global renewable energy: wind & solar: an investable future · 2016-09-21 · opportunities: in...

Equity Research1 September 2016

Barclays Capital Inc. and/or one of its affiliates 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.

This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 62.

Global renewable energy

Wind & solar: An investable future Solar and wind energy have become mainstream energy sources. They require much less direct government support, but still benefit from the highly ambitious COP-21 climate goals the world has set. Economics continue to improve drastically and wind and solar are now the cheapest energy source in most emerging markets. Being careful not to generalize, we think renewables will become competitive in many mature markets, too. Concluding first that both technologies will take share from coal, in this report we compare and contrast wind and solar across several dimensions including technological characteristics, cost paths, market sizes and competitive landscapes. We conclude that both offer interesting investment opportunities: In solar, we like FSLR. Our Top Pick in wind is Vestas (DKK590).

A realistic future: We model wind and solar to become a c$200bn p.a. capital goods market globally by 2020. In our view, wind is maturing but should still show a 7% CAGR (ex-China) for a 70GW 2020E market. Over the period, we estimate solar reaches late S-curve growth of 14% and annual installations of 91GW. Falling equipment costs and rising load factors should continue to drive down cost of generation (LCOE). We forecast wind LCOE to decline by 26% to $43/MWh, while solar’s LCOE should decline even faster at 39%, to $54/MWh by 2020.

Risks and rewards: It’s not only about declining costs, however, as the universally dispersed nature of solar resources make it the most intrinsically appealing source of energy. Nevertheless, complementarity of technologies means neither will “win”, but rather displace coal together, while cheap natural gas remains the main threat to both. High renewable penetration could lead to diseconomies of scale in certain markets, at least until battery storage economics enable the next leg of growth.

Profitability follows industry structure: The industry structure for wind provides better opportunity for profitability, in our view. The wind industry is broadly consolidated with the top three competitors largely stable. The solar industry, on the other hand, continues to be marked by a boom-bust cycle and revolving leadership with eight different firms having held a top-3 module market share position since 2010. As competition intensifies, we forecast our solar coverage margins to decline from 10.4% in 2015 to 8.5% in 2020E. Given a more favorable competitive situation, wind coverage margins should expand from 8.9% to 11.1% in 2020E, for EBIT growth of c80%. Within wind, we favor Vestas, which benefits from growth, quality and a strong balance sheet, as well as the best service business. In solar, given the expected 2017 weakness in profitability, we favor names with limited leverage, e.g., First Solar.

INDUSTRY UPDATE

European Capital Goods NEUTRAL Unchanged

North America Alternative Energy & Environmental Services NEUTRAL Unchanged

For a full list of our ratings, price target and earnings changes in this report, please see table on page 2.

European Capital Goods David Vos, CFA +44 (0)20 7773 5629 [email protected] Barclays, UK

James Stettler, CFA +44 (0)20 3134 4802 [email protected] Barclays, UK

Lars Brorson +44 (0)20 3134 1156 [email protected] Barclays, UK

Andrew Hoyle +44 (0)20 3134 4541 [email protected] Barclays, UK

North America Alternative Energy & Environmental Services Jon Windham, CFA +1 617 342 4181 [email protected] BCI, US

Daniel Ford, CFA + 1 212 526 0836 [email protected] BCI, US

William Grippin, CFA +1 617 342 4179 [email protected] BCI, US

Barclays | Global renewable energy

1 September 2016 2

Summary of our Ratings, Price Targets and Earnings Changes in this Report (all changes are shown in bold)

Company Rating Price Target EPS FY1 (E) EPS FY2 (E)

Old New Date Price Old New %Chg Old New %Chg Old New %Chg

European Capital Goods Neu Neu

North America Alternative Energy & Environmental Services Neu Neu

Source: Barclays Research. Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.

FY1(E): Current fiscal year estimates by Barclays Research. FY2(E): Next fiscal year estimates by Barclays Research.

Stock Rating: OW: Overweight; EW: Equal Weight; UW: Underweight; RS: Rating Suspended

Industry View: Pos: Positive; Neu: Neutral; Neg: Negative


1 September 2016 3

CONTENTS INDUSTRY FRAMEWORK ................................................................................ 4 Scaling to win .............................................................................................................................................. 4 Market structure: Evolution or Revolution............................................................................................ 5 No one future is guaranteed .................................................................................................................... 6 WIND INVESTMENT FRAMEWORK ............................................................... 7 Maturing very attractively ........................................................................................................................ 7 SOLAR INVESTMENT FRAMEWORK ............................................................. 9 Playing the long game ............................................................................................................................... 9 Stock recommendations......................................................................................................................... 10 WIND & SOLAR GLOBAL DEMAND FORECAST ...................................... 12 Building sustainable growth .................................................................................................................. 12 HISTORIC MARKET DEVELOPMENT .......................................................... 13 Two strong, but very volatile and different growth cycles ............................................................. 13 Wind – high-teens CAGR driven by China joining the party ........................................................... 15 Solar – Geographic dispersion drives demand growth .................................................................... 16 COST ROADMAP ............................................................................................. 17 Trends and outlook for costs ................................................................................................................. 17 Wind – historic cost reductions ............................................................................................................ 19 Solar cost declining, but at a slowing rate .......................................................................................... 22 POLICY FRAMEWORK .................................................................................... 26 Incentives sparking and sustaining a virtuous cycle ........................................................................ 26 Wind – Moving towards competitive markets ................................................................................... 28 Solar Policy: Gives & takes ...................................................................................................................... 31 INDUSTRY MARKET STRUCTURE................................................................ 33 Evolution versus revolution .................................................................................................................... 33 Wind: consolidation under way ............................................................................................................ 34 Solar: Evolving business models ........................................................................................................... 36 INDUSTRY PROFITABILITY ........................................................................... 38 Wind: Balanced capacity utilisation drives margin expansion ....................................................... 38 Solar: 2017 module supply/demand imbalance expected ............................................................. 39 TECHNOLOGY FUNDAMENTALS ................................................................ 41 Similar, yet different ................................................................................................................................. 41 Wind basics – how does a wind farm work? ...................................................................................... 42 Solar basics – Direct conversion of solar energy ............................................................................... 45 APPENDIX 1 - WHAT IS THE LCOE? ........................................................... 58 APPENDIX 2: DEMAND OUTLOOK BY REGION ....................................... 59


1 September 2016 4

INDUSTRY FRAMEWORK

This is not a report about a hypothetical and idealized future, but rather an analysis of the realistic opportunities and challenges wind and solar face as they scale into providing a greater share of the global energy needs. While policy and declining cost curves support both, they have distinct advantages/disadvantages that make them complementary technologies, and both will have a significant role in gradually displacing fossil fuel generation.

