
14%14%15%16%
21%
31%32%33%
‐40.0%
‐30.0%
‐20.0%
‐10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
Drax
RWE
CEZ
Endesa
Terna
E.ON
EDP
Enel
Snam
RG
National Grid
Gas Natural
International Power
Iberdrola
Enagas
REE
ENEL GREEN POWER
GDF SU
EZ
Scottish &
Southern
Suez Environnement
Severn Trent
Verbund
Centrica
A2A
Edison
Fortum
Northumbrian
Water
EDF Energies Nouvelles
EDF
Pennon
Polska Grupa Energetyczna
United Utilities
Veolia Environnement
Iberdrola Renovables
Acciona
Shanks
EDP Renovaveis
Current Potential EV/EBITDA 2011E 2012E P/E CROCI
Valuation Comparison Rating share price upside 2010E 2011E 2012E 2013E at target price 2010E 2011E 2012E 2013E 2010E 2011E 2012E 2013E
Acciona Buy 55.5 37% 10.0x 9.2x 7.9x 6.9x 10.3x 8.8x 22.3x 20.2x 12.8x 9.9x 5.8% 6.1% 6.8% 7.5%
EDF Energies Nouvelles Neutral 31.8 10% 13.3x 11.6x 10.3x 9.5x 11.9x 10.6x 21.8x 19.3x 15.8x 15.0x 7.1% 7.3% 7.7% 7.9%
EDP Renovaveis Buy 4.4 32% 11.2x 9.7x 8.5x 7.9x 11.0x 9.7x 48.4x 36.4x 22.9x 20.7x 5.0% 5.8% 6.6% 6.9%
Iberdrola Renovables Buy 2.6 29% 10.1x 9.3x 8.1x 7.1x 11.1x 9.6x 25.5x 21.9x 17.5x 14.5x 6.8% 6.7% 7.0% 7.2%
Enel Green Power Neutral 1.6 25% 9.5x 8.2x 7.5x 6.8x 9.4x 8.7x 17.3x 18.0x 16.4x 14.1x 6.8% 6.8% 7.0% 7.2%
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 24
High exposure to power prices, particularly in Italy
Enel Green Power is exposed to wholesale power prices, particularly in Italy (where
it produces 12TWh of power exposed to market prices) and, to a lesser extent in
Spain (3TWh exposed to market prices). Thus, almost 70% of its production is
exposed to power prices. In Latin and North America, most of its power is sold
under fixed feed-in tariffs or PPAs (except for Panama). EGP has no or immaterial
exposure to power prices in France, Greece and Portugal, as its power is sold under
feed-in tariff contracts.
Exhibit 41: Enel Green Power is highly exposed to wholesale power prices (as a result of
higher fuel costs) Unhedged exposure of EBITDA and net income to power prices to a €10/MWh change in power
prices globally (as a result of higher fuel commodity costs).
Source: Company data, Goldman Sachs Research estimates.
European power prices show a strong correlation with Brent…
European power prices are all strongly correlated with each other and historically have
been strongly correlated to the oil price (Brent) as this is the main variable determining
the evolution of input costs such as gas (and CO2). This correlation broke down during in
2009 and 2010 as a result of gas oversupply, which allowed cheap spot gas to flood the
European market, thus depressing CO2 and power prices. We remain of the view that the
European gas market will return to balance by 2012, and we therefore expect European
power prices to regain their historical correlation with oil. For more on this please see,
“European gas fundamentals have bottomed”, December 31, 2009.
…and are occasionally impacted by weather
Occasionally, weather conditions can also influence day-ahead prices. This was the case
in 2006 in Spain (a dry year, which pushed day ahead prices above German levels) and
1H2010 (the second wettest year of the decade, which pushed prices during many off-
peak hours to zero). While Enel Green Power has the option to sell some of its power
Total clean
generation (ex
Spain wind); Net
Income
Total clean
generation; Net
Income
Total clean
generation (ex
Spain wind);
EBITDA
Total clean
generation;
EBITDA
Verbund 29% 29% 22% 22%
Fortum 23% 23% 17% 17%
EGP 17% 22% 8% 11%
E.ON 17% 17% 9% 9%
CEZ 16% 16% 9% 9%
EDF 13% 13% 5% 5%
Endesa 13% 13% 5% 5%
Edison 12% 12% 4% 4%
RWE 12% 12% 5% 5%
Iberdrola 11% 14% 6% 7%
Enel 9% 10% 4% 4%
GDF SUEZ 8% 8% 4% 4%
PPC 8% 8% 3% 3%
Acciona 8% 42% 2% 10%
A2A 8% 8% 4% 4%
EDPR 8% 26% 2% 6%
SSE 5% 5% 3% 3%
Gas Nat 5% 6% 2% 2%
IBR 5% 18% 2% 7%
EDF EN 5% 5% 2% 2%
Centrica 4% 4% 3% 3%
EDP 4% 6% 1% 2%
IPR 2% 2% 1% 1%
PGE 1% 1% 1% 1%
Drax 0% 0% 0% 0%
% change due to €10/MWh higher prices on:
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 25
forward (within or outside the Enel group), it remains at least partially reliant on the spot
price as its production (particularly wind) is intrinsically unreliable. In Italy, 20% of power
is sold on a spot (day-ahead) basis. In Iberia this figure in 1H2010 was 65%, though in our
view Enel Green Power España might try to reduce this in the future through supply
agreements with the Endesa group.
Exhibit 42: Spanish and German wholesale power prices historically strongly correlated;
Italy at a premium Day-ahead power prices
Source: GME, Datastream, Goldman Sachs Research.
We expect European wholesale power prices to increase from 2012
Exhibit 43: Our forecasts point to higher wholesale power prices in Italy and Spain on the
back of rising commodity prices
Source: Goldman Sachs Research estimates.
Italian prices – high and likely to stay well above European levels
In Italy, which currently enjoys higher wholesale prices than the rest of Europe, wholesale
prices are unlikely to fall over the next five years, in our view. We expect a higher
hydrocarbon prices and a rising CO2 price (we assume €25/tonne) longer term to drive
prices higher. Therefore, despite recent investment in new capacity having brought the
reserve margin to over 26% in 2009 (source: Terna), we expect wholesale power prices to
rise, particularly from 2012, on the back of higher oil and gas prices and higher CO2 prices.
0
20
40
60
80
100
120
0
10
20
30
40
50
60
70
80
90
2004 2005 2006 2007 2008 2009 2010 to Nov.
US$/bl
EUR/M
Wh
Italy Germany Spain Brent/ €bbl
Year to December 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
Assumptions
Italy baseload power price 75 71 87 64 64 72 73 78 83 79
Spain baseload power price 51 39 64 38 37 42 57 62 66 68
German baseload power price assumption 50 50 49 55 55 58 68
Italy - Germany price differential 23 18 23 25 11
US$/€ 1.30 1.35 1.47 1.39 1.35 1.35 1.35 1.35 1.35 1.35
CO2, €/tonne 15 1 22 12 15 20 25 25 25 25
Oil, $/bbl 65 70 98 62 79 85 85 85 85 85
Green certificate cost, €/MWh 4 4 4 4 4 0
Green certificate, €, avrg traded price 119 88 88 89 89 76 75 72 68 71
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 26
Exhibit 44: Italian wholesale power prices have been driven by oil prices (Brent); we
expect this to continue Italian and German wholesale power prices and Brent in €/bbl (forecasts in dotted line)
Source: GME, Goldman Sachs Research estimates.
Italian power prices remain linked to Brent
Italian power prices have been linked historically to the evolution of Brent. This is because
the vast majority of gas imported into Italy and burnt in thermal power plants is linked
through formulas to Brent and its derivatives, typically with a 6 or 9-month lag (which
partly explains also the lag in 1H2010).
Italian wholesale prices have consistently traded above German levels
In the following exhibits we show that day-ahead power prices have remained
consistently higher in Italy than in the rest of Europe (we take Germany as a benchmark),
despite large investments in new capacity in recent years (see Appendix).
Exhibit 45: Italian wholesale prices have been
consistently €20/MWh above German prices since 2004…Italian versus German day-ahead wholesale power prices
Exhibit 46: ...and remained so into 2010; the gap has
widened in recent months Italian versus German day-ahead wholesale power prices
Source: GME, Goldman Sachs Research estimates.
Source: GME, Goldman Sachs Research estimates.
0
20
40
60
80
100
120
0
10
20
30
40
50
60
70
80
90
2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
US$/bl
EUR/M
Wh
Italy baseload power price Oil, $/bbl
0
10
20
30
40
50
60
70
80
90
2004 2005 2006 2007 2008 2009 2010 to Nov.
EUR/M
Wh
Italy Germany difference
0
10
20
30
40
50
60
70
80
90
Jan Feb March April May June July Aug Sept Oct Nov
EUR/M
Wh
Italy Germany difference
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 27
Why are Italian wholesale prices above northern European levels?
Despite large investments in new capacity and a nameplate reserve margin, we believe
there are at least four specific reasons why Italian prices could remain above German or
central European levels in the medium term:
Generation mix, as Italy still relies heavily on imported oil-linked gas for its power generation. As a result of infrastructure bottlenecks, spot gas has a difficult
time reaching Italy. In our view, this currently explains at least €5-10/MWh of the
difference between Italian power prices, relative to German prices. We expect this
spread to gradually decline as more gas import infrastructure is built, but not before
2015, and expect Italy to continue to have a €0-5/MWh premium to northern Europe
through the rest of the decade given the poor transport infrastructure.
Specific rules in the Italian wholesale power market, where thermal generators (which
set the marginal price) have also to pay an additional cost of pollution as they are required to buy green certificates, thus adding a variable cost. Considering
the current green certificate price and the quota obligation for 2010 of 6.05%, this
additional cost currently equates to c.€5.4/MWh. The Italian government has recently
announced that it will phase out the green certificate system from 2013 to 2015,
replacing it with feed-in tariffs for renewables. We do not believe that these will have
an impact on wholesale prices (as it is not a variable cost for generators) and we
expect to see this €4-5/MWh premium removed from the Italian price. In our
estimates we reflect this in 2015 through a €4/MWh yoy fall in power prices.
The shape of the Italian wholesale market (which is significantly more “peaky”
than northern European markets), leading to higher prices at peak when less efficient
plants are used. Although the addition of solar capacity might mitigate this
phenomenon in the future, we doubt it will disappear (summer peaks are now as high
as winter peaks and thus Italian reserve margins are some 10% lower in summer than
in winter). In 2010, peak summer demand was up 9% yoy, exceeding 56,000MW, as
the rising peaks are also a result of air conditioning which is becoming more
widespread. We estimate this peaky shape adds €2-5/MWh to the Italian wholesale
price, relative to Germany, as less efficient plants are used during this period.
Exhibit 47: In Italy, the summer peak (close to 52,000MW in 2009) equals the winter peak,
unlike in the rest of Europe, yet during the summer less capacity is available
Source: Country system operators, Terna for available capacity.
It is worth noting that, from a national security of supply perspective, the high summer
peaks make solar developments more attractive in Italy.
Electricity grid bottlenecks (particularly congestion in the Sicilian and Sardinian
grid), which add €2-4/MWh to the average national price, are unlikely to be eliminated
before 2015. Beyond that, assuming that the upgrades to the transmission grid are
completed, we would expect a €0-2/MWh premium due to congestion, given the
morphology of Italy. This is also particularly relevant for renewables, as wind (and
solar) receive a zonal price (i.e. a wind farm in Sicily would achieve a higher price
while still having the same right to make additional revenues from green certificates).
Ratio of summer peak to
winter peak
Capacity available at
summer peak (2009), MW
Capacity available at
winter peak (2009), MW
South Australia 1.43
California 1.43
Texas 1.30
Italy 1.00 65,604 70,009
Spain 0.91
Poland 0.78
UK 0.75
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 28
Exhibit 48: Same national price, but different by regions: lower in the north, higher on
the islands where most of the wind capacity is concentrated
Source: GME, Goldman Sachs Research estimates.
