Goldman Sachs favours European renewables as demand growth and catalysts outweigh rate concerns

Overview

This is a European utilities sector outlook that argues macro concerns may cap near-term performance but do not undermine the sector’s structural growth outlook. Goldman Sachs favours renewable developers and manufacturers, citing contained rate sensitivity, improving power-demand fundamentals, supportive winter pricing and forthcoming company and policy catalysts.

Core views

Goldman Sachs frames the sector against a difficult near-term macro backdrop: sticky inflation, rates about 60 bp higher since the February 2026 energy crisis, and potential election risk in France and Italy. European utilities have underperformed the Stoxx 600 by about 10% since the Middle East conflict. However, the report argues that this weakness is disproportionate to the underlying impact. It estimates the sector’s de-rating already prices in about a 70 bp increase in rates, while a reopening of Hormuz should ultimately reduce the cost of capital. The rate case rests on defensive financing and earnings offsets. Average utility debt duration is about eight years and only about 25% of debt is variable, limiting the immediate profit effect of higher rates. Goldman Sachs estimates that a 50 bp rate increase lowers average equity valuations by 7% and reduces 2028E EPS by 4%; this is material but less severe than market perception. Regulated returns, renewable PPAs and inflation-linked RABs in markets such as the UK and Italy provide pricing power. Moreover, as hedges roll off, each 10% increase in power prices is estimated to lift 2028E EPS by 4%. Conversely, each 50 bp fall in the risk-free rate is estimated to increase average utility valuations by about 7%. The report’s central structural thesis is an electricity-demand-led “earnings super cycle.” Power consumption has risen 2%-3% year on year in most European regions, with accelerated electrification evident in German EV sales, up 50% year on year, and heat-pump applications, up 35%. Goldman Sachs sees datacenter development adding 1%-2% to annual power-consumption growth later this decade and potentially continuing beyond 2035; its upside scenario puts European datacenter capacity at about 80 GW by 2035. Although current estimates assume only 1%-2% annual demand growth, the report’s base case reaches 3%-3.5% after 2030, with peaks of 5% possible if electrification and datacenters accelerate. This demand inflection should require €2.2-3.5 trillion of power-sector investment over 2026-35 and, because supply responds slowly, should support higher margins and returns. The sector is forecast to grow EPS by 8% annually over 2026-30, or 10% for Buy-rated electrification compounders. Winter commodity conditions are an additional tailwind. European gas storage is about 25% below historical averages, while Middle East supply disruptions and heatwaves have tightened global LNG supply-demand conditions. Goldman Sachs says a normal winter could sustain TTF strength; TTF prices are already up more than 50% since the start of the year. This is most favourable for merchant-exposed power generators, renewable developers and gas-commercial businesses. For main generators, a 10% power-price increase, equivalent to about €5-10/MWh in most regions, is estimated to add roughly 4%-5% to 2028-29E EPS; the sensitivity table shows an average net-income impact of 3% in 2027E, 4% in 2028E and 5% in 2029E. Goldman Sachs therefore places a bias on renewables. It sees support from energy-security policy, possible US mid-term-election tailwinds for EDPR, RWE, Orsted and renewable-equipment manufacturers, and datacenter-related value opportunities for RWE, Solaria, PPC and Drax. It prefers growth-oriented renewable exposures over higher-leverage utilities such as Terna, Elia and Redeia, and flags that nominal regulatory regimes such as Spain may be more vulnerable to inflation. France and Italy’s affordability debate could create election-related headwinds for Engie, Veolia, Enel, Terna and Snam. Company-specific catalysts reinforce the sector view. Goldman Sachs expects late-2026 and early-2027 capital-markets days to drive medium-term guidance upgrades, noting that several covered companies beat H1 2026 consensus and raised full-year guidance. It is ahead of consensus at several forthcoming CMDs, including RWE’s 2031 EPS estimate of €5.65 versus €4.72 consensus and Naturgy’s €2.61 versus €2.19. Other identified catalysts are Solaria’s September results and November CMD, the German CCGT auction for RWE, a potential Iran peace deal lowering capital costs, and winter TTF upside. At the stock level, the report highlights Drax’s contracted cash flows and forecast £3.5 billion cumulative FCF in 2025-31E; EDPR’s US renewables exposure, anticipated 2028-31E profit acceleration and datacenter optionality; Naturgy’s balance-sheet capacity for transformative investment and M&A; and Nordex and Vestas as beneficiaries of stronger orders, margins and cash returns. It sees Orsted’s US projects and later balance-sheet capacity supporting a turnaround, PPC as an electrification and datacenter infrastructure platform, RWE as geared to AI/datacenters and potential Amprion ownership, Siemens Energy as exposed to grid capex and data-center demand, and Solaria as a high-return renewable developer with storage and datacenter upside. These are all presented as report-specific Buy-rated opportunities, subject to the detailed risks stated for each company.

Analysis framework

Goldman Sachs first tests whether higher rates materially impair utility fundamentals through debt structure, valuation and EPS sensitivities, pricing power and the interaction between rates and power prices. It then links observed power-demand growth, electrification, datacenters and investment needs to sector earnings forecasts, adds winter gas-price and policy/election scenarios, and applies company-level earnings, cash-flow and valuation analyses to its preferred names.