Scaling to win We forecast global wind and solar annual installations to reach 161GW by 2020, a 45% increase from 2015 (+8% 5-year CAGR). The key drivers of growth are further cost reductions and continued policy support. Rather than being competing technologies, we view wind and solar as complementary clean generation options based on the distinct characteristics of the underlying technology. Wind’s competitive costs and high utilization has driven early adoption in geographies with strong wind resources. On the solar side, rapid cost declines, scale flexibility, and its non-intrusive footprint continues to open new end-markets driving faster relative growth from a lower base. Our demand forecast is not dependent on large-scale deployment of new energy storage, which we view as most likely occurring after 2020.

Roadmap to cost competitiveness Broadly we expect wind technology to be more competitive on an LCOE basis through 2020 given incremental improvements in capacity factor. However, this cost gap should narrow as we forecast solar LCOE to decline 39% through 2020 driven by “Swanson’s Law,” (i.e., PV solar module costs decline 20% for every doubling of production) compared to a 26% decline for wind.

FIGURE 1 Steep declines in LCOE will be the main driver for capacity additions to 2020…

FIGURE 2 … which will be built increasingly in emerging markets, with India becoming a key driver

Source: GWEC, BP Stat. Review, IRENA, IEA, EIA, Barclays Research estimates Source: GWEC, BP Stat. Review, IRENA, IEA, EIA, Barclays Research estimates

20

30

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50

60

70

80

90

100

110

0

20

40

60

80

100

120

140

160

180

2015 2016E 2017E 2018E 2019E 2020E

$/MWhGW

Wind Solar Wind LCOE Solar LCOE

CAGR: Wind: 2% (7% ex-China)Solar: 14%Total: 8%

22% 24%15% 10%

17% 18%17%

18%

4%8%

6% 18%

48% 36%

31% 20%

8% 14%30% 34%

2015 (63GW)

2020E (70GW)

2015 (47GW)

2020E (91GW)

Wind Solar

Europe N. America India China RoW

Wind & solar: US$+200bn/yr capital goods market by 2020E


1 September 2016 5

Policy: A double-edged sword We expect the global policy framework to remain supportive and incrementally less volatile for renewable generation driven by increasing political consensus on climate change policies, and more diversified end demand which reduces industry dependence on any single policy framework. However, we expect the unintended consequences of policy to also drive overcapacity in solar module manufacturing in 2017 as Chinese producers expand production in SE Asia to circumvent U.S. import tariffs and emerging markets impose “local content” requirements. In wind, technology-driven cost reductions have been captured by tax-payers due to declining incentives.

Market structure: Evolution or Revolution In our view, the market structure of the wind turbine industry provides a better opportunity to create consistent returns given the ongoing consolidation. GE and Vestas already control nearly half the ex-china market. By contrast, the solar module market is best described as chaotic, in our view, with eight different firms occupying a top three market position since 2010. Solar’s immense long-term potential and near-term demand volatility make it a higher risk/reward proposition, in our view

In our view, these market structures stem directly from the nature of their underlying technologies. In 2015, there were only just over 30,000 wind turbines shipped and lifetime servicing cost can be 35-40% of the initial turbine cost. Limited opportunity for competitors to scale and the need for bankable counter-parties drives consolidation in the wind industry. In 2015, there were roughly 200mn solar modules shipped. The passive nature of solar modules minimizes servicing cost and the potential impact from catastrophic failure compared to wind, pricing an opening for new low-cost entrants.

FIGURE 3 Wind and solar forecasts

Source: Company reports and Barclays Research

Wind and Solar Comparison Wind Solar

Industry level forecasts 2015 2020E Delta 2015 2020E Delta

Installations GW p.a. 63 70 11% 47 91 93%

Global Penetration % of generation 4% 6% 61% 1% 3% 135%

Equipment cost $m/MW 1,000 850 -15% 805 564 -30%

Load Factor % of total 35% 39% 11% 18% 21% 17%

Levelised Cost of Energy $/MWh 58 43 -26% 90 54 -39%

Top-5 market share * % of total 48% 55% +7ppts 38% 40%

Company level forecasts** 2015 2020E Delta 2015 2020E Delta

Revenue €m / $m 16,496 23,803 44% 9,659 14,439 49%

Clean EBIT €m / $m 1,475 2,638 79% 1,006 1,224 22%

Clean EBIT Margin % of sales 8.9% 11.1% 24% 10.4% 8.5% -19%

Earnings per share € / $ 5.72 11.78 106% 10.93 11.41 4%

Free Cash Flow €m / $m 1,644 1,677 2% -1,387 -701 49%

Valuation (average) 2015 2018E 2015 2018E

EV/Sales x 1.1 0.8 0.7 1.0

EV/EBITDA x 10.0 6.1 4.8 6.0

EV/EBIT(A) x 13.4 8.1 7.9 22.5

P/E x 23.6 13.6 5.2 10.6

* Wind is including China; ** Covered companies only: VWS, GAM, NDX and SEN for Wind - FLSR, SPWR and CSIQ for Solar.

Key global policy risks: Judicial review of the US Clean Power Plan Viability of India’s 100GW National Solar Mission

Consolidation & Chaos

Wind: Low volume, High quality Solar: High volume, Low quality


1 September 2016 6

No one future is guaranteed Increasing political consensus over climate change, declining cost structures and the long-term potential for mass deployment of energy storage provide a potential framework for decades of renewable generation growth. However, the future has many possible paths. We highlight natural gas in the United States and sustainability of policy commitments in Emerging Markets as potential risks to wind and solar deployment growth.

Cheap natural gas: The availability of inexpensive natural gas, particularly in the U.S., is a key headwind to larger wind and solar deployments. Natural gas combustion emits roughly half the CO2 of coal, which still generates approximately 35-40% of global electricity. Coal-to-gas conversion provides CO2 reduction, low cost, and dispatchability. The Barclays North America Power & Utilities team expects natural gas generation to be the leading technology deployed to achieve CPP compliance. See our 25 August 2016, report: “August Review/September Preview” for more details on our CPP analysis.

Policy commitment: We estimate that emerging markets will account for more than half of total renewable energy capacity additions between 2016 and 2020E. While emerging markets provide end-market diversification, there is substantial risk that slower economic growth in EM would drive policy shifts away from renewable generation to more immediate funding needs.

Batteries: The intermittent nature of wind and solar generation is the paramount challenge to higher penetration rates. Energy storage is the ultimate solution, in our view. However, our framework looks for investments that make sense without mass deployment of energy storage; reserving faster-than-expected storage technology and cost reductions as upside risks. A deep dive into energy storage is beyond the scope of this report, but we point investors to our 18 September 2015 note: “The Battery Revolution: The Stationary Energy Storage Opportunity”.

Natural gas as a killer app

Energy storage is the ultimate solution, in our view

https://live.barcap.com/go/publications/content?contentPubID=FC2256763�





1 September 2016 7

WIND INVESTMENT FRAMEWORK

Maturing very attractively Over the coming years, the wind market (ex-China) faces a moderation of growth from >20% in 2014/15 to 6.5% CAGR between 2015 and 2020. Whilst clearly maturing, we still consider this very attractive long-term growth in what is becoming a large mainstream market. Whilst we see a 4% decline in 2017 volumes, this is mostly product of regulatory phasing in the US and not indicative of underlying structural demand. So long as interest rates remain low, wind farm investments will continue to deliver attractive yields to (financial) investors, further supporting demand.