We expect a €9-23/MWh premium to Germany to be sustainable for Italy through 2015; €2-12/MWh premium after that appears reasonable
In total, we believe wholesale power prices in Italy can remain at a €9-23/MWh premium
to the European price through 2015, and a €2-12/MWh premium thereafter (assuming no
green certificate costs, and that gas and electricity grid investments are completed on
time).
Exhibit 49: We expect Italian wholesale power prices to remain at a premium to Germany
The new law for renewables is expected to phase out green certificates between 2013 and 2015.
Source: Goldman Sachs Research estimates.
Italy heavily reliant on gas (and oil-linked gas contracts); lack of base-load generation (no nuclear)
Historically, high Italian electricity prices have reflected Italy’s reliance on energy imports
(>80% of primary energy), its abandonment of its nuclear programme in the 1980s
following a public referendum on nuclear (after the Chernobyl disaster) and a lack of
domestic coal reserves and limited gas reserves (leading to limited coal and gas-fired
generation). Instead, the largest source of power generation in the 1990s was fuel oil,
which represented over 40% of all the thermal generation in 1999 (the year of sector
liberalization), a percentage which in 1995 was as much as 60%. In 2009, gas and fuel oil
generation still represented almost 50% of the total national generation.
50
60
70
80
90
100
110
120
2005 2006 2007 2008 2009 Jan‐Aug 10
EUR/M
Wh
Sicily Sardinia Italian baseload Northern Italy
Italian vs. German price differential 2010‐15E 2016E‐beyond
Gas price 5‐10 (or more) 0‐5
Green certificate 0‐4 0
Peaking requirements 2‐5 2‐5
Grid bottlenecks 2‐4 0‐2
Sum, €/MWh 9‐23 2‐12
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 29
Exhibit 50: High-cost gas and oil-based represent almost 50% of Italian gross power
generation, coal only 12%, hydro 16% and nuclear 0% Italian gross power generation and imports in 2009, TWh (total value 337 TWh)
Source: Terna, Goldman Sachs Research estimates.
A superficial view of the reserve margin suggests Italian power prices may be unsustainable after recent strong investments
Since 2002, the Italian power sector has added over 34GW of new, high efficiency gas-
fired plants (CCGTs), 17GW since 2005. During 2009, according to Terna data, Italian
power demand peaked at 52GW, yet Italy enjoyed a 26% reserve margin in the summer
and a 37% reserve margin in the winter peak. Despite this, Italian power prices remain
stubbornly above European power prices and we expect this to continue. We believe that
the large capex cycle for new CCGT has substantially been completed as companies
prioritize paying down debt, and the system has adequate spare capacity.
Fuel oil has been providing expensive reserve margin to Italy
Following the increase in oil prices from the middle of the last decade, the use of fuel oil
plant started becoming prohibitively expensive (with prices above €100/MWh or even
€150/MWh). However, Italy had fortuitously started a major programme of upgrading its
generation fleet by building over 30GW of gas-fired CCGTs over the decade.
Now new and old gas plants set prices at the peak
We believe a more appropriate view of the evolution of Italian reserve margins excludes
fuel oil generation. Margins on these terms reached positive values only from 2008. If we
exclude also older gas plants (Exhibit 51), the percentage becomes barely positive only
from 2009, implying that old simple-cycle (or some of the older and lower efficiency)
CCGTs are still required to provide power during peak times, often demanding prices in
excess of €100/MWh.
Hydro
16% Other
renewables
3%
Imports
13%
Coal
12%
Other fuels
7%
Gas
44%
Oil
5%
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 30
Exhibit 51: Italian reserve margins (2000-2015E) gradually improved as fuel oil plants
have been replaced by CCGT; new investments or new interconnectors required by 2015-
2018 We assume a 2.5% pa growth in the Italian peak power demand
Source: Goldman Sachs Research estimates.
We expect no further major CCGT programmes as companies pay down debt
Most of the planned new CCGTs have now been completed, with less than 3GW currently
under construction according to our estimates. In our view, the Italian large replacement
programme has stopped just ahead of a shift to oversupply.
Exhibit 52: Most new CCGTs have already been added – few more expected
Additions of new CCGTs in Italy since 2000 (see appendix for more details)
Source: Goldman Sachs Research estimates.
As all major players in Italy (Enel, Edison, A2A, Eon, Sorgenia-Verbund) are currently
focused on preventing increases in their debt levels, we believe that a further phase of
investments is unlikely. Instead, we believe companies will try to generate cash from
existing plants and pay down debt for at least a few years. Several plants, which were
planned to start in 2010 or 2011 appear to be on hold (for example A2As’ Monfalcone
repowering). Thus, Italy should continue to rely marginally on older, lower efficiency
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
Avai
labl
e C
apac
ity le
ss P
eak
Dem
and
as %
of P
eak
Dem
and
Reserve margin Reserve margin excluding interconnectors Reserve margin excluding fuel oil and old gas
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2002
2003
2004
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
Gas (CCGT) Coal
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 31
CCGT (with efficiency of 45%-52%) or even simple-cycle plants (with efficiency of
42%-43% or less) to supply power during peak times.
New import pipeline planned for Italy to bring cheaper gas, but not before 2016
Another possible reason for the lag between the Brent price and Italian power prices in 1H
2010 could be the shipment of some cheaper spot gas to Italy. While Italy has limited LNG
import facilities (two terminals, for 12bcm of capacity pa; a third one of 3bcm/pa is due to
be completed at the end of 2011), there are several projects to expand this capacity. Two
new pipelines are planned for Italy (one via Algeria, Galsi, and another connecting Italy to
Greece, IGI, to bring gas from the Middle East or the Caucasus), though as a result of
administrative delays neither is likely before 2016, in our view. A fully authorized LNG
terminal is also planned by Enel in Porto Empedocle, near Agrigento, Sicily, however we
do not expect this to be built before 2015 at the earliest.
No excess gas supply in Italy this winter
As a result of the lengthy authorization process, we do not see looming gas overcapacity
for Italy. Over the next twelve months Italy might even face a gas shortage. The
Transitgas pipeline, which delivers gas to Italy from northern Europe via passo Gries, and
represents 18% of national import capacity (up to 24bcm/pa maximum) went offline in the
summer following an avalanche in Switzerland which has damaged the pipeline. In 2009,
it delivered to Italy 12bcm of gas, or 15% of total consumption. This implies that there will
have been no excess gas in Italy through the current winter period.
Spain: we expect prices to rise (but also political intervention)
Contrary to the situation in Italy, Spain has experienced a significant fall in wholesale
power prices, to a significant discount to German price levels, on the back of overcapacity,
competitive gas sourcing and, in 1H2010, adverse weather. Higher gas and CO2 prices are
likely to have a positive effect on the Spanish power market in our view, yet in our
assumptions we do not expect the government to allow wind farms to benefit from higher
power prices. Should this not happen (and recently approved legislation remained
unchanged) wind farms could benefit from rising power prices.
Most of the wind production is under the old regime and unhedged
In Spain, Enel Green Power produces close to 3TWh, mostly from wind. In 1H2010, 67% of
Enel Green Power’s production in Spain (from 939MW of installed capacity) was
unhedged. All of this production was linked to the RD436 legislation (transitory
disposition), which allows the wind farm to receive a €38/MWh premium over the pool
price until 2012 inclusive (instead of the €31/MWh premium for new wind farms), but does
not benefit from floors (and is not subject to caps).
Exhibit 53: Only 35% of Iberian 1H production was hedged
Source: Company data, Goldman Sachs Research estimates.
Iberia, 1H2010 No plants MW GWh % ot total
RD661 ‐ Pool + premium, with cap&floor 3 82 71 6%
RD661 ‐ fixed tariff (wind €77.5/MWh) 33 259 249 21%
PPA (Portuguese assets) 26 128 98 8%
Total hedged 418 35%
RD 436 ‐ Pool + €38/MWh premium for wind 51 939 740 65%
Total 113 1,408 1,158 100%
of which wind is 80% of total production 1,246 931
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 32
Focus on renewable capacity growth in selected regions
EGP’s presence in the renewable energy market exposes the company to growth
opportunities. Globally, renewable energy generation (ex. hydro) has experienced a 26.2%
CAGR in installed capacity over the last five years (source: BP statistical review of world
energy) as governments in the OECD and emerging markets institute policies to support
renewable technologies. For example, the EU directive on renewable energy (2009/28/EC)
requires member countries to source 20% of primary energy consumed from renewable
sources by 2020 and achieve a 20% reduction in CO2 emissions (from a 1990 base) – the
so called triple 20.
28% of global installed capacity and growing
Exhibit 54: With 1,225 GW renewables are 28% of the global installed generation capacity
Global renewable electricity generation capacity as of 2009, includes all hydro
Source: Enel estimates based on WEO2009/GWEC 2008 (2008); WEO 2009 reference scenario (2020 min)l industry reports/McKinsey (2020max); Ren21 “Rapporto Renewables Global Status” 2009-2010; For Nuclear, Thermal & Total World data from EIA (data from 2007).
Similarly, China is targeting 330GW of hydro (including large hydro) and 150GW of wind
power by 2020, from 196GW and 16GW in 2009 respectively. In the US, different
legislative proposals (none of them signed into law) target a 17%-20% renewable energy
requirement at the federal level by 2020 (ex. large hydro), vs. c.3% in 2009. Currently, 29
US states have state-wide renewable electricity requirements. In our view, the key drivers
of increased support of renewables are:
Environmental concerns, particularly climate change. Power generation is the largest
source of green house gas emissions globally and we expect increasing momentum to
limit growth in emissions. Our analysis suggests over one-third of global generation
capacity will need to be zero-carbon by 2030 to meet emission reduction targets (GS
SUSTAIN).
Security of supply. The OECD imported 59% of its energy needs in 2009 (Source: IEA).
Renewable energy power generation is intrinsically local (e.g. hydro, wind, solar,
geothermal) and therefore can help mitigate supply risk and increase diversification in the
power generation portfolio and create local jobs.
High and volatile commodity prices, falling LCEO for renewables. Volatility of energy
commodity prices and their levels have risen materially in the last decade, and although
wind and solar power continue to be more expensive than hydrocarbon-based power,
980
159 54 21 11
1,225
379
2,968
4,429
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Hyd
ro
Win
d
Bio
mas
s
So
lar
Geo
ther
mal
Tota
l re
new
able
s
Nuc
lear
Ther
mal
Tota
l wo
rld
GW
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 33
these are becoming more competitive. Improving technology has dramatically reduced
the levelized cost of energy for both wind and solar PV, where panel prices have fallen
more than 50% in the last two years alone. Improvement could continue to reduce the
relative costs of renewable alternatives, with small hydro and geothermal already cost
competitive.
New renewable capacity could grow 130%-550% by 2020 (ex.
hydro)
Growth in renewable energy is highly correlated with supportive regulation. External
bodies such as the IEA suggest varying degrees of expansion in renewable capacity
depending on policy outcomes. Exhibit 55 highlights Enel’s estimates, based on these
reference scenarios (which are broadly in line with our estimates: that one-third of global
generation capacity will need to be zero-carbon by 2030 to meet emission reduction
targets).
Exhibit 55: Global renewable energy capacity could grow 50%-150% by 2020 depending
on different regulatory outcomes Current renewable capacity (2009) vs. min and max 2020 scenarios
Source: Enel estimates based on WEO2009/GWEC 2008 (2008); WEO 2009 reference scenario (2020 min)l industry reports/McKinsey (2020max); Ren21 “Rapporto Renewables Global Status” 2009-2010.
Using Enel’s estimates (based on external sources), we calculate renewable (ex. hydro)
could grow between 130% and 550% depending on regulation. Including hydro (which
has a much larger installed base) growth could be 50%-150% to 2020.