Methodology notes

• Industry AnalysisSupply-demand framework

  Power and gas supply-demand analysis

  The report links lower gas storage, LNG tightness, electricity demand growth and slow supply response to stronger power prices, investment, margins and returns.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  Electrification and datacenter demand transmission

  It traces demand growth through renewable developers, generators, grid investment and wind-equipment manufacturers.

• Valuation methodsSOTP (Sum-of-the-Parts) Valuation

  Company-specific sum-of-the-parts valuations

  Several preferred companies are valued by separately assessing businesses such as renewables, generation, distribution and infrastructure.

• Valuation methodsDCF (Discounted Cash Flow)

  Discounted-cash-flow valuation

  The report uses DCFs with stated WACCs and capacity-addition assumptions for renewable and other operating assets.

• Valuation methodsP/E and PEG Valuation

  P/E-based valuation

  Naturgy and PPC valuation work includes target P/E multiples applied to forecast earnings.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Drax

  Preferred renewable and flexible-generation exposure with datacenter optionality.

  Strengths

  Forecast £3.5bn cumulative FCF in 2025-31E; Renewables, Flexible Generation & Supply expected to comprise c.90% of EBITDA beyond FY2032.

  Weaknesses

  Government-support exposure at Drax Power Station remains a market concern.

  Comparison

  Goldman Sachs argues the business is no longer simply a low-multiple, support-dependent operation.

  Risks

  Regulation and policy for biomass and pellets, plant maintenance, investment returns, datacenter demand and legal outcomes.

• EDPR

  Renewable developer positioned for US return and datacenter tailwinds.

  Strengths

  US renewables represent c.65% of the business; Goldman Sachs expects 2028-31E net profit to rise c.90% to c.€1.0-1.1bn.

  Weaknesses

  Depends on capacity additions and electrification progression.

  Comparison

  2031E net-profit estimate is c.17% above Visible Alpha consensus.

  Risks

  Electrification delays, lower capacity additions or power prices, higher rates and USD/BRL appreciation.

• RWE

  Renewable, flexible-generation and datacenter beneficiary.

  Strengths

  Potential FlexGen pre-tax upside of c.€300-600mn by 2030-31 in the hyper-electrification scenario; potential strategic Amprion stake.

  Weaknesses

  Execution in the renewable pipeline is critical.

  Comparison

  Goldman Sachs sees scope for a more Iberdrola-like profile if the Amprion strategy succeeds.

  Risks

  Recession, weaker LNG and power prices, higher sovereign rates, weak pipeline execution and GBP/USD depreciation.

• Solaria

  Preferred high-return renewable developer with storage and datacenter optionality.

  Strengths

  Forecast 17% ROE by 2028E; BESS could reduce zero-pricing risk on merchant exposure.

  Weaknesses

  Execution delays are assumed and remain material.

  Comparison

  Goldman Sachs describes it as the highest-returning renewable developer in its coverage.

  Risks

  Lower commodity and power prices, execution delays, weaker new-capacity returns, higher rates and weaker macro conditions.

• Vestas

  Preferred wind-equipment manufacturer exposed to rising installations and order intake.

  Strengths

  Scale, geographic diversification, expected margin expansion and FCF growth through FY2027.

  Weaknesses

  Offshore ramp-up remains an execution dependency.

  Comparison

  Goldman Sachs calls Vestas the best-positioned company in its wind-manufacturer coverage.

  Risks

  Lower onshore-wind volumes or US installations, lack of wind-sector M&A and lower commodity prices.

Key data

• European utility share-price performance-c.10%Decline since the Middle East conflict; Goldman Sachs estimates this prices in a +c.70 bp rate move.
• Average debt durationc.8 yearsEuropean utilities average; only c.25% of debt is variable.
• Rate sensitivity+50 bp rates: -7% average equity valuation; -4% 2028E EPSGoldman Sachs estimate of fundamental impact.
• Power-demand growth2%-3% yoyYear-to-date growth in most European regions.
• Sector EPS growth+8% CAGR, 2026-30+10% on average for Buy-rated electrification compounders.
• Electrification investment need€2.2-3.5 trn, 2026-35Estimated cumulative EU power-sector investment requirement.
• European gas storagec.25% below historical averagesSupports the report’s positive TTF skew into winter.
• Datacenter capacity upside casec.80 GW by 2035European datacenter market capacity in Goldman Sachs’ upside scenario.

Impact & implications

The report says the combination of already-discounted rate risk, structurally rising electricity demand and potential winter power-price support should favour renewable developers, flexible generators, grid-linked businesses and renewable-equipment manufacturers. It expects upcoming CMDs and policy developments to be potential triggers for medium-term earnings upgrades.

Risks

• A larger-than-expected rise in interest rates could slow the economy and weaken sector demand.
• Election and affordability risks in France and Italy could pressure selected regulated utilities.
• A weaker-than-expected winter or lower gas and power prices would reduce merchant-generation and renewable tailwinds.
• Company-specific risks include project execution delays, lower renewable returns, policy or regulatory changes, construction cost overruns, weaker volumes and foreign-exchange movements.

What to watch

• Solaria’s September results and November capital-markets day.
• Late-2026 and early-2027 CMDs, particularly the potential guidance upgrades for 2028-31.
• US mid-term elections and their implications for EDPR, RWE, Orsted and renewable manufacturers.
• Germany’s infrastructure plan and forthcoming CCGT auction.
• European gas-storage levels, winter weather and TTF prices.
• Any Iran peace deal or Hormuz reopening that could lower the cost of capital.