At the same time, competitive dynamics remain attractive: the industry is becoming more concentrated and supply and demand are roughly balanced. In addition, the regulatory/support environment is at its most stable in post crisis years. This should keep price pressure manageable. In this context, we would recommend investors to seek exposure to the wind industry, both on a stand-alone basis and relative to other European capital goods companies.

We prefer Vestas, (also our Sector Top Pick) as it offers high quality, growth and a strong balance sheet. For investors seeking higher risk/return equation we recommend buying Nordex, as it offers under-appreciated growth at more favourable valuation. Senvion offers yet higher upside as the company executes a commercial transformation buoyed by an aggressive share buy-back. We are neutral on Gamesa: whilst the company offers attractive growth exposures in India and other EMs, we believe the potential benefits of the proposed acquisition by Siemens will not accrue to shareholders over a 12 month window.

FIGURE 4 Valuation table (alphabetical order)

Source: Bloomberg and Barclays Research. Prices as of 2:00PM 31 August 2016

Vestas (OW/Neu, PT DKK590): Vestas benefits from growth, quality, and a strong balance sheet. We see a 2015-20E CAGR of 7% for the market (ex-China), driven by yield-seeking in the US and Europe and capacity expansions in EM. Crucially, we think there’s little linkage to the GDP/IP cycle and see uncertainty reduced by the most stable regulatory environment in recent years. With only little pressure on prices, we believe margins can continue to expand. Vestas is trading at an EV/Sales ratio of 1.4x, an EV/EBITA multiple of 11.2x and a PE ratio of 17.4x (all 2017E). On EV/EBITA, this represents a premium of c20% to the wind space, which we think is deserved. It still represents a discount to the Capital Goods Sector, whereas we think Vestas deserves to trade at least in line with it.

Nordex (OW/Neu, PT €31): Following communication-mishaps around the AWP deal, Nordex is now trading at a considerable discount to the Wind space and Cap Goods sector. However, with the EEG-2016 that was passed by the German Parliament in June, the company is one of the prime beneficiaries of what Vestas has labelled the German “goldrush”, a sizeable pre-buy before the country transitions to an auction system in 2018. It also benefits from potential AWP orders from the United States, which we believe are not

2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E

Gamesa * DV EUR 20.71 20.00 EW -3% 5.8 5.2 1.2x 1.1x 9.4x 8.7x 12.0x 11.3x 20.3x 19.3x 1.4% 1.8% 2.9% 4.6%

Nordex DV EUR 25.07 29.50 OW 18% 2.4 2.6 0.8x 0.6x 8.4x 6.4x 11.1x 8.4x 15.9x 13.5x 0.0% 0.0% -1.6% 10.0%

Senvion DV EUR 14.14 18.00 OW 27% 0.9 1.0 0.4x 0.4x 4.6x 4.4x 6.5x 6.0x 13.4x 10.3x 0.0% 0.0% -2.6% 8.3%

Vestas DV DKK 550.50 590.00 OW 7% 16.5 13.2 1.4x 1.4x 8.3x 8.6x 10.8x 11.2x 19.3x 17.4x 1.5% 1.7% 7.0% 3.1%

Average Wind Sector 12% 0.9x 0.9x 7.7x 7.0x 10.1x 9.2x 17.2x 15.1x 0.7% 0.9% 1.4% 6.5%

Average Capital Goods Sector (market-cap weighted) -6% 1.7x 1.6x 10.9x 10.3x 13.0x 12.3x 18.6x 17.3x 2.8% 3.0% 5.3% 5.5%* Reflects stand-alone valuation

FCF yieldEV/Sales EV/EBITDA EV/EBITA P/E Div YieldRec U/D %

MV (€bn)

EV (€bn)

Company Analyst Cur PricePrice

Target


1 September 2016 8

discounted by the market at all at this stage. We also believe that there is scope for upgrades to conservatively issued FY16 profitability guidance, as well as ahead-of-consensus FY17 guidance. The upcoming CMD on September 28 could act as a catalyst in this regard. Nordex is currently trading on a very attractive 8.4x EV/EBITA (2017E).

Senvion (OW/Neu, PT €18): Senvion’s stock has performed poorly since the IPO in March of this year: the stock is still down 10% (SXNP +7%) YTD, mostly illustrates the market’s concern about the Senvion equity story and illiquidity, in our view. However, following reasonable Q2 results and two significant announcements a week later, the stock has bounced 33%. First it launched a buyback that could see the company purchase 10% of the outstanding shares (up to €75m) over the next two years. Second, Senvion announced its intention to acquire the Indian assets of Kenersys. This deal is transformational as it will instantly give Senvion an Indian product lineup, a 250MW/yr production base (incl crucial inventories) and a service organization in India. This de-risks the most important pillar of management’s strategy to counter declines in Germany and elsewhere. We continue to see c30% upside to our Price Target, as attractive valuation is balanced by lower-than-peers growth outlook.

Gamesa (EW/Neu, PT €20.00): The long-awaited Siemens-Gamesa acquisition fails to inspire us, as it does not, to our minds, create a global wind leader. We question key deal premises: Financially, leaving a Siemens-controlled Gamesa listed has little benefit, we think, as it diminishes attractiveness to outside investors and limits liquidity. We are also somewhat apprehensive of Siemens Wind Power’s sudden “catch-up” to industry-leading profitability. Industrially, we have a sceptical view on revenue synergies, while we believe costs could surprise. Gamesa is trading close to fair value of the combined entity and the €3.75/share special dividend.


1 September 2016 9

SOLAR INVESTMENT FRAMEWORK

The solar industry, particularly in the United States, faces a number of challenges that are likely to be a headwind for stocks in the medium-term. We advise exposure in the names that have the least amount of leverage and are relatively better positioned to ride out medium-term weakness before regulatory support under the Clean Power Plan (CPP) rejuvenates the market.