Wind, solar and geothermal combined 5-year CAGR of 26%
Growth in installed capacity has been material for wind and solar, both relative
newcomers to the renewable space compared to geothermal and hydro power. Globally,
wind installed capacity has grown at a 27% CAGR in the last five years (by 111GW) and
solar by 43% (19GW). This contrasts to a 3.8% 5-year CAGR for geothermal power
capacity (1.8GW) and a 3.2% 5-year CAGR for hydro electricity production (although this
has supplied a further 474TWh of energy due to the large base).
1,225
243 16435
407 376
1,820
330200
70
620 600
3,020
550
330
110
1,030 1,000
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Total world North America Latin America Africa Europe Asia
GW
2009
2020 min
2020 max
EGP focus regions EGP focus region
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 34
Exhibit 56: Wind, solar and geothermal combined installed capacity 5-year CAGR of 26%
Cumulative installed capacity for wind, solar and geothermal
Source: BP statistical review of World Energy 2010.
Exhibit 57 highlights the relative competitiveness of power generation technologies on a
levelized cost of electricity basis (LCEO), with no subsidies or carbon costs. This helps
identify the cost of different generation technologies, normalizing for differences in
up-front capital costs vs. ongoing fuel costs. Typically renewable energy (solar, wind,
geothermal, hydro) tends to have high up-front capital costs, with low or zero marginal
costs, as the fuel costs are zero. This is also true for nuclear energy, where fuel costs are
small compared to up-front capital costs. Conversely, both coal and gas plants tend to
have ongoing fuel costs, which as evidenced through 2006-2009 can be very volatile.
Wind becoming commercially competitive from €80/MWh
Exhibit 57: Hydro and geothermal technology is very competitive, wind close behind
Levelized cost of electricity (LOCE) for different generation technologies; average European
S
olar PV €2.2-2.9/W & 15% load factor, Solar thermal €4.5/W & 24% load, Wind €1.3/W & 24% load, Natural gas €0.6/W, 65% load (fuel
cost €32/MWh current, €55/MWh long term), Nuclear €5/W & 90% load, Coal €1.2/W & 85% load (fuel cost €32/MWh); Small hydro €2/W
& 46% load, Geothermal €3/W & 85% load factor. All analysis uses a 7.6% WACC, no CO2 costs, no production or investment subsidies
Source: Goldman Sachs Research estimates.
0
50
100
150
200
250
2003 2004 2005 2006 2007 2008 2009
GW
cum
mul
ativ
e in
stal
laed
cap
acity
Wind
Solar
Geothermal
€0
€50
€100
€150
€200
€250
€300
€350
PV -residential
Solar thermal PV -commercial
PV - utility Wind Natural gas long term
Small Hydro Geothermal Nuclear Coal Natural gas current
€/M
Wh
Average baseload electricty price
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 35
Our LCEO analysis indicates that geothermal energy is on average already one of the
cheapest forms of generation, even compared with traditional hydrocarbon-based energy
at current commodity costs. The economics of hydro power are equally compelling
(c.€60/MWh). We estimate wind has an LCEO of €80/MWh (assuming a good location),
higher than current hydrocarbon base-load or nuclear power, but only marginally so.
Indeed, during the period of high commodity prices in 1H2008, wind power’s LCEO was
lower than traditional hydrocarbon-based generation in many European countries.
Adding CO2 costs to thermal would make renewables more competitive
Exhibit 57 uses current coal costs of €32/MWh and shows two scenarios for gas prices,
the first consistent gas price in Europe through the summer (equal to €32/MWh on an
average of fuel costs) and the second using €55/MWh (more consistent with our long-
term bullish view on gas prices). We highlight that our analysis assumes load factors of
65% for CCGT, while currently certain regions (like Iberia) have much lower loads, largely
as a result of a strong increase in renewable power supply (with priority of dispatch) and
lower demand due to the poor economic environment.
On our long-term assumptions, gas is close to the LCOE of wind power. In addition,
European thermal generation also faces additional CO2 costs, currently €12-15/MWh for
coal and €5/MWh for gas. The only renewable technology that remains materially more
expensive than hydrocarbon-based power is solar. However, as we have mentioned
previously, solar panel prices have fallen 50% over the last two years, and if we continue
to see this rate of decline going forward, solar’s LCOE will improve materially. For our
solar PV analysis we use a 15% load factor as a European average, however, areas with a
significant amount of solar radiation (such as southern Italy or Spain) can see load factors
closer to the high teens.
Recent agreement for the supply of 1.3GW of turbines
As part of Enel Green Power’s growth plans, it has signed a framework contract for wind
turbine supplies with two leading global suppliers, for 1.3GW from 2011 to 2014, with an
option for a further 1.3GW. This allows substantial coverage of its wind capacity roll out
(we forecast 2.7GW of added wind capacity for the period), allowing for flexibility of
delivery location with fixed or limited indexation in prices. Furthermore, warranties will
cover availability, O&M and power curve efficiency and EGP will be able to access the
latest technology from the turbine suppliers. EGP has stated it secured 10% lower prices
vs. those achieved in 2009.
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 36
Italy and Iberia are key for growth, Europe and Americas follow
3.5GW of additions planned by 2014, well covered by the pipeline
Enel Green Power is targeting the addition of 3.5GW of renewables by 2014,
bringing its installed capacity to 9.2GW. At its FY2010 results, Enel provided details
of this, indicating that it expects to add 0.8GW in Italy, 1.2GW in Iberia and 1.5GW in
the rest of the world over the period. While wind should represent more than 85% of
the planned installation, it should represent only two-thirds of the total capex, with
the remainder focused on hydro, geothermal and solar; these are more capital-
intensive but also have higher load factors.
Exhibit 58: Enel Green Power has a diversified pipeline globally (1H2010) Not to scale; projects under construction or in execution. Excludes solar (32MW currently under construction in Italy and 7
under execution, different locations; small hydro in Italy 3MW (different locations) and a 1MW mini-hydro plant in Chile.
Source: Company data, Goldman Sachs Research estimates.
Under construction
Ready to build
Castle Rock Ridge (76)
Caney River (200)
(MW)
Valdihuelo (16)Lanchal (21)
Pucheruelo (23)Padul (9)El Puntal (13)
Los Barrancos (20)
Alto do Marco (12)
Alvaiazere (10)
Sources de la Loire (12)Haute de
Conge (26) (completed)
Cogollos (50)Valdelin (9)
Valdelin expansion(3)
Eneop (52 + 85)
Charmoy (10)Coulonges (36)
Cara Constantine (10)Dealul Pietros (24)
Salbatica 1(70)
San Pietro Avellana (10)
Hlogos (20)Prophet Helias (10)
Martinou (6)
Trapani Contrada Coniglia (21)Bagaladi (12)
Montebello Jonico (21)
Aquilon (50)
Maida (44)Maida expansion (12)
San Floro (8)
Wind
Hydro
Geothermal
Chucas (50)
Palo Viejo (85)
Energiaky (6)Kastiantiko (2)Pougakia (1)
Cove Fort (17)
On drilling
Apacheta (40)El Zouquete (40)
Radicondoli GR_1 (16)Chiusdino (17)
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 37
Exhibit 59: Most of EGP’s capacity expansion is likely to
happen in wind... GS expected capacity addition by technology, broken down
by stage of development (# at top is total)
Exhibit 60: ... with capacity additions having a good
geographical mix; Iberia the largest region GS expected capacity addition by region, broken down by
stage of development (# at top is total)
Source: EGP data: Ready to build & under construction figures, Goldman Sachs Research: total estimates.
Source: EGP data: Ready to build & under construction figures, Goldman Sachs Research: total estimates.
Italy – we expect 0.8GW of capacity additions by 2014
Italy is EGP’s core market. It represents 47% of its installed capacity (in MW as a
percentage of 2009PF) and we expect the company to add 722MW through to 2014, 21%
of total additions. As a result of the high load factors of its Italian capacity (hydro,
geothermal), Italy represents 56% of power output (in MWh as a percentage of 2009PF),
falling to 45% in 2014E. Exhibit 61 highlights the split of total Italian renewable installed
capacity (ex. large hydro) as of 2009. Exhibit 62 shows the additions we expect in Italy.
Exhibit 61: Italy’s renewables capacity is 10.9GW ... Make up of Italian renewable power capacity (small hydro
only), as of 2009
Exhibit 62: ... with EGP at 2.6GW, growing to 3.4GW by
2010 according to our estimates GS expected capacity additions to 2014 by technology, Italy
Source: EGP based on EER “Global renewable power generation forecast 2010-2015).
Source: EGP data: Italy 2009PF, Goldman Sachs Research estimates.
Italy targets 29% of electricity from renewables by 2020 from 17% today
In Europe, the key regulatory driver for investment in renewables is the European
directive 2009/28/EC which fosters the use of renewable energy sources. The directive sets
binding targets for the EU to reach 20% of total energy use from renewables, with the
target varying for each member country. Italy’s target is to derive 17% of its total energy
use from renewables by 2020 (from 8.7% as of 2006). To help reach this target, the Italian
Ministry for Economic Development’s draft national action plan sets a specific target for
final gross electricity consumption of 28.97% from renewables by 2020, from 16.58% in
2008 (source: Minister dello Sviluppo Economico, June 11, 2010).
509 630
543643
1,962
2,232
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Hydro Geothermal Wind Solar Total
MW
Future development
Ready to build
Under construction 3,014
218105170
3,505
162 72 216 85 76
611157200
610
579272
835
231367
2,284
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Italy Europe Iberia Latin America North America Total
MW
Future development
Ready to build
Under construction
3,505
643
367
1,208
505
782
4,900
10,900
2,700
700
1,000
1,600
0
2,000
4,000
6,000
8,000
10,000
12,000
Wind Small hydro Geothermal Solar Other Total
MW
429
3,419
1509
548
24 48
162
695
4
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Italy 2009PF Wind Small hydro Geothermal Solar Italy 2014
MW
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 38
Further to climate change legislation, security and diversification of supply and fuel price
volatility are further drivers of the Italian market. Italian renewables are compensated
mostly through a tradable green certificate (GC) system, set to be replaced by feed-in
tariffs from 2013 to 2015.
New renewables to receive feed-in tariffs from 2013, phasing out of GCs
The Italian government recently announced a change in the remuneration system for
renewables in Italy. All new plants (from 2013) will receive a fixed feed-in tariff power
price to be determined by an auction. The government will set a minimum price to
guarantee investment. Under the current system, renewables receive tradable certificates
(GC) on top of the power price which together are c.€150-160/MWh. We expect feed-in
tariffs to set remuneration levels lower than the current system, but could provide greater
certainty in terms of timeframe. In our estimates, we assume hydro and geothermal
receive compensation in line with our 2015 forecast pool price of €79/MWh. This still
allows new hydro and geothermal plants to have an IRR of 9%-11% in our estimates. For
wind, we expect €110/MWh feed-in tariffs, consistent with a 7.5% return and in line with
returns we assume for the Spanish market.
Italy: energy dependency and high energy prices make renewable attractive
We believe policy will continue to support renewables expansion in Italy as it will not only
allow Italy to reach its renewable energy quotas (as mandated by the EU), but will also
help reduce energy dependency (Italy is a large net importer of fuel) and thus reduce
imports. In addition, investments in renewables can assist the economic development of
Italy’s southern regions, in line with long-term Italian government objectives.
Most renewable projects are in the south of Italy
While geothermal is present in only one Italian region, Tuscany, hydro and other
renewables are spread across the country. In the case of wind, which received 32% of the
national green certificates in 2009 (with the rest going to (mini)hydro, geothermal and
biomass), southern Italy is the region of choice, also as a result of greater wind availability.
According to Terna, more than 96% of the planned wind capacity through 2015 is likely to
be built in the Italian southern regions or on the islands.
Exhibit 63: Expected Italian wind capacity by region: 96% in the southern regions
Terna’s expectation of installed wind capacity by 2015, by region. Total expected 10,260MW
Source: Terna.
Sicily23%
Sardinia13%
Puglia24%
Campania14%
Calabria11%
Abruzzo3%
Basilicata4%
Molise4%
Other4%
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 39
Exhibit 64: EGP Italian installed capacity and production data by technology
Source: Company data, Goldman Sachs Research estimates.
Iberia – 1.2GW by 2014E (0.8GW in Spain, 0.4GW in Portugal)
Iberia is EGP’s second largest market (24% of installed capacity in MW as percentage of
2009PF) and we expect the company to add 1,208MW to 2014 (35% of total additions). As
of 2009PF, Iberia represented 14% of production, as the vast majority of MW were wind,
with relatively low load factors. We expect Iberia to represent 20% of production in 2014.
Exhibit 65 shows the split of total Iberian renewable installed capacity (ex. large hydro) as
of 2009. Exhibit 66 illustrates the additions we expect EGP to make in Iberia.
Exhibit 65: Iberia’s renewables installed capacity was
29.4GW as of 2009, of which 75% was wind Make up of Iberian renewable power capacity (small hydro
only), as of 2009
Exhibit 66: We expect EGP to add 1.2GW by 2014, with
the vast majority of additions in wind GS expected capacity additions to 2014 by technology, Iberia
Source: EGP based on EER “Global renewable power generation forecast 2010-2015).
Source: EGP data: Iberia 2009PF, Goldman Sachs Research estimates.
Spain targets 38% of its electricity from renewables by 2020
As in Italy, the EU renewables directive is a key driver of investment in renewable capacity
in Spain. Spain is expected to source 20% of its total energy from renewable by 2020 and
Portugal 31% (from 8.7% and 20.5% respectively in 2006).
The Spanish electricity system has seen substantial growth in renewables, with Solar PV
having added 3.3GW to the system in the last three years. This has contributed to a large
increase in total system costs, which in turn has increased the Spanish tariff deficit. As a
result, the Spanish government has instituted a pre-registry for new renewable projects,
which will determine which renewable projects are developed until 2012. EGP had
Year to December 2008 2009 2010E 2011E 2012E 2013E 2014EMWItaly, Capacity
Hydro 1,510 1,509 1,510 1,511 1,513 1,523 1,533Geothermal 671 695 711 728 728 728 743Wind 362 429 503 557 697 847 977Solar 4 4 36 76 106 136 166Other 0 0 0 0 0 0 0Total 2,547 2,637 2,760 2,872 3,044 3,234 3,419Net additions 56 90 123 112 172 190 185GWhItaly, Production
Hydro 5,235 6,231 6,017 6,021 6,027 6,050 6,090Geothermal 5,181 5,000 5,050 5,357 5,612 5,612 5,670Wind 467 499 735 836 1,043 1,285 1,518Solar 2 2 26 74 120 159 198Other 0 0 0 0 0 0 0Total 10,885 11,732 11,828 12,287 12,802 13,106 13,476
growth (%) 8.4% 7.8% 0.8% 3.9% 4.2% 2.4% 2.8%
21,900
29,400
1,900
3,800
1,800
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Wind Small hydro Solar Other Total
MW
1,190
2,561
1,189
21
0
500
1,000
1,500
2,000
2,500
3,000
Iberia 2009PF Wind Solar Iberia 2014
MW
other 161
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 40
583MW in the “preregistro” as of 1H 2010. Furthermore, EGP has a 30% holding in ENEOP,
a wind company in Portugal, which is in the process of building 1,200MW of wind farms.
EGP will fully consolidate its 30% holding in 2013 (currently an associate), thus adding
360MW to its consolidated installed capacity.
Two regimes for wind remuneration in Spain
The Spanish wind farm remuneration regime (RD 661/2007) uses market power prices
with a premium (currently €31.0/MWh) and a cap and floor of €89.6/MWh and €75.4/MWh
respectively (see Exhibit 111 in the appendix for details of all relevant regulation; wind
farms brought on line before 2008 will be remunerated under RD 436 which gives a
premium of €38.3/MWh on top of the power price). There is also an alternative option,
choosing a fixed remuneration for 20 years (currently €77.5/MWh). We expect all new
wind farms to be built in Iberia to be incentivized.
At year end 2010, the Spanish government approved regulatory changes to the RD661
wind regime. The government will reduce the €31/MWh premium to €20.1/MWh for 2011
and 2012 (although keeping the floor for compensation at €75.4/MWh). The premium is
then set to return to €31 in 2013. We include these changes in our estimates.
Exhibit 67: EGP Iberian installed capacity and production data by technology
Source: Company data, Goldman Sachs Research estimates.
Europe (ex. Italy & Iberia): we expect 0.5GW of capacity additions
EGP operates in France, Greece and Romania. With 222 operating MW, this region
represents only 4% of installed capacity (in MW as a percentage of 2009PF; EGP is in the
process of divesting its 21MW wind operations in Bulgaria). We expect the company to
add 505MW (after divesting Bulgaria) to 2014, 15% of its total additions. Europe
represents less than 2% of 2009PF production, with our estimate for 2014 production as
less than 5%. Exhibit 68 shows the split of total renewable installed capacity (ex. large
hydro) by country as of 2009. Exhibit 69 illustrates the additions we expect EGP to make in
France, Greece and Romania.
Year to December 2009 2010E 2011E 2012E 2013E 2014E
MWIberia, Capacity
Hydro 29 57 57 57 57 57Geothermal 0 0 0 0 0 0Wind 439 1,412 1,619 1,769 2,279 2,379Solar 0 13 18 23 28 33Other 26 92 92 92 92 92Total 494 1,574 1,786 1,941 2,456 2,561Net additions 1,080 212 155 515 105
GWhIberia, Production
Hydro 58 197 200 200 200 200Geothermal 0 0 0 0 0 0Wind 766 2,560 3,186 3,561 4,433 5,101Solar 0 17 27 36 45 53Other 143 415 506 506 506 506Total 967 3,189 3,919 4,303 5,183 5,860growth (%) 229.8% 22.9% 9.8% 20.4% 13.1%
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 41
Exhibit 68: France, Greece and Romania had an
aggregate 9GW of installed renewable capacity as of
2009... Renewable power capacity for France, Greece and Romania,
ex large hydro (rounded to the nearest 1GW)
Exhibit 69: ... we expect EGP to add 526MW by 2014, with
the vast majority of additions in wind GS expected additions of renewable capacity from 2009-2014
Source: EGP based on EER “Global renewable power generation forecast 2010-2015).
Source: EGP data: Europe 2009PF, Goldman Sachs Research estimates.
France, Greece and Romania also have ambitious renewables targets
France, Greece and Romania are required to derive 23%, 18% and 24% of their energy
from renewables by 2020, from 10%, 6% and 17% respectively in 2006. Remuneration
schemes in France and Greece are through feed-in tariffs, €81-88/MWh for wind and
€276-440/MWh for solar PV, depending on the installation size (although the latter are
likely to be cut to take into account the rapidly falling cost of solar panels). France is
currently reviewing its solar subsidies to reduce the rate of installations.
High incentives in Romania
Romania has an attractive green certificate (GC) and mandatory quota system similar to
that of Italy. Wind producers get two GCs per MWh of wind energy with prices for GCs
capped at €55 and a floor set at €27. GCs are on top of the pool price. This combination of
incentives makes Romania one of the most attractive places to install wind power in
Europe (where peers of EDP Renovaveis are achieving c. €134/MWh). EGP has 34MW
under construction in Romania and 70MW ready to build (as of 1H2010). Notably, the Enel
group has a large presence in Romania, as it also owns three distribution companies,
including the distributor for the capital, Bucharest. Specifically for Romania, the
government targets a rise in electricity from renewables from 8.3% in 2010 to 20% by
2020.
Exhibit 70: EGP European installed capacity and production data by technology
Source: Company data, Goldman Sachs Research estimates.
8,000
9,000
1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
France Greece Romania Total
MW
212
748
10
482
935
0
100
200
300
400
500
600
700
800
Europe 2009PF Wind Hydro Solar Europe 2014
MW
Year to December 2009 2010E 2011E 2012E 2013E 2014E
MWEurope, Capacity
Hydro 10 10 13 19 19 19Geothermal 0 0 0 0 0 0Wind 212 236 398 494 594 694Solar 0 0 5 15 25 35Other 0 0 0 0 0 0Total 222 246 416 528 638 748Net additions 24 170 112 110 110GWhEurope, Production
Hydro 17 26 30 42 50 50Geothermal 0 0 0 0 0 0Wind 298 451 639 899 1,096 1,298Solar 0 0 3 13 26 39Other 0 0 0 0 0 0Total 315 478 672 954 1,172 1,387
growth (%) 51.6% 40.7% 41.9% 22.9% 18.3%
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 42
North America: we expect 0.6GW of capacity additions
North America is EGP’s third largest market in terms of installed capacity (14% in MW as a
percentage of 2009PF), but fourth largest in terms of production, with 12% of 2009PF
output. We expect the company to add 643MW to 2014, 19% of total additions and for
North America to produce 15% of output. Exhibit 71 shows the split of total US renewable
installed capacity (ex. large hydro) as of 2009. Exhibit 72 shows our forecast of EGP’s
additions in North America as a whole.
State targets and federal support for the US
US regulation is currently a patchwork of state-level renewable portfolio standards (where
the state regulator requires a certain percentage of electricity to be generated from
renewables resources) and federal-level production and investment tax incentives. The
combination of RPS and tax incentives generally leads to a purchase power agreement
(PPA) between wind farm operator and larger utilities.
PPAs are also influenced by the prevailing power price, particularly if the state RPS is not
a binding reason for procurement of renewable power. As demand for power in the US
remains constrained by lower economic activity, and power prices remain low as a result
of excess natural gas, PPAs for renewable projects are more difficult to sign. This has led
to a slowdown in the rate of installations for wind farms in particular. The US installed
c.10 GW of wind power in 2009 alone, while available 2010 data indicates a drop of 50% to
c.5 GW.
Exhibit 71: The US is one of the largest single renewable
energy market globally, with 59.8GW of installed
capacity ... Make up of Iberian renewable power generation (hydro is
small hydro)
Exhibit 72: ... we expect EGP to add 623MW by 2014, with
the vast majority of additions in wind GS expected additions of renewable capacity from 2009 to
2014
Source: EGP based on EER “Global renewable power generation forecast 2010-2015).
Source: EGP data: North America 2009PF, Goldman Sachs Research estimates.
We expect Enel Green Power to be able to add capacity in California
EGP is unlikely to be immune to the slowdown in the market and we assume it only
converts a very small fraction of its 8.3GW pipeline in the US.
35,000
59,800
7,000
3,0002,000
13,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Wind Small hydro Geothermal Solar Other Total
MW
406
1,411
314
606
17
0
200
400
600
800
1,000
1,200
1,400
1,600
North America 2009PF Wind Geothermal North America 2014
MW
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 43
Exhibit 73: Enel Green Power pipeline in the US
Source: Company data, Goldman Sachs Research estimates.
Of the 623MW of additions we forecast, 276MW (as of 1H2010) are either under
construction or ready to build (meaning they are fully permitted with signed PPAs). We
therefore only expect 300MW of new developments in the US, which considering the
large pipeline in the profitable Californian market (where renewable “RPS” incentives
currently reach US$50/MWh) could occur by 2013/14 and 60MW in Canada over the
period.
Exhibit 74: EGP North America installed capacity and production data by technology
Source: Company data, Goldman Sachs Research estimates.