Playing the long game While the solar industry faces a number of near-term headwinds, we see a possibility that inefficient and/or highly levered companies could exit the market over the next 12-18 months. This could potentially set up a longer-term opportunity for surviving players to benefit from demand under the EPA’s Clean Power Plan (CPP) and continued increases to state RPS standards. Our target multiples and stock recommendations are closely aligned with the amount of leverage at each company. Key near-term solar issues include:

• Module manufacturing overcapacity due to U.S. imports tariffs driving Chinese module manufacturers to expand into SE Asia

• Stagnant global demand in 2017E primarily due to weakness in U.S. utility scale demand following the policy-driven demand surge in 2016, as well as uncertainty over the “rules of the game” under the CPP

• High penetrations rates in some markets limiting the value of incremental solar generation

• High fixed costs and high financial leverage stressing cash flow demands in a volatile revenue environment

FIGURE 5 Alternative Energy price target methodologies

Source: Barclays Research estimates Prices as of the market close on 30 August 2016. Stock ratings: OW = Overweight; EW = Equal Weight; UW = Underweight; RS = Rating Suspended. Industry view is Neutral. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com

Company Name Ticker BusinessCompany

RatingShare Price

Price Target

Potential Upside/

Downside %2016E net

debt/EBITDA Valuation Methodology

First Solar Inc. FSLR Systems/Modules OW 38.25 50 31 - 15x 2017E P/E plus $20/sh net cash

SunPower Corp SPWR Systems/Modules EW 10.28 12 17 3 15x 2017E P/E

Canadian Solar CSIQ Modules EW 13.18 14 6 6 9x 2017E P/E

SolarCity Corp. SCTY Residential UW 20.69 20 -3 - 20% discount to implied merger value

Sunrun Inc. RUN Residential EW 6.01 7 16 - YE2018E retained equity cash flow

Solaredge SEDG Power tech OW 17.60 22 25 - 10.5x 2017E P/E

8point3 Energy Partners LP CAFD Solar Yield co OW 15.71 18 15 6 7% 2016E DPS

Terraform Global Inc. GLBL EM Yield co RS 3.57


1 September 2016 10

Stock recommendations

First Solar (FSLR, OW/Neu) While we continue to see FSLR as the best positioned of the U.S. solar stocks to weather a potential 2017 downturn thanks to a strong balance sheet and substantial ($20/sh) net cash position, industry headwinds are unlikely to enable a significant upward re-rating for the share price in the near term. We see continued risks to the consensus 2017 forecast and expect investors to remain skeptical until the December 2017 guidance call.

• For more detail on FSLR, see our 10 August 2016 note: “Scaling Back”

SunPower (SPWR, EW/Neu) SPWR announced plans to focus on its distributed generation (DG) business with the low end of FY2017 EBITDA guidance ($300-$400mn) including minimal contribution from utility-scale. Given DG comprises only half of 2016E capacity, we think this will not be an easy pivot. Furthermore, we expect the residential market to also experience declining growth due to less favorable net metering regimes. SPWR is also taking a hit in 2016E due to lower-than-expected project selling prices. Given the 39% reduction in FY2016E EBITDA guidance, we expect SPWR to enter the investor “penalty box”.

• For more detail on SPWR, see our 10 August 2016 note: "A tough pill to swallow; Downgrade to Equal Weight"

Canadian Solar (CSIQ, EW/Neu) CSIQ’s 5.9x 2016E net-debt/EBITDA poses a greater risk relative to the other names in our coverage such as FSLR ($20/sh YE16E net cash) or CAFD (contracted, stable cash flows) heading into a margin-challenged 2017E. We estimate a value for CSIQ’s YE2016E power plant assets of $6-$9/sh, implying an $8-$5/sh value and 9x-5x P/E multiple on the module business; compelling, in our view, given CSIQ’s leading module market share and operating history. However, near-term industry risks and CSIQ’s leverage keep us on the sidelines.

• For more detail on CSIQ, see our 24 August 2016 note: “Cautious on Leverage, Downgrade to Equal Weight”

SolarCity (SCTY, UW/Neu) We expect growth to slow and for SCTY to pivot more toward system sales. The key upside risk to our thesis is the completion of the merger with Tesla, which given a final conversion ratio of 0.11 implies a SCTY value of $25.20 based on TSLA’s 9-Aug-2016 closing price. Overall we think the TSLA/SCTY merger would create a formidable competitor in the U.S. residential solar space.

• For more detail on SCTY, see our 10 August 2016 note: “SCTY: 2Q16 model update”

Sunrun (RUN, EW/Neu) While we remain cautious on the direction of pricing and profitability in the residential leasing space due to competition from rooftop system sales, Sunrun management has articulated a strong argument for the role of leasing as product offerings (storage/grid services/smart home) expand. In our view, the recent weakness in the share price seems overdone relative to our price target of $7.

• For more detail on RUN, see our 11 August 2016 note: "2Q16 update: Steady execution"

Cash is king with FSLR ~50% per share cash value

We expect an uphill battle as SPWR pivots to DG

CSIQ’s 5.9x leverage make this a high-risk name, in our view

Our $20 PT reflects 20% deal risk discount for a failed TSLA/SCTY merger

There is potential for RUN to capitalize on scaled-back growth at SCTY









1 September 2016 11

SolarEdge (SEDG, OW/Neu) While we see continued challenges in the residential solar market, we continue to view SEDG as our preferred residential exposure given its strong balance sheet and customer diversification. Key downside risks include policy uncertainty in the U.S. driving slower-than-expected residential solar growth, as well as increasingly intense competition from Chinese inverter manufacturers and new entrants.

• For more detail on SEDG, see our 11 August 2016 note: "SEDG CY2Q16 model update"

8point3 Energy Partners (CAFD, OW/Neu) We view CAFD as a relative safe haven for investors looking for exposure to the alternative energy space given expected weak 2017E U.S. utility-scale demand. Compared with the module manufacturers, CAFD’s ROFO pipeline visibility gives us more confidence in the near-term growth prospects and fairly predictable nature of CAFD’s dividend payout. We now see potential for equity raises in 2H16-1H17E to fund growth given a stabilizing yield co market.

• For more detail on CAFD, see our 11 July 2016 note: “Upgrade to Overweight”

FIGURE 6 North America Alternative Energy & Environmental Services comps

Prices as of the market close on 30 August 2016 Stock ratings: OW = Overweight; EW = Equal Weight; UW = Underweight; RS = Rating Suspended. Industry view is Neutral For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to http://publicresearch.barcap.com Source: Thomson One, Barclays Research estimates

Price U/D Mkt CapDiv.

YieldNet debt/

EBITDA

Company Ticker Rating Price Target % $bn 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2016E

Alternative energy

First Solar Inc. FSLR OW 38.25 50 31 3.9 8.7 19.8 17.5 3.4 3.8 3.7 - -

SunPower Corp SPWR EW 10.28 12 17 1.4 11.4 9.1 6.5 7.6 8.0 7.4 - 3.1

Canadian Solar Inc. CSIQ EW 13.18 14 6 0.8 6.6 8.6 7.9 7.8 7.6 6.9 - 5.9

SolarCity Corp. SCTY UW 20.69 20 -3 2.0 - - - - - - - -

Sunrun Inc. RUN EW 6.01 7 16 0.6 - - - - - - - -

Solaredge SEDG OW 17.60 22 25 0.8 10.1 8.5 8.0 7.3 4.3 2.9 - -

8point3 Energy Partners LP CAFD OW 15.71 18 15 1.1 32.3 70.8 53.8 32.2 30.8 30.2 6.0 5.8