Latin America: we expect 0.4GW of capacity additions
Although Latin America represents c.12% of 2009PF capacity, it delivered 17% of output in
2009. This is a result of high load factor hydro plants, particularly Fortuna in Panama. We
CA, Solar and windStrong “in state” demand, attractive prices
• Acquire presence in California market and interconnected states
• Early stage 3,900 MW pipeline
AB, WindLiquid market with good
wind resource~ 300 MW in Alberta Northern Midwest, Wind
Good wind resource, medium prices, RPSs• Expand in Northern Midwest with strong State
RPS, more liquid merchant market (MISO) and long term Demand f rom RPS
• Early stage 4,000 MW pipeline
North East, Wind and SolarLiquid markets and strong RPSs
Southern Midwest, WindVery good wind resource,
medium-low prices
NV, UT, Geothermal and SolarStrong in state demand (NV)
~ 100 MW
Alberta
California
Nevada
Utah
Kansas
Nebraska
S. Dakota
N. Dakota Minnesota
Iowa
Illinois
Wisconsin
MichiganMassachusetts
Year to December 2008 2009 2010E 2011E 2012E 2013E 2014E
MWNorth America, Capacity
Hydro 314 314 314 314 314 314Geothermal 47 47 47 47 47 64Wind 406 406 482 682 782 1,012Solar 0 0 0 0 0 0Other 21 21 21 21 21 21Total 749 788 788 864 1,064 1,164 1,411Net additions 39 0 76 200 100 247
GWhNorth America, Production
Hydro 997 990 990 990 990 990Geothermal 155 272 288 309 329 389Wind 1,127 1,228 1,368 1,806 2,252 2,754Solar 0 0 0 0 0 0Other 149 149 149 149 149 149Total 1,900 2,428 2,639 2,795 3,254 3,721 4,282growth (%) 27.8% 8.7% 5.9% 16.4% 14.4% 15.1%
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 44
expect net capacity additions of 367MW by 2014 (10% of the total), with output at 16% of
the total. Latin America had limited wind and solar power installed capacity as of 2009,
although it is a very large hydro market. Exhibit 75 shows the additions we expect EGP to
make in Latin America.
Exhibit 75: We expect EGP to add 367MW between wind, hydro and geothermal plants
GS expected additions of renewable capacity, 2009-2014E
Source: EGP data: Latin America 2009PF, Goldman Sachs Research estimates.
Hydro developments in Costa Rica & Guatemala; geothermal potential in Chile
Several key projects are coming on line in Latin America including two hydro plants, one
in Costa Rica (50MW) and another in Guatemala (85MW). We expect two geothermal
plants to come on line in Chile towards the end of our forecast period. We expect the rest
of capacity growth to be driven by wind projects.
Exhibit 76: EGP Latin American installed capacity and production data by technology
Source: Company data, Goldman Sachs Research estimates.
Sensitivity to installation: the risk is to the upside
Our Enel Green Power capacity forecasts fully includes the company’s target to add
3.5GW of new capacity (reaching 9.2GW) by 2014. As explained previously, we are
confident on delivery, given EGP’s significant financial headroom and the large pipeline to
targeted growth relative to peers.
24
1,034
643
190
137
40
0
200
400
600
800
1,000
1,200
Latin America 2009PF
Wind Small hydro Geothermal Latin America
MW
Year to December 2009 2010E 2011E 2012E 2013E 2014E
MWLatin America, Capacity
Hydro 643 644 645 730 780 780Geothermal 0 0 0 0 20 40Wind 24 24 24 24 114 214Solar 0 0 0 0 0 0Other 0 0 0 0 0 0Total 667 668 669 754 914 1,034Net additions 1 1 85 160 120GWhLatin America, Production
Hydro 3,386 3,389 3,395 3,495 3,838 3,965Geothermal 0 0 0 0 74 221Wind 75 75 75 75 272 646Solar 0 0 0 0 0 0Other 0 0 0 0 0 0Total 3,461 3,464 3,470 3,570 4,184 4,832growth (%) 0.1% 0.2% 2.9% 17.2% 15.5%
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 45
However, as a downside sensitivity, below we analyze a lower growth scenario, where we
assume only 90% of the targeted installation programme to 2014 is achieved (3.15GW
rather 3.5GW). In this scenario, we assume 90% as this is the average capacity rollout vs.
targets we factor into our estimates for green utility peers.
Exhibit 77: Under a lower growth scenario (90% of targeted installations) our EBITDA estimates would be only
marginally lower
Source: Goldman Sachs Research estimates.
Potential to double growth if gearing is taken to level of peers
We have also assessed an upside installation scenario, were EGP gears up its balance
sheet to the level of its peers. We estimate that this would allow it to spend an extra €5 bn
on capex (beyond its targeted €5.2 bn + associates). We estimate that this would take
EGP’s net debt/EBITDA closer to the average of its peers (4.4x net debt/EBITDA by 2014E)
from its current low level, allowing EGP to increase its capacity to 13GW in 2014 and
40TWh of production (vs. 9.2GW and 29TWh respectively), doubling the growth over the
period (>7GW compared to 3.5GW in our forecasts). We estimate that this would add
c.€600 mn of EBITDA in 2014 (to €2.6 bn), from our current estimate of €2 bn.
Risks: regulation, growth, prices and future level of feed in tariffs
The major risks facing Enel Green Power relate to regulation, wholesale power price
evolution and delivery of growth. In Italy, the Italian green certificate system is
being phased out to be replaced with feed-in power tariffs, the level of which is
unknown. Seasonal (not structural) risk could also come from the fluctuations of
hydro and wind conditions and the company bears geothermal exploration risk.
Movements in exchange rates and interest rates also pose a potential risk.
Changes in regulation or tariffs
While Enel Green Power faces potential adverse regulatory development in each of the
countries in which it operates, the three most material regulatory developments affect
Italy, Spain and the US.
Italy: uncertainty over future feed-in tariffs post green certificate system, corporate taxes and fees for hydro concessions
In Italy, we view the major risk as changes to regulation for renewables. A new
remuneration system is being discussed which would (1) introduce a new incentive
system for new renewable plants that come on stream after December 31, 2012,
differentiating between the size of the plant: feed-in tariff for plants smaller than
10MW (no indication on tariffs level at the moment) and an auction system for plants
bigger than 10MW; (2) confirm the obligation for the system operator GSE to buy
green certificates, but at 70% of the issue price determined by the 2008 Budget Law,
i.e. (€180-pool price)*70%; (3) gradually reduce to zero the quota at which thermal
generators are required to input certificates into the system by 2015 (starting from
Low Scenario € mn 2010E 2011E 2012E 2013E 2014E Base case € mn 2010E 2011E 2012E 2013E 2014EEBITDA group 1,317 1,418 1,548 1,741 1,940 EBITDA group 1,317 1,424 1,561 1,773 2,009Net Income 463 446 496 574 655 Net Income 463 445 488 568 661MW 6,036 6,527 7,261 7,976 8,813 MW 6,036 6,607 7,331 8,406 9,173Production 21,597 23,047 24,701 26,788 28,936 Production 21,597 23,144 24,882 27,366 29,838
Low Scenario (%) 2011E 2012E 2013E 2014E CAGR Base case % 2010E 2011E 2012E 2013E 2014EEBITDA growth 8% 9% 12% 11% 10% EBITDA growth 8% 10% 14% 13% 11%NI growth -4% 11% 16% 14% 9% NI growth -4% 10% 16% 16% 9%MW growth 8% 11% 10% 10% 10% MW growth 9% 11% 15% 9% 11%Production growth 7% 7% 8% 8% 8% Production growth 7% 8% 10% 9% 8%
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 46
2013); (4) move all renewables to the new feed-in tariff system from 2016. The level of
the new feed-in tariffs will be key for the future profitability of plant and adds
uncertainty going forward. We currently forecast that from 2013, only new investment
wind farms and Solar PV (of relevance to EGP) will receive incentives above the pool
price in Italy (old plants will keep green certificates until year end 2015). Given the
uncertainty surrounding levels of feed-in tariffs, we have modeled that wind farms
will receive €110/MWh (a level which will deliver a 7.5% IRR on our estimates), equal
to that which we forecast for Spain and in line with our WACC assumptions. Under
this scenario, however, new hydro and geothermal investment in Italy continue to
have returns above the cost of capital (IRRs of 9% and 11% respectively), assuming
no subsidies. A change of €10/MWh in the subsidy level for EGP’s Italian generation
(assuming 23% receives subsidies in 2011) has an impact of 2% on 2011E EBITDA. We
estimate EGP’s revenues from green certificates is €214 mn in 2011, 15% of EBITDA.
In 2008, the Italian government introduced an additional 5.5% corporate tax for all
energy companies in Italy. There is no guarantee that the government might not
attempt to introduce a similar additional tax in the future. In 2009, the government
introduced an additional 1% corporate tax for energy companies, which was
overruled by a national court however. In our estimates for other Italian utilities, we
assume that this tax is introduced from 2012 as a form of political intervention. A 1%
higher tax rate for EGP would have a 1.7% negative impact on EPS.
The recent “summer budget” law 122/2010, article 15, granted up to 7-year life
extensions to most hydro concessions, provided that at the end of the concessions
companies allow local government to take a 30%-40% stake. As a result, Enel Green
Power now expects its hydro concessions to last till 2034 (from 2029 previously).
However, the government has also introduced additional fees for hydro concessions
of €7/KW. We estimate this represents a cost €11 mn pa for Enel Green Power
(already implicit in our models). There is no guarantee that in the future such charges
might not be increased.
Spain: New laws approved (wind, solar PV), but long term uncertainty remains
In Spain, the government signed a new law for the wind sector in December. While all
wind farms built before 2008 will be unaffected, new wind farms will see their premia
reduced by 35% for two years (until 2012 inclusive), from €31/MWh to €20/MWh. Pre-
2008 wind farms will continue to receive a €38/MWh premium. From 2013, there will
be no change, with all wind farms moving to the new system with caps and floors
(currently set at €75-87/MWh, adjusted for inflation), or with the option to receive
fixed feed-in tariffs (currently €77.5/MWh). In our estimates for all Spanish wind
farms, we assume that from 2012 they are forced onto feed-in tariffs at the current
level of €77.5/MWh. This is more harsh than the approved law, but given continued
pressures on budgets and the pressure on the Spanish electricity deficit, we do not
rule out future re-regulation of the Spanish wind sector. As of 1H2010, 67% of Enel
Green Power’s installed capacity in Iberia (1,408MW) was under the old regime (i.e.
receiving the €38/MWh premium relative to pool prices for wind), 18% under fixed
tariffs and 6% under the new system with caps and floors. 9% of the capacity was
under PPA (in Portugal).
The Spanish government also announced a retroactive cut to solar PV subsidies of
30% for two years. Enel Green Power España has 12MW of solar in Spain which will
be affected by the cut (a c.€3 mn EBITDA impact).
US federal renewable energy support remains uncertain beyond 2011
In the US, the support for renewable energy is uncertain post 2011 for wind, as the
current federal support system (in the form of production or investment tax credits) is
expected to expire in 2012. A cash grant in lieu of these tax incentives for wind is being
extended until the end of 2011.
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 47
In addition to federal support, 29 individual US states also have mandatory renewable
quotas (“RPS”, or renewable portfolio standards). Given the current targets, the growth in
renewable production and the fall in overall demand in 2010, several states have already
reached or exceeded their RPS targets and given current quotas might not need any
further renewables to 2015 or even 2020.
Exhibit 78: Enel Green Power’s US exposure, by state and technology
Source: Company data, Goldman Sachs Research estimates.
Failure of adequate incentives could jeopardize growth targets
To hit its growth targets and maintain high profitability, we believe Enel Green Power will
continue to rely on subsidies or incentives for its renewable production, as the
technologies are today not competitive with traditional thermal generation.
This could be particularly true in the US, where for example, according to EDP, Texas
(ERCOT), the Midwest area MISO (where Enel has 4,000MW of early stage pipeline) might
not require any additional renewables as it has already reached its RPS quotas. In the
absence of adequate state or further federal support, the profitability of such projects
might not be economically viable and therefore the pipeline may never be developed.
The exception to these appears to be California, where the state has set itself a target of
33% of electricity from renewables by 2020. Enel has around 4,000MW of early stage
pipeline in California.
In Europe, the European Union has set to all its member states a binding target to derive
20% of their energy from renewable sources by 2020, compared to the current level of
only c.10%. While policy might vary across different countries, nonetheless the
continent-wide long-term binding national quotas provide better visibility and a
significant potential requirement for growth in renewables. As such, failure to grow in
these markets would be mostly down to Enel Green Power’s inability to deliver new
installations.
North AmericaHydro 314Wind 406Geothermal 47Biomass 21Total 788
USHydro 314Wind 379Geothermal 47Total 740
CanadaWind 27Biomass 21Total 48
Hydropower
Geothermal
Wind Power
Bio mass
Geothermal & Hydropower
Hydropower & wind
CANV
UT
ID
WA
ABQC
NL
NY
MEVT
NHMA
CTPA
WV
NCSC
GA
VAKS
MN
TX
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 48
Lower power prices would negatively impact Enel Green Power
As discussed previously, Enel Green Power is greatly exposed to higher (or lower) power
prices. To mitigate such exposure, Enel Green Power actively hedges most of its output
(but is unable to hedge 100% of its output as a result of the volatility of its output).
Position in Iberia mostly unhedged
Iberia appears as the least hedged region. This is because most of the wind under the old
regime (receiving pool + €38/MWh of premium) has been left unhedged. The high hedged
price is partly a result of the inclusion of some PPAs in Portugal (with high PPA prices of
c.€120/MWh), and partly the result of the inclusion of some non-wind technologies which
receive higher prices. To reflect potential regulatory risk, post 2012 we assume all wind
goes to fixed feed-in tariffs at €77.5/MWh.
We prefer to be slightly conservative for 2011 in Iberia
For 2011, we assume wholesale power prices for Iberia of €42/MWh respectively, in line
with our assumptions for other Spanish renewables. The current spot price is €40-
50/MWh, while 2011 forwards trade around €49/MWh, indicating some potential upside
for the Spanish business. During 1H2010, however, on the back of strong hydro (also
good wind conditions), Spanish day-ahead power price averaged only €30/MWh.
Seasonal risk for hydro and wind production
Hydro and wind suffer seasonality. This implies quarterly production data could be
volatile, affecting volumes. While wind volatility typically does not last more than two or
three quarters, hydro volatility (drought or floods) could last several years, as seen in
historical production data for Italy. El Niño, which tends to occur at regular multi-year
intervals, could also have adverse effects on hydro production in some Latam countries.
Exhibit 79: Italian hydro production dropped sharply between 2001 and 2007, but has
recovered recently
Italian hydro production and hydro coefficient (1= average, <1 dry, >1 wet year)
Source: Terna.
20.6
20.7
20.7
20.8
21.0
21.1
21.3
21.4
21.5
21.6
21.7
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
0
10
20
30
40
50
60
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Hyd
ro c
oef
fici
ent
GW
(ca
pac
ity),
TW
h (g
ener
atio
n)
Hydro installed capacity Hydro generation Hydro coefficient
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 49
Exploration risk in geothermal
The geothermal business presents high exploration risk, as wells are drilled in the ground
to ascertain the potential for resources of geothermal energy. Exploration is currently
under way in Italy, the US, Chile and Nicaragua, which may or may not lead to successful
discovery of geothermal potential. Rare, but not impossible seismic movements could
also jeopardize existing facilities’ installations and require new drilling, with additional
costs.
FX and interest rate risk
As of 9M2010, 73% of Enel Green Power’s debt was linked to floating rates. In 9M2010,
the average cost of debt was only 2.8%. A rise in interest rates could therefore lead to
higher interest expense. While as of 9M2010 Enel Green Power had €1.5 bn of short-term
debt (within 12 months), we do not view this as a concern as only a small part (€0.2 bn in
1H2010) of this debt was with third-parties (the majority was with Enel, its parent
company, with which the company has a €2.5 bn 7.5-year credit facility). Additionally, we
expect Enel Green Power to be FCF neutral, therefore not requiring further material
funding, and would expect its parent company to support it in case of exceptional
liquidity concerns.
While Enel Green Power’s North and Latin American revenues are mostly US
dollar-denominated, its P&L has some FX risk. Enel Green Power does not hedge its US
dollar exposure in the P&L. A 10% movement in the euro versus the US dollar would have
a €22-24 mn impact on 2010E EBITDA as a translation effect. A stronger US dollar would
typically also result in higher energy commodity prices in euro terms and thus higher
power prices in euro terms. As of 1H2010, 11% of its net debt was denominated in US
dollars.
Financials: double-digit growth rates
Enel Green Power has a stated business plan target, presented by Enel at its FY2010 results: to grow its EBITDA from €1.4 bn in 2011E to €2.1 bn in 2014. In the process,
the company expects to invest €5.2 bn to grow its capacity from 5.7GW to 9.2GW at
the end of the period. We believe the company will be able to fund most of its growth from its cash flow, and that its net debt/EBITDA will fall over this period, to
1.9x. We forecast the company will deliver broadly double-digit growth, with an
11.1% EBITDA CAGR and 9.3% net income CAGR over 2010-2014.
Some major corporate activity in 2010
The acquisition and full consolidation of Endesa’s renewables (ECyR) from 2Q 2010
(April 1) should be the main driver of EBITDA growth at the consolidated level for 2010. In
2010, we also expect Enel Green Power to experience lower financial expense than in
2009, primarily as a result of the capitalization of the €3.7 bn loan by Enel Spa in 1H from
2010.
Achieved power prices to fall in Italy in 2011E (on hedging), then to rise
We also expect achieved prices in Italy in 2011 to fall by €4/MWh (from €76MWh to
€72/MWh; Exhibit 80 shows only the hedged portion for 2010 and 2011) considering the
annual 12TWh of production in Italy, this should have a €50 mn negative impact on the
P&L. From 2012, we expect a small increase in the achieved price (+€1/MWh), followed by
further increases in 2013E and 2014E (+€5/MWh in each year).
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 50
Exhibit 80: Except for Iberia, Enel Green Power has hedged most of its output Enel Green Power forward hedging; from 2012 we show our expected achieved prices by
region. Achieved prices in Italy do not include GC or other incentives (c.€15 mn pa from 2011E).
Iberia includes all technologies
Source: Goldman Sachs Research estimates.
CIP6 expiring during 2010 in Italy
In the Italian business, we estimate that the expiry of some CIP6 contracts in 1H 2010 will
have a €45 mn negative yoy impact in 2010, and a further €30 mn negative impact in 2011,
when there will be no CIP6 contribution left. At the end of 2009, Enel Green Power had
five CIP6 contracts (one in geothermal expired in February and the others (hydro) mostly
in June) (see Exhibit 81).
Exhibit 81: Incentivized production at Enel Green Power, by region and technology; lower
incentives in Italy in 1H
Source: Company data.
Dividend policy at the top end of the renewable companies
Enel Green Power intends to have a dividend payout ratio in line with the top end of its
renewables peers. With most of the renewable companies paying around 30% of their net
income as dividends, we assume Enel Green Power will pay out 30% of its net income as
dividends from 2011.
2010E 2011E 2012GSf 2013GSf 2014GSf
Italy % 82% 81%
Price, €/MWh 78 71 73 78 83
Iberia % 39% 43%
Price, €/MWh 97 100 93 93 94
Latam % 98% 89%
Price, €/MWh 70 70 70 70 70
North America % 90% 82%
Price, €/MWh 41 41 41 42 42
2009 Hydro Geo Wind Average
Italy 14% 34% 99% 26%
Europe 99% 100% 100%
Iberia (pro‐forma) 100% ‐ 100% 100%
Latin America 12% ‐ 0% 12%
North America 8% 54%* 91% 55%
Total 14% 34% 96% 39%
*ITC (cash grant)
1H2010 Hydro Geo Wind Average
Italy 14% 29% 100% 25%
Europe 100% 100% 100%
Iberia 100% ‐ 100% 100%
Latin America 5% ‐ 0% 5%
North America 26% 0% 92% 52%
Total 14% 28% 96% 35%
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 51
Exhibit 82: Enel Green Power installed capacity summary, by technology and region
MW
Source: Company data, Enel annual report 2008, 2009, Goldman Sachs Research estimates.
Exhibit 83: Enel Green Power capacity additions summary, by technology and region
MW
Source: Company data, Enel annual report 2008, 2009, Goldman Sachs Research estimates.
Exhibit 84: Enel Green Power production summary, by country and by technology GWh. 1,000 GWh = 1 TWh. Italy and Europe form one division, Iberia and Latin America
another
Source: Company data, Goldman Sachs Research estimates.
Some exceptional in 1H2010
In 2010, Enel Green Power enjoyed €25 mn of fiscal benefits (booked in 1H) from the
Tremonti-ter law, which allows for fiscal benefits on reinvestments. This benefit is
currently under dispute. As the dispute could take a long time to settle, we have left the
benefit in Enel Green Power’s 2010 accounts. We assume no further benefit from 2011.
Year to December 2008 2009 2010E 2011E 2012E 2013E 2014E
MWCapacity by technology
Hydro 2,498 2,505 2,535 2,540 2,633 2,693 2,703Geothermal 678 742 758 775 775 795 847Wind 1,237 1,510 2,581 3,080 3,666 4,616 5,276Solar 4 4 49 99 144 189 234Other 47 47 113 113 113 113 113Total 4,464 4,808 6,036 6,607 7,331 8,406 9,173
Capacity by region
Italy 2,547 2,637 2,760 2,872 3,044 3,234 3,419Europe 222 246 416 528 638 748Iberia 494 1,574 1,786 1,941 2,456 2,561Latin America 667 668 669 754 914 1,034North America 788 788 864 1,064 1,164 1,411Total 3,296 4,808 6,036 6,607 7,331 8,406 9,173
749
Year to December 2008 2009 2010E 2011E 2012E 2013E 2014EMWNet capacity additions by technology
Hydro 17 6 30 5 93 60 10Geothermal 0 64 16 17 0 20 52Wind 380 273 1,071 499 586 950 660Solar 0 1 45 50 45 45 45Other 0 0 66 0 0 0 0Total 397 344 1,228 571 724 1,075 767
Net capacity additions by region
Italy 56 90 123 112 172 190 185Europe 0 0 24 170 112 110 110Iberia 0 0 1,080 212 155 515 105Latin America 0 0 1 1 85 160 120North America 341 254 0 76 200 100 247Total 397 344 1,228 571 724 1,075 767
Year to December 2008 2009 2010E 2011E 2012E 2013E 2014E
GWhProduction by technology
Hydro 9,653 10,689 10,619 10,636 10,754 11,128 11,295
Geothermal 5,218 5,155 5,322 5,646 5,921 6,015 6,280Wind 2,061 2,765 5,049 6,104 7,384 9,338 11,317Solar 2 2 43 104 169 230 291Other 308 292 564 655 655 655 655Total 17,300 18,903 21,597 23,144 24,882 27,366 29,838
growth (%) 9% 14% 7% 8% 10% 9%
Production by region
Italy 10,885 11,732 11,828 12,287 12,802 13,106 13,476Europe 315 478 672 954 1,172 1,387Iberia 967 3,189 3,919 4,303 5,183 5,860Latin America 3,461 3,464 3,470 3,570 4,184 4,832North America 2,428 2,639 2,795 3,254 3,721 4,282Total 17,300 18,903 21,597 23,144 24,882 27,366 29,838
growth (%) 9% 14% 7% 8% 10% 9%
6,415
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 52
In 1H 2010, Enel Green Power experienced exceptional costs in Panama; it had to buy
power to supply its contractual obligations, driven by lower hydro availability due to El
Nino. Such exceptional costs amounted to €25 mn according to the company.
Material associates at Enel Green Power
Equity income contains the share of income from several operating companies and
developers. As some of the associates are development companies (with no assets
currently, but only operating costs), we expect the income from associates to gradually
improve as projects are developed. Associates also include investments in two solar joint
ventures, which could become net income positive from 2012/2013, in our view. We
prudently assume a 5% return on investment from associates, rising to 8% by 2014.
Portuguese associate ENEOP to be fully consolidated in 2013
In 2013, Portuguese associate ENEOP will be split among its shareholders (Enel Green
Power España has 30%). This should lead to 360MW being fully consolidated at Enel
Green Power, as well as €350 mn of debt at the associate coming onto the balance sheet.
Consolidated equity income is likely to fall as this item becomes fully consolidated.