Terraform Global Inc. GLBL RS 3.57 0.6 -

Environmental Services

Waste Management Inc. WM EW 64.05 70 9 28.7 22.5 20.5 18.3 10.2 9.6 8.9 2.6 2.6

Republic Services Inc. RSG OW 50.60 56 11 17.4 23.5 21.3 19.5 9.1 8.5 8.0 2.4 2.9

Waste Connections WCN OW 76.71 86 12 13.5 35.2 24.1 20.9 16.0 12.0 10.7 0.7 3.3

Waste Connections WCN.TO OW 100.40 120 20 17.7 35.7 24.4 21.2 16.0 12.0 10.7 0.7 3.3

Covanta Holding Corp. CVA EW 14.79 16 8 1.9 - 121.2 37.3 10.5 11.2 9.2 6.8 5.9

Clean Harbors CLH OW 48.36 57 18 2.8 101.2 37.3 24.5 9.3 7.6 6.9 - 2.9

US Ecology ECOL UW 45.35 40 -12 1.0 24.9 22.9 20.7 9.9 9.2 8.5 1.6 2.0

Adj. P/E Adj. EV/EBITDA

Market leader with a clean balance sheet

Stability provided by long-term PPA’s




1 September 2016 12

WIND & SOLAR GLOBAL DEMAND FORECAST

Building sustainable growth We forecast wind and solar annual installations to reach 161GW by 2020, a 45% increase from 2015, an 8% 5-year CAGR. We expect annual solar installations to outpace wind installations for the first time in 2016 and estimate a 5-year 2016-20 CAGR of 14% solar; 2% for wind and 7% for wind ex-China.

As demand shifts incrementally to lower-income countries there is risk that climate-oriented polices get de-emphasized in a slowing macro environment given other more urgent government spending needs in the developing economies. China is expected to remain the largest single end-market with 27% of total wind and solar combined incremental demand by 2020.

We forecast India demand to grow at a 5-year CAGR of 30% through 2020, reaching 21GW of combined wind and solar annual installations and making it the fastest growing individual market in our forecast. This rapid pace of growth is largely driven by government actions aimed at meeting the country’s aggressive National Solar Mission (NSM) goal of 100GW of solar by 2022.

In the United States we expect the implementation of the U.S. CPP (the U.S. federal government to regulate state CO2 emissions) to be a key driver of medium-term forecasting risk depending on the final implementation schedule. In our view, some form of federal government CO2 emission control is likely and will stimulate both wind and solar demand. The question is whether this spurs demand in 2018-2020 or if legal challenges push demand past 2020.

FIGURE 7 Annual global wind and solar capacity additions

FIGURE 8 Annual installations

Source: GWEC, BP Statistical Review, IRENA, IEA, EIA, Barclays Research Source: GWEC, BP Statistical Review, IRENA, IEA, EIA, Barclays Research

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We expect India to be the fastest growing individual market through 2020


1 September 2016 13

HISTORIC MARKET DEVELOPMENT

Two strong, but very volatile and different growth cycles Global wind and solar installations have experienced rapid growth over the past decade with 2015 combined wind/solar capacity installations of 110GW compared to just 13GW in 2005, a YE2015 10-year CAGR of 24% for wind and solar combined. In our view, the rapid growth has been driven by a combination of cost reductions, government policies to reduce GHG (Green House Gas) emissions, and desire for energy diversity (security) to hedge against rising fossil fuel prices.

The geographical development patterns have been quite different for wind and solar however. Early solar development (2007-2011) took place in Europe, where the market grew from almost nothing to over 20GW. Since then, the European market has collapsed to just over 10GW. European wind has been far less volatile, growing steadily from 6GW in 2005 to 14GW in 2015.

Wind hasn’t been without volatility but in its case the volatility has been driven by the United States. The boom-bust nature of the main support scheme has caused huge swings. Demand has averaged 5GW, but was as low as 1GW in 2013 and as high as 13GW in 2012. U.S. solar on the contrary has grown steadily from zero in 2009 to 6GW in 2015.

China is now very important for both, but it had a much earlier start in wind than in solar. In 2009, solar was still at zero while the country was already installing 14GW of wind, or 35% of global demand. China now represents c50% of global wind installations, whereas it is “only” 31% for solar.

The importance of other emerging markets differs, too: for wind, they’ve remained stable at 7-8% of global demand, while for solar they now represents c30% of total. This strong growth has come mainly from the Middle East and LatAM driven by increased government support. India as yet represents about c5% of demand for both technologies.

FIGURE 9 Annual global wind and solar capacity installations have grown at a CAGR of 24%

FIGURE 10 Europe’s dominance has faded in favour of China and other Emerging Markets


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Volatility in demand for wind power driven by U.S. policy

Solar has seen growing emerging market demand


1 September 2016 14

Technology drives pace of adoption

Wind leads off Wind has been the more popular technology to date with 432GW of cumulative capacity deployed compared to 227GW for solar. Assuming a global average capacity factor of c30% for wind and 20% for solar, existing wind capacity generates 2.8x more electricity currently than solar. In our view, the early adoption of wind over solar was driven by factors inherent in their technologies.

• Lower cost of wind historically relative to solar, this is partially driven by the mature nature of the underlying wind turbine technology. Solar is a newer, evolving, technology, which declines with cumulative production.

• Wind resources can be highly concentrated and consistent in some locations, mostly coastal areas or open plains. This is different from solar which is much more widely dispersed on the planet. In other words, if you have a great wind resource within your potential generating area, then it makes sense to tap that resource first.

Solar coming on strong However, inherent in their technologies is the potential for solar to be a more widely adopted technology in the long-term and we currently forecast solar installations of 353GW from 2016 to 2020 compared with 309GW for wind. This is consistent with recent trends. 2005 solar installations were just 12% of 2005 wind installations. In 2015, solar installations had risen to 75% of wind additions.

In our view, the later and potentially wider adoption of solar over wind will be driven by several factors inherent in their technologies.

• Solar is an electronic process, in which module costs are likely to continue to decline and individual module’s efficiency improves over time. Wind, on the other hand, is unlikely to see similarly steep cost declines long-term given the nature of the technology. Nevertheless, we still see ample potential for cost reductions in wind driven by continuous improvement in yields and cost engineering.

• Solar is a widely dispersed resource that can be scaled, which enables small-scale localized deployment. Given the passive nature of solar technology and scalability a primary advantage is its ability to be sited close to (on) customer demand sites.

FIGURE 11 Technology as a percentage of renewable installations

FIGURE 12 Renewables’ share of generation

Source: IRENA, Barclays Research Source: BP, Barclays Research estimates

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1 September 2016 15

Wind – high-teens CAGR driven by China joining the party Wind installations reached 59.5GW globally in 2015. Since 2002, the market has grown at a CAGR of 18%, mostly driven by a dramatic increase in new installations in China, which grew by 60% CAGR over that period and now represents half of global demand. Europe has grown by 7% CAGR to 14GW of installations, while North America has achieved a 27% CAGR for a total market of size of 11GW, of which the U.S. was 8.6GW in 2015. India has grown at 20% and now represents a 2.6GW market. Finally, the Rest of the World catch-all represented c5GW in 2015 and has shown 25% growth over the period.