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 53
Exhibit 85: 11% EBITDA CAGR for 2010-2014E, 9.3% CAGR for net income. Enel Green Power has stated business plan
targets of €1.4 bn of EBITDA in 2011 and €2.1 bn in 2014 Enel Green Power P&L, cash flow statement and balance sheet (€ mn)
Our estimates only include EGPs Bulgarian assets as held for sale, we make no adjustment for the asset split of EURFER assts between EGP and Gas
Natural Fenosa, as these will return to the balance sheet once the split transaction is completed.
Source: Company data, Goldman Sachs Research estimates.
Low cost of debt and financial backing from the parent company
We expect cost of debt, which we forecast at 3.3% for the whole of 2010, to gradually rise,
reaching 5.5% by 2014E. This reflects our expectation of a general recovery in the
European and world economies, in line with the views of our GS economists and GS
commodities analysts. Should this not materialize, our power price forecasts might be too
high, but so too might our financial charge estimates.
Year to December 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 10-14 CAGR
Profit and loss account 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 10-14 CAGR
Net revenues 1,776 1,895 2,342 2,490 2,694 2,946 3,187 3,312 8%Operating expenses (635) (688) (1,025) (1,065) (1,133) (1,173) (1,178) (1,175) 4%EBITDA - reported 1,141 1,207 1,317 1,424 1,561 1,773 2,009 2,137 11%EBITDA - adjusted 1,141 1,207 1,317 1,424 1,561 1,773 2,009 2,137 11.1%
Depreciation (418) (416) (511) (563) (611) (660) (706) (751) 8%EBIT 723 791 806 861 950 1,114 1,303 1,386 13%
Associates 0 0 5 19 28 12 15 18 0Net financial expense (228) (133) (108) (126) (157) (187) (213) (202) 19%Profit before tax 495 658 703 755 821 940 1,105 1,202 12%
Gains on disposals/discountinued 0 0 0 0 0 0 0 0Profit before tax 495 658 703 755 821 940 1,105 1,202 12%
Tax (183) (219) (211) (257) (283) (319) (376) (409) 16%Minorities (24) (21) (30) (53) (50) (52) (68) (76) 23%Reported group net income 288 418 463 445 488 568 661 717 9.3%
Exceptionals adjustment, post tax, memo 0 0 0 0 0 0 0 0Clean earnings 288 418 463 445 488 568 661 717 9.3%
Balance sheet 2009 2010E 2011E 2012E 2013E 2014E 2015E 10-14 CAGR
Tangible assets 7,200 9,040 9,536 9,890 10,821 11,192 11,478 5%Investments/intangibles 1,242 2,642 2,711 2,789 2,708 2,723 2,741 1%Fixed assets 8,442 11,682 12,248 12,679 13,529 13,915 14,219 4%
Cash and cash equivalents 372 372 372 372 372 372 372 0%Other current assets 680 831 862 935 1,010 1,081 1,118 7%Total assets 9,494 12,885 13,482 13,986 14,911 15,368 15,709 5%
Current liabilities 890 998 1,033 1,083 1,143 1,201 1,231 5%Other liabilities 267 507 507 507 507 507 507 0%Gross capital employed (including cash) 8,337 11,380 11,942 12,397 13,261 13,660 13,971 5%
Provisions 114 169 169 169 169 169 169 0%Short and long term debt 5,659 3,634 3,827 3,898 4,309 4,171 3,909 4%Shareholders' Equity 2,384 6,819 7,148 7,503 7,924 8,415 8,934 5%Minority interests 180 710 749 779 811 858 911 5%Total liabilities 9,494 12,885 13,482 13,986 14,911 15,368 15,709 5%
Cash flow 2009 2010E 2011E 2012E 2013E 2014E 2015E 10-14 CAGR
EBIT 791 806 861 950 1,114 1,303 1,386 13%Depreciation 416 511 563 611 660 706 751 8%Change in working capital (62) (43) 4 (24) (14) (14) (7) -25%Provision payments, deferred taxes etc 0 0 0 0 0 0 0Dividends received from assoc./JVs 0 0 0 0 0 0 0Interest (79) (108) (126) (157) (187) (213) (202) 19%Tax (219) (211) (257) (283) (319) (376) (409) 16%Operating cash flow 897 875 1,046 1,097 1,253 1,406 1,519 13%
Capex (794) (1,250) (1,110) (1,014) (1,147) (1,076) (1,037) -4%Acquisitions 0 (1,300) 0 0 0 0 0 -100%Divestments / Grants 0 0 0 0 0 0 0Free cash flow (post interest/pre-dividends) 103 (1,675) (64) 83 106 330 482
Dividends 0 0 (129) (153) (167) (192) (221)Financing 0 3,700 0 0 0 0 0 -100%Other, changhes in consolidation (179) 0 0 0 (350) 0 0Change in cash (net debt) at year end (76) 2,025 (193) (71) (411) 138 262Net debt incl. tax/PTC liabilities 5,287 3,262 3,455 3,526 3,937 3,799 3,537 4%
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 54
Exhibit 86: Italy to contribute more than 50% of EBITDA through 2014E
Divisional revenues and EBITDA split
Source: Company data, Goldman Sachs Research estimates.
Exhibit 87: Around €1 bn of capex per year
Divisional capex split
Source: Company data, Goldman Sachs Research estimates.
Year to December 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
€ mnRevenues
Italy 1,189 1,189 1,168 1,246 1,330 1,429 1,436Europe 32 49 70 101 125 151 177
Italy & Europe 1,144 1,221 1,238 1,238 1,346 1,456 1,579 1,612Iberia 110 288 370 399 479 547 580Latin America 242 242 243 250 293 338 381
Iberia & Latin America 373 352 530 613 649 772 886 961North America 106 144 139 141 161 186 219 257Retail 153 178 435 498 538 532 503 481Other 0 0 0 0 0 0 0 0Total 1,776 1,895 2,342 2,490 2,694 2,946 3,187 3,312Revenues growth (%) 7% 24% 6% 8% 9% 8% 4%Revenue €/MWh 94 91 88 86 87 88 90 88
Year to December 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E€ mnEBITDA
Italy 872 858 836 901 972 1,060 1,062Europe 26 39 56 80 100 120 141
Italy & Europe 838 898 897 892 982 1,073 1,180 1,203Iberia 56 166 244 273 338 402 438Latin America 156 148 171 172 202 246 281
Iberia & Latin America 233 212 314 415 445 540 649 719North America 64 90 72 75 88 114 137 170Retail 6 7 44 42 47 46 43 44Other 0 0 (10) 0 0 0 0 0Total 1,141 1,207 1,317 1,424 1,561 1,773 2,009 2,137EBITDA margin (%) 64% 64% 56% 57% 58% 60% 63% 65%EBITDA margin ex. retail (%) 70% 66.8% 69.4% 70.2% 71.5% 73.3% 73.9%EBITDA growth (%) 6% 9% 8% 10% 14% 13% 6%
Year to December 2009 2010E 2011E 2012E 2013E 2014E 2015E
€ mnDivisional Capex
Italy & Europe (453) (558) (457) (398) (471) (426) (400)Iberia & Latin America (254) (406) (374) (428) (410) (382) (405)North America (36) (87) (228) (139) (266) (269) (232)Retail 0 0 0 0 0 0 0Other (Financial) (50) (200) (50) (50) 0 0 0Total (794) (1,250) (1,110) (1,014) (1,147) (1,076) (1,037)Capex growth (%) 58% -11% -9% 13% -6% -4%
Capex by technology
Hydro (128) (30) (172) (139) (81) (47) (48)Geothermal (199) (120) (60) (89) (172) (222) (230)Wind (408) (760) (742) (671) (824) (743) (696)Solar (139) (85) (64) (69) (63) (61)Other (9) (1) (1) (1) (1) (1) (1)Other (Financial) (50) (200) (50) (50) 0 0 0Total (794) (1,250) (1,110) (1,014) (1,147) (1,076) (1,037)Capex growth (%) 57% -11% -9% 13% -6% -4%
January 19, 2011
Goldman Sachs Global Investment Research
Company and managem
Historica
ENEL Green
separate en
assets, inclu
On January
and the ren
In March 20
(ECyR), the
a capital inc
subscribed
Union Feno
Power Espa
Endesa mai
the acquisit
previously b
Power and
core compe
JV EUFER, w
Exhibit 88: Enel Green Power (EGP) Espan
renewable assets End-2009 data
Source: Enel FY2009 results presentation, Endesa 1H re
ment profile
al development: formed in 2008, built up
n Power is a subsidiary of ENEL Spa. The business was
ntity within the ENEL Group in 2008 with ownership of
uding all geothermal plants, virtually all run-of river hy
y 1, 2009, it acquired ENEL’s international renewable as
ewables equipment retailing company Enel.Si.
010, Enel Green Power acquired 30% of Endesa Cogene
renewables subsidiary in Iberia of Endesa, SA, for €32
crease that allowed it to reach 60% of ECyR. The capita
to with €534 mn in cash and for €280 mn in kind (cont
osa Renovables (EUFER), valued at €280 mn). ECyR wa
ana. Enel Spa owns 92% of Endesa, SA.
intains its Latin American renewables; according to En
tion of exclusive control of Endesa (via the buyout of th
by Acciona), greater coordination has been achieved b
Endesa over Latam renewables projects, with each com
etences. In July 2010, Enel and Gas Natural Fenosa agr
which as of 1H2010 was still proportionally consolidate
na is the result of the combination of ECyR (Endesa) a
esults press release, Goldman Sachs Research estimates.
Enel Green Power (EGPW.MI)
55
in 2009 and 2010
s established as a
ENEL’s Italian renewable
ydro, and all wind assets.
ssets (excluding Endesa)
eracion y Renovables
26 mn and subscribed to
al increase was
ributing 50% of Enel
s renamed Enel Green
el’s management, since
he 25% stake held
between Enel Green
mpany building on its
reed to split their 50-50
ed.
and 50% of EUFER (Enel)
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 56
Presence in 16 countries worldwide: Europe, Latam, North
America
Enel Green Power is present in 16 countries: In Europe it is present in Italy, Spain,
Portugal, Greece, France, Romania and Bulgaria. Enel Green Power has put its Bulgarian
assets up for sale, and classified them as for sale as of 1H2010. This coincides with Enel’s
group strategy, to exit non-core countries where the group cannot achieve a vertically
integrated position.
In Latin America, it is present in Panama, Brazil, Mexico, Chile, Costa Rica and Guatemala,
where it owns hydro or minihydro plants. In Costa Rica it also owns a 24MW wind farm
and had recently won a tender to build 90MW of wind farms in Brazil. Enel Green Power
also has a 36.2% minority stake in La Geo SA de CV, a geothermal producer in which it is
trying to achieve majority control (currently in arbitration), and is also prospecting for
geothermal opportunities in Chile, Nicaragua and the US.
In North America, Enel has assets in the US (hydro, wind and geothermal; the major asset
about to start construction is a 200MW wind farm) and Canada (wind and biomass, with a
new 76MW wind farm currently under construction).
Enel Green Power is also pursuing wind, geothermal and solar project opportunities in
Turkey, Morocco, Egypt, Tunisia and South Africa, which we have not taken into account.
Relationship with ENEL Group
Enel plans to achieve €10 bn of cumulative disposals in 2009 and 2010. As of 9M2010,
Enel has closed disposals worth €8.4 bn.
We expect Enel Green Power will continue to benefit from ENEL Group’s scale in
procurement for non-generation equipment.
Experienced management with strong engineering background
Enel Green Power’s management has significant experience of the power generation
sector, both within Enel and elsewhere.
The Chairman is Luigi Ferraris, with a degree in Economics and has been with Enel
since 1999. He is currently CFO of Enel Group, while the CEO, Francesco Starace is the
former head of Enel Produzione (Enel’s Italian power generation arm). Mr. Starace, a
nuclear engineer, had experience in the electrical generation industry (having worked
abroad at GE, ABB, Alstom) before moving to Enel. The CFO, Alberto de Paoli, has a
degree in Economics, and has spent most of his career at Wind, previously Enel’s telecom
subsidiary. He has been with Enel since 2008.
Other key managers in our view are Ingmar Wilhelm, from Essen, Germany, with a degree
in electrical engineering (specialized in Energy Economics) and experience at other large
European utilities. He joined Enel in 2003 to head business development; Vittorio
Vagliasindi, a nuclear engineer heading Engineering & Construction (with Enel since 1980),
and Dino Marcozzi, a nuclear engineer and head of procurement, who has been with Enel
since 1980. Together with Mr Starace, who serves also as interim chief of operation and
maintenance, they form a committee responsible for approving the go-ahead to all new
renewable projects for Enel Green Power.
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 57
Appendix 1: Italian generation market and EU power demand
Older plants can adequately supply peaks through the coming decade
Older gas plants which have now moved to mid-merit or peak include Enel’s large
Montalto di Castro plant in Central Italy (3.6GW) and the old Edison CIP6 CCGT plants
(2.2GW). As these are not new CCGTs, Italian peak prices tend to be higher, leading to
higher average base-load prices. As the last 5,000MW of demand in Italy is typically
utilized less than 10% of the time, it is unlikely that companies will try to build new
capacity in the short term to replace this capacity, as it would achieve only very low load
factors. As a result, this has a small positive impact on Italian power prices of €2-4MWh,
we estimate.
As per Exhibit 89, during peak-time (midday or early evening), Italian power demand rises
as do power prices, as less efficient plants come into operation. Enel Green Power can sell
its power throughout the day.
Exhibit 89: A typical day in the Italian day-ahead market
Line (left axis) represents power prices; columns (right axis) demand during the day
Source: GME, Goldman Sachs Research estimates.
New interconnectors might replace old fuel oil as more capacity needed post 2015
While from 2015 Italy might require new capacity, particularly as old fuel oil plants are
unlikely to be compliant with the new large combustion plant directive (LCPD), this might
come in the form of new interconnectors which are currently being planned by Terna with
several countries (including France, Switzerland, Albania, Tunisia and Montenegro for a
total of 6.6GW). According to the system operator, the first interconnectors could be ready
in 2016/2018.
Sicily (and Sardinia) contribute to higher average national wholesale prices
Italy has a national wholesale power price, however the islands, Sardinia and Sicily,
currently each have power prices above the national average. The two islands combined
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
0
20
40
60
80
100
120
140
160
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
MW
hEU
R p
er M
Wh
Hours
CCGT variable costs (fuel, GC and CO2)
Imports, coal and CCGTs up to 8GW of CIP6 havepriority dispatching
Peaking units, including peaking hydro, turbogas
and fuel‐oil plants
Coal variable costs including CO2 and GC
Fuel oil or peakinggas plants
CCGTs in operation
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 58
contribute 10% of national demand (Sicily 6% and Sardinia 4%). During 2009, their zonal
power price average was c.€30/MWh, €3/MWh above the national average as a result of
the local generation mix and bottlenecks in transmission. These are being partly resolved
by Terna, which is completing a 1,000MW new interconnector for Sardinia (SAPEI, half
already operational, due to be completed in 2011) and has started a 2,000MW
interconnector to Sicily which is likely to be ready no sooner than 2015 (Sorgente-
Rizziconi). Once completed, these are likely to lead to a substantial reduction in the price
differential.
Large capacity additions since 2002, some in construction
Exhibit 90: Currently 2.4GW in construction; more projects available, but stalled
Amount of new thermal plants built over the last decade or currently being built/planned
Source: Company data, Goldman Sachs Research estimates.
Investments over the last five years, particularly in new high-efficiency CCGTs, have
reduced the weight of fuel oil in the mix (from 14% to just 5%), however as most of the
gas in Italy is imported via oil-linked formulas, this has not substantially modified the
Italian generation mix exposure to oil or Brent prices (as oil and gas continues to account
for around 50% of the total generation).
Date first start-up Location Company Size, MW
2002 9602003 4,0302004 6,7502005 5,7602006 3,2002007 5,3102008 3,7602009 2,400
Commercial operation 2010 Scandale, Calabria Eon-A2A 800 Gas CCGTCommercial operation 2010 Nuce, Priolo Gargallo, Sicilia ERG 480 Gas CCGTCommercial operation 2010 Civitavecchia Enel 2,000 CoalTesting (2010) Modugno, Bari, Puglia Sorgenia 800 Gas CCGTTesting (2010) Ferrara ENI-EGL 780 Gas CCGT/CHPEntered into operation last 12 months 4,860
2011 Aprilia, Lazio Sorgenia 800 Gas CCGT2011 Lodi, Lombardia Sorgenia 800 Gas CCGT2011 San Severo, Puglia EnPlus 400 Gas CCGT2012 Torino Nord Iride 400 Gas CCGT/CHPDue to enter into operation over next two years 2,400
Planned but not started2011-12 - we expect it to go ahead Gas peakers Edison 120 Gas SCGT repowering2012 - we expect it to go ahead Turbigo Edipower 400 Gas CCGT repowering2011 ? Ostiglia Eon 400 Gas CCGT repowering2012+ (delay announced) Monfalcone, Friuli A2A 800 Gas CCGT repowering2012+ Tavazzano Eon 400 Gas CCGT repowering2013 - we expect it to go ahead Taranto Eni 140 Gas CCGT repoweringTotal 1,740
Other major projects? Salerno EGL 800 Gas CCGT2015+? Porto Tolle Enel 2,000 Coal2015+? San Filippo del Mela Edipower 1000-2000 Gas/Coal?Withdrawn from business plan Central Italy Edison 800 Gas CCGT
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 59
Exhibit 91: Installed capacity, production and demand in the Italian power market
To reach available capacity, installed capacity needs to be multiplied by the technology available
Source: Goldman Sachs Research estimates based on Terna and Company data.
Exhibit 92: Italian generation mix has changed little over the last five years, with gas
replacing fuel oil on the margin Italian gross power generation and imports in 2004, TWh (total value 348 TWh)
Source: Company data, Goldman Sachs Research estimates.
Italian Cumulative Capacity (gross MW) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015EHydro 20,658 20,744 20,837 20,987 21,072 21,139 21,429 21,476 21,640 21,738 21,847 21,956 22,066 22,176 22,287 22,398Wind and solar 370 670 787 881 1,138 1,645 1,915 2,801 3,969 6,040 8,040 9,540 11,040 12,040 13,040 14,040
Nuclear 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Geothermal 626 573 707 707 707 711 711 711 711 737 737 737 737 737 737 737Coal 7,800 7,800 7,800 7,800 7,800 7,940 7,940 7,940 7,940 8,600 9,920 9,920 9,920 9,920 9,920 9,920CCGT 4,750 6,470 7,430 11,460 18,210 23,970 27,170 32,480 36,240 37,840 40,740 42,740 43,140 43,340 43,340 43,340Gas (simple cycle or peaker) 28,082 26,804 27,227 25,098 21,879 19,323 17,723 15,068 13,188 12,388 10,938 9,938 9,738 9,638 9,638 9,638Fuel oil 15,799 15,726 14,539 13,617 13,617 13,617 12,117 10,617 10,617 10,617 10,617 10,617 10,617 10,617 10,617 5,617Interconnectors 5,700 5,700 5,700 6,000 6,000 6,000 7,000 8,000 8,000 8,000 8,000 8,200 8,400 8,600 8,800 9,000Total (MW) 78,085 78,787 79,327 80,550 84,423 88,345 89,005 91,093 94,305 97,960 102,839 105,448 107,258 108,468 109,579 105,690Maximum available capacity (Terna) 70,009
Italian power production, TWh 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015EHydro production 51 54 47 44 50 43 43 38 47 53 48 48 49 49 49 49Gross thermal production 220 219 231 243 246 253 262 266 261 227 239 244 248 252 256 261Gross geothermal production 5 5 5 5 5 5 6 6 6 5 5 5 6 6 6 6Wind and solar 1 1 1 1 2 2 3 4 5 7 10 12 15 17 19 22Use from auxilary services -13 -13 -14 -14 -13 -13 -13 -13 -12 -12 -12 -12 -12 -12 -12 -12Sum net domestic production, Twh 263 266 271 280 290 291 301 301 308 282 290 298 305 312 319 326y-o-y change 1.0% 1.8% 3.5% 3.5% 0.2% 3.7% -0.1% 2.1% -8.4% 2.9% 2.9% 2.2% 2.2% 2.2% 2.2%Net Imports 44 48 51 51 46 49 45 46 40 44 42 40 40 40 40 40National demand (net production + imports) 308 314 321 331 336 340 346 348 347 326 332 338 345 352 359 366y-o-y 2.2% 2.3% 3.0% 1.4% 1.2% 1.9% 0.4% -0.1% -6.1% 1.7% 2.0% 2.0% 2.0% 2.0% 2.0%
Peak demand, MW 49,019 51,980 52,590 53,403 54,738 56,107 55,539 56,810 55,292 51,873 56,425 57,836 59,282 60,764 62,283 63,840y-o-y 6.0% 1.2% 1.5% 2.5% 2.5% -1.0% 2.3% -2.7% -6.2% 8.8% 2.5% 2.5% 2.5% 2.5% 2.5%
Hydro
14%
Other
renewables
2%
Imports
13%
Coal
13%
Other fuels
7%
Gas
37%
Oil
14%
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 60
Appendix 2: Enel Green Power pipeline
Exhibit 93: Enel Green Power pipeline by geography and technology
MW
Source: Company data, Goldman Sachs Research estimates.
Italy Europe Iberia Latam
North
America
New
Markets Total
Wind 2,356 2,529 9,711 4,018 8,207 ‐ 26,821
Solar 652 109 692 33 150 1,636
Hydro 47 5 243 486 ‐ ‐ 781
Geothermal 48 ‐ ‐ 389 100 ‐ 537
Biomass 15 ‐ 53 ‐ ‐ ‐ 68
Other ‐ 12 10 ‐ ‐ ‐ 22
3,118 2,655 10,709 4,893 8,340 150 29,865
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 61
Reg AC
I, Mariano Alarco, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or
companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific
recommendations or views expressed in this report.
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Disclosures
Coverage group(s) of stocks by primary analyst(s)
Mariano Alarco: Europe-Utilities. Deborah Wilkens: Europe-Utilities. Andrew Mead: Europe-Utilities. Fred Barasi: Europe-Utilities.
Europe-Utilities: A2a SPA, Acciona SA, Centrica, CEZ, Drax Group Plc, E.ON, EDF, EDF Energies Nouvelles S.A., Edison SpA, EDP Renovaveis SA,
Enagas, Endesa SA, Enel Green Power, Enel SpA, Energias de Portugal, Fortum, Gas Natural, GDF SUEZ, Iberdrola Renovables SA, Iberdrola SA,
International Power, National Grid, Northumbrian Water Group, Pennon, PGE, Public Power Corporation SA, Red Electrica de Espana, RWE,
Scottish and Southern Energy, Severn Trent, Shanks Group, Snam Rete Gas SpA, Suez Environnement, Terna, United Utilities, Veolia
Environnement, Verbund.
Company-specific regulatory disclosures
The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies
covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.
Goldman Sachs has received compensation for investment banking services in the past 12 months: Enel Green Power (€1.61)
Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Enel Green Power (€1.61)
Goldman Sachs has received compensation for non-investment banking services during the past 12 months: Enel Green Power (€1.61)
Goldman Sachs had an investment banking services client relationship during the past 12 months with: Enel Green Power (€1.61)
Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: Enel Green Power
(€1.61)
Goldman Sachs had a non-securities services client relationship during the past 12 months with: Enel Green Power (€1.61)
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships
Buy Hold Sell Buy Hold Sell
Global 31% 54% 15% 50% 42% 37%
As of January 1, 2011, Goldman Sachs Global Investment Research had investment ratings on 3,137 equity securities. Goldman Sachs assigns
stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold
and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions'
below.
January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 62
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January 19, 2011 Enel Green Power (EGPW.MI)
Goldman Sachs Global Investment Research 63
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