Growth over this period has been driven by technological advances bringing down costs and by support from various governments’ incentive schemes. We will discuss both in more detail below. Global Wind penetration reached 7.5% in 2015, having climbed steadily from near-zero at the end of the 1990s.

FIGURE 13 Annual wind installations have grown 18% CAGR since 2002 and reached 63GW in 2015

Source: GWEC, BP Statistical Review

FIGURE 14 Installations have shifted away from Europe to China, while the US has fluctuated heavily historically

FIGURE 15 Global Wind penetration reached 7.5% in 2015

Source: GWEC, BP Statistical Review Source: GWEC, The Shift Project and BP Statistical Review

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1 September 2016 16

Solar – Geographic dispersion drives demand growth Installed global solar capacity has experienced rapid growth over the past decade with YE2015 cumulative installed global solar capacity reaching 227GW compared to just 5GW cumulative capacity in YE2005. This more than 40x increase in cumulative capacity in the past decade has been driven by a combination of falling costs and targeted government incentives, in our view. Despite the strong growth, solar still represents only approximately 3.6% of global electric generating capacity and less than 2% of actual electricity generation, implying significant headroom for continued solar installation growth, in our view.

Global solar demand historically had been dominated by Japan and Europe which employed FiT to stimulate solar installations in an effort to reduce carbon emissions (Germany) and increase generation diversification (Japan). Current and future solar capacity demand is expected to be increasingly driven by the U.S. and emerging markets, particularly China and India, which have recently stepped-up their stated targets for renewable generation.

FIGURE 16 Global solar incremental capacity additions

Source: IRENA, IEA, EIA, Barclays Research estimates Note: Percentages above each column represent p.a. growth

FIGURE 17 Composition of solar installations by region

FIGURE 18 Global incremental solar installations

Source: IRENA, IEA, EIA, Barclays Research estimates Source: IRENA, IEA, EIA, Barclays Research estimates

91% 63% 34% 8% 67%127%

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Solar represents less than 2% of global electricity generation


1 September 2016 17

COST ROADMAP

While wind is expected to remain the lowest cost renewable option over the next several years, we expect more rapid declines in solar costs driven by increasing scale to improve the cost competitiveness of solar. However, this is only part of the story. Both wind and solar must also compete with traditional forms of fossil fuel generation, and the competition is fierce. In the U.S., this means abundant, cheap, and dispatchable natural gas generation.

Trends and outlook for costs Wind has historically been the cheaper technology, relative to solar. This is driven by a combination of lower equipment costs and capacity factors that exceed what is achievable with a typical solar PV installation. However, we reiterate that the primary benefit of solar PV over wind, in our view, is the highly distributed nature of the technology (it can be installed almost anywhere). Broadly we expect wind technology to be more competitive on an LCOE basis through 2020 given incremental improvements in capacity factor. However, this cost gap should narrow as we forecast solar LCOE to decline 39% through 2020 driven by “Swanson’s Law,” compared with a 26% decline for wind.

We would suggest caution in using LCOE alone to assess relative competitiveness of the two technologies. LCOE, while useful, is an imperfect measure of electric generation costs. This is because LCOE does not take into account the reduction in value of each new increment of generation as penetration rates increase.

FIGURE 19 Wind & solar cost drivers

Source: Company reports, NREL, GTM, Barclays Research

2015 vs. 2020 2015 2020E Delta 2015 2020E Delta

LEVELISED COST OF ELECTRICITY $/MWh 58 43 -26% 90 54 -39%

Costs (Numerator) LC000/MW 2,174 2,025 -7% 2,125 1,503 -29%

All-in Capex LC000/MW 1,500 1,300 -13% 1,900 1,300 -32%

Equipment O&M LC000/MW/year 25 23 -10% 15 14 -10%

Other Opex LC000/MW 30 30 0% 0 0 NA

Generation (Denominator) MWh/MW 37,569 47,200 26% 23,696 27,646 17%

Generation hours Hours per year 3,066 3,416 1,577 1,840

Load Factor % 35% 39% 11% 18% 21% 17%

Useful life (years) 20 25 25% 30 30 0%

Capex Detail

All-in Capex LC000/MW 1,500 1,300 -13% 1,900 1,300 -32%

Equipment LC000/MW 1,000 850 -15% 805 564 -30%

Balance of Plant LC000/MW 150 135 -10% 462 369 -20%

Installation LC000/MW 150 135 -10% 204 153 -25%

Planning and other LC000/MW 200 180 -10% 429 214 -50%

Turbine/module % split 67% 65% 42% 43%

Balance of Plant % split 10% 10% 24% 28%

Installation % split 10% 10% 11% 12%

Planning and other % split 13% 14% 23% 16%

Wind SolarWind vs. Solar - Typical MM Project

LCOE is not without its flaws...


1 September 2016 18

On a country-by-country basis, wind installations are expected to be more cost competitive on average as new installations will be sited to harness the best untapped wind resources. We do not expect significant improvement in solar capacity factors given inherent limitations in available solar insolation. Additionally, new solar generation is not always sited in the most cost-effective or highest capacity factor geography. Relative to wind, solar decisions are more often proximity driven to improve the ease of electric transmission. Despite these differences, solar is cost competitive in several current and former high-growth markets, including India, Mexico, Australia, and the Middle East.

FIGURE 20 Recent PPA prices

FIGURE 21 Solar lowest PPA prices

Source: IRENA and Barclays Research Source: GTM, Bloomberg, Barclays Research

The relative cost of wind and solar to each other is only a part of the story as both technologies will also compete with existing fossil fuel generation, particularly natural gas in the United States. Natural gas generation produces roughly half the CO2 of coal with coal-to-gas conversion providing CO2 reduction, low cost, and dispatchability.

FIGURE 22 US LCOE

FIGURE 23 US natural gas prices

Source: EIA, Barclays Research estimates Source: Thomson One, Barclays Research

Selected recent PPAs ($/MWh)

Wind Price Solar Price

Morocco 30 UAE 30

USA 47 Peru 48

Brazil 52 Chile 65

South Africa 59 Jordan 67

Netherlands - offshore 73 South Africa 75

Chile 84 Brazil 80

UK - offshore 115 Germany 87

France 89

71.00

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Natural gas is the true competitor


1 September 2016 19

Wind – historic cost reductions In 1983, Wind LCOE was almost $400/MWh (see Appendix 1 for more details on the LCOE concept). Given this elevated cost versus fossil fuels and nuclear, the wind industry has had to rely on governments’ support to grow. On a global average basis, the LCOE of wind has since come down to $70/MWh in 2016. This 80% decrease equates to a CAGR of -5% over the 1983-2016 period.

The improvement in costs has been achieved through a combination of factors. Most importantly, total wind farm investment costs have been lowered by 80% from an average of $4.8m/MW in 1983 to $1.6m/MW in 2014. Note that while this includes both the turbine capital cost, as well as the balance of plant, the vast majority of the improvement has come from the turbine side.

Better capacity factors have also contributed a significant amount. Where the average installed base load factor was 25% in 1983, this had risen to 35% in 2014, an improvement by one third.

FIGURE 24 Wind LCOE has decreased by 80% since the first turbines were built in 1983…

FIGURE 25 … driven by lower investment costs and better capacity factors

Source: IRENA and Barclays Research Source: IRENA and Barclays Research

LCOE – Wind illustration As discussed above, the LCOE for wind projects depends on the wind quality and factor costs in the local economy. To illustrate what this means, we display four very different projects below. First, an “average” German project, consisting of 6 x 3MW turbines has an LCOE of c€50/MWh. This assumes a load factor of 37% and all-in capex of €2m/MW. Capex is very high in Germany compared to other parts of Europe, as German customers demand bells and whistles (e.g., shadow and noise control, wildlife protection systems); and because of higher planning and installation costs.

In contrast, a project in one of the world’s top wind areas, the Texas Panhandle can achieve an unsubsidised LCOE as low as $26/MWh. This LCOE can be achieved through a combination of a superb load factor of 50%, and low capex. The latter is obtained by using “cheap” 2MW machines and scale advantages on logistics and planning.

Vestas’ recently announced 1GW Fosen project in Norway illustrates the scale point even more forcefully. Installed over a compact, easily accessible coastal area, the project should be able to achieve an LCOE of €30/MWh. In an emerging market such as Chile, with decent,

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1 September 2016 20

but not spectacular wind resources, an LCOE similar to Germany can be achieved, as added logistics and servicing costs elevated costs somewhat.

FIGURE 26 Illustrations of LCOE

Source: Company reports and Barclays Research

To round of the discussion, we include an illustration of gas-fired generation. Natural gas is close to historic lows at the current price levels of $2.60/MMBtu in the United States and €c1.30/KWh in Europe. Nat gas is also widely regarded at the “least bad” among the fossil fuels. In our view, this makes nat gas the main competitor to wind and solar. As can be seen above, at a 45% load factor, natural gas is currently capable of generating electricity at around $30/MWh. Load factors may actually be higher than that.

Nat gas isn’t quite that cheap in Europe. In fact, cheap coal imports from the U.S. and elsewhere have depressed profitability of gas plants to such a degree that most of them are

Onshore wind Offshore

Wind

Newbuild Power Gen AssetsEstimated LCOE

MetricGermany Average 6 x 3 MW

Texas Panhandle

100 x 2MW

Norway Fosen

278 * 3.6MW

ChilePatagonia

125MW

Borssele (NL) 2x 350MW

Local Currency EUR USD EUR USD EUR

LEVELISED COST OF ELECTRICITY LC/MWh 72 34 35 57 67

LEVELISED COST OF ELECTRICITY €/MWh 72 30 35 52 67

Costs (Numerator) LC000/MW 2,872 1,813 1,412 2,124 4,522

All-in Capex LC000/MW 2,000 1,300 1,100 1,700 3,600

Equipment O&M LC000/MW/year 30 22 15 30 50

Other Opex LC000/MW/year 40 20 10 10 10

Fuel LC000/MW/year 0 0 0 0 0

CO2 LC000/MW/year 0 0 0 0 0

Generation (Denominator) MWh/MW 39,879 53,671 40,393 37,121 67,331

Generation MWh/year/MW 3,200 4,380 3,241 3,504 4,380

Load Factor % 37% 50% 37% 40% 50%

Other inputs

Discount rate (WACC) 5% 5% 5% 7% 5%

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All-in Capex LC000/MW 2,000 1,300 1,100 1,700 3,600

Equipment LC000/MW 1,250 950 750 1,100 1,500

Balance of Plant LC000/MW 200 150 150 200 700

Installation LC000/MW 300 100 150 200 700

Planning and other LC000/MW 250 100 50 200 700

Turbine % split 63% 73% 68% 65% 42%

Balance of Plant % split 10% 12% 14% 12% 19%

Installation % split 15% 8% 14% 12% 19%

Planning and other % split 13% 8% 5% 12% 19%


1 September 2016 21

mothballed. Estimating an LCOE for European gas-fired plants shows a cost of c€50/MWh – well in excess of current base-load prices in Germany of €30/MWh.


1 September 2016 22

Wind LCOE reduction Wind LCOE reductions can be achieved by reducing capex and/or opex and by increasing production. Turbine OEMs can reduce capex of their developers by taking out costs from the turbine, the tower and its foundations, as well as auxiliary equipment and processes. Farm owners can also reduce costs by lowering operational expenses through lowering O&M (either provided by the OEM or not). OEMs can also improve the rated power, availability and harnessed resource (e.g. through higher towers or bigger rotors).

The combination of factors discussed above has led to drastic improvements in capex as discussed in Figure 26 above. Figure 27 below shows the improvements in annual energy production that turbine OEMs have achieved over the past years.

FIGURE 27 Past cost reduction efforts by company

FIGURE 28 Current LCOE reduction ambitions by company

Source: Company reports and Barclays Research Source: Company reports and Barclays Research

Solar cost declining, but at a slowing rate Based on EIA data, the LCOE of utility-scale solar in the U.S. has declined from $360/MWh in 2009 to about $65/MWh by 2015. This cost reduction is primarily driven by declining cost of the solar modules which have declined from $1.24/W as of 1Q10 to $0.37/W currently.

Solar cells contain semiconductors and the core technology is electrical, not mechanical, in nature. Solar module cost have declined as production ramps, a dynamic referred to as “Swanson’s Law” for the experience that PV solar module costs decline 20% for every doubling of production.

Turbine model Achievement From To Versus

Nordex N90/2500 3rd gen +35% AEP 2011 2014 2nd gen

Nordex N100/2500 3rd gen +32% AEP 2011 2014 2nd gen

Gamesa G106-2.5 +30% AEP 2010 2014 G90-2

Gamesa G114-2.5 +30% AEP 2010 2013 G97-2

Gamesa G126-2.5 +25% AEP 2012 2015 G114-2

Senvion 3.4M140 +20% AEP 2012 2015 3.0M122

Senvion MM92 +11% AEP 2003 2005 MM82

Vestas V110-2.0 +18% AEP 2009 2015 V100-2.0

Vestas V126-3.45 +18% AEP 2010 2015 V112-3.0

Vestas V117-3.45 +35% AEP 2010 2015 V90-3.0

* AEP = Annual Energy Production

Company / Institution

Reduction target From To

Nordex 15-18% Lower Cost 2015 2018

Gamesa No official target

Vestas To outpace BNEF 2016 2020

BNEF 23-36% lower LCOE 2016 2030

A key driver of solar growth has been the decline in cost.


1 September 2016 23

FIGURE 29 Solar module cost and global installations

FIGURE 30 Historical module cost

Source: IRENA, IEA, EIA, Barclays Research estimates Source: PV Insights, Barclays Research

A rapid decline in polysilicon costs has also contributed to falling module prices, however, with poly prices now stabilizing, future reductions in installed cost will come from reducing overhead, and increasing installation efficiency along with innovative balance of system (BOS) improvements. In addition, as solar modules become a smaller proportion of the total system cost, the impact of Swanson’s Law has a diminishing impact on the total system cost.

FIGURE 31 2016E US residential solar installation cost stack

Source: SCTY, RUN, JKS, and CSIQ company reports, MIT, EIA, NREL, Barclays Research estimates

Inverters Solar modules generate direct current (DC) which must then be converted into alternating current (AC) in order for the energy to be fed into the grid. This conversion process is done using a device known as an inverter. Inverters make up approximately 12% of the total installed cost for a residential system, however, this cost is declining. Inverter prices continue to decline and provide further opportunity for overall solar generation cost reductions. This is compounded because inverters typically have shorter life spans than modules and will likely need to be replaced at least once during the life of a solar module.

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1 September 2016 24

FIGURE 32 Global inverter market

FIGURE 33 Solar Edge inverter ASP

Source: IRENA, company reports, Barclays Research estimates Source: Company reports, Barclays research

Solar LCOE Once installed, the system generates near-zero marginal cost electricity. Annual operations and maintenance expense (O&M) is typically around 1% of capital costs and consists of inverter replacement (usually after 10 years), site maintenance, panel cleaning, and performance monitoring, among other things. The LCOE for solar (particularly distributed generation) has come down significantly in recent years, significantly increasing the number of projects that make economic sense.

FIGURE 34 US electricity costs ($/MWh)

FIGURE 35 Solar LCOE by installation type

Source: EIA, Barclays Research Source: Open EI, Barclays Research estimates

The land of sunshine Typically, 1MW of solar capacity would require 20,000 square meters (~4 football fields for our American readers and ~3 FIFA football pitches for our European readers). We estimate that land acquisition, permitting, and interconnection studies account for roughly 3-6% of total project costs. While roof-top solar is often seen as having no land cost, the cost of installing on a roof more than offsets the “free” land.

A typical timeline for sourcing land for a utility scale project in the U.S. is as follows:

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1 September 2016 25

• Acquire land: 3-9 months

• Permitting: 1-3 months

• Preliminary engineering for applications: 1-2 months

• Obtaining special-use permits and re-zoning: 2-4 months


1 September 2016 26

POLICY FRAMEWORK

Government incentives have been a key driver of global demand growth for solar and wind, primarily driven to slow the growth of GHG (Green House Gas) emissions to address increasing concerns over long-term climate change, but also as a hedge against fossil fuel prices. Historically, these incentive structures have created positive feed-back loops with incentives driving demand, which in turn enables scale-driven cost reductions driving further incremental demand. This interplay between typically slower moving policy and more dynamic market drive cost reductions has been a key driver of demand volatility in some markets, in our view. While we do expect the absolute level of subsidies to be modestly rolled back in some markets, the key issue is the pace of the incentive roll-backs against the pace of cost reductions.

Incentives sparking and sustaining a virtuous cycle In our view, we expect incentives to remain a key driver to both sustain demand in key existing wind and solar markets as well as an important in sparking demand in emerging renewable markets.

• For more on the current global consensus from the 2015 UN Climate Change conference in Paris (COP21) see Mark Lewis’s 14 December 2015 note: COP Till You Drop: Paris Keeps 2°C Door Ajar

FIGURE 36 Global CO2 emissions 2014

FIGURE 37 Lifecycle CO2 emissions by generation type; tons per GWh

Source: EDGAR, Barclays Research Source: WNA, Barclays Research

Incentives drive demand and reduce cost Early government subsidies for wind and solar were focused on stimulating early stage R&D to develop the technologies. In our view, wind and solar have both grown beyond the early stage-technology stage and we will focus on the incentives on driving large-scale volume demand for renewable technologies. Government subsidies for renewable generation can be classified into three broad categories:

• Government mandated demand: Such as renewable portfolio standards (RPS), the Public Utility Regulatory Policies Act (PURPA), and the Clean Power Plan (CPP).

• Revenue enhancement: Such as feed-in-tariffs (FiT), solar residential net metering or renewable energy credits (RECs)

• Cost reductions: Such as tax credits (PTC, ITC) and subsidized loans or loan guarantees.

ROW12%

China31%

U.S.15%

Rest of Asia12%

Europe11%

India7%

Japan4%

Russia5%

So. America3%

0100200300400500600700800900

1,000

Tons CO2/GWh




1 September 2016 27

FIGURE 38 Support for Wind is moving to Auction systems, whereas solar is relatively more dependent on subsidies

Source: KPMG, IRENA, GTM, MESIA, Barclays Research

Historical Current Historical Current

Europe Feed-in-Tariff FiT / Auctions Feed-in-Tariff FiT / Auctions

US Tax Credits Tax Credits Tax credits Tax credits/net metering

China Feed-in-Tariff Feed-in-Tariff Feed-in-Tariff Feed-in-Tariff

Asia ex-China Limited Feed-in-Tariff Limited Feed-in-Tariff Feed-in-Tariff FiT / Auctions

LatAm Auctions Auctions Auctions/net metering Auctions/net metering

Africa Limited Support Auctions Limited Support Auctions

Middle East None Direct investment Limited Support Feed-in-Tariff/Auction

Wind SolarTypical renewable energy support schemes


1 September 2016 28

Wind – Moving towards competitive markets As many other new technologies, Wind power has depended on government incentives to reach a more mature state. Germany, Denmark and Spain have been at the forefront of such incentives schemes, with both countries establishing predecessors to the current schemes in the 1990s. Germany in particular had one of the most generous support schemes on offer. During the Global Financial Crisis of 2007-2009, most European governments put brakes on their incentive schemes. This has resulted in several markets declining to near-zero levels, most notably Spain and Italy.

All along, the industry has worked hard to produce more efficient and less expensive wind turbines. As a result, governments across Europe and elsewhere have been able to adopt a less accommodative stance towards subsidy regimes. This has resulted in a more competitive global set-up, where 75% of countries now use competitive bidding processes as the main wind/renewables policy.

Nevertheless, a number of major markets continue to use some support mechanism. Following a number of years of negative momentum around incentives and regulation, we believe this has now turned. The prime driver of this is the four-year renewal of the U.S. PTC scheme established earlier this year (see below for more detail). But elsewhere too, the momentum is positive. In Germany, the government signed the new EEG-2016 into law in early July. The new law underwrites the market at 2.8-2.9GW, while it also moves the country from the current FiT to an auction system. Over time this will make the market more competitive, but the transition period is generous, in our view.

The UK remains the only country with outright negative regulatory momentum with all support for onshore wind essentially scrapped. The country’s decision to leave the EU might provide a reversal (through support for local jobs), but it is too early to say with any kind of certainty. India, meanwhile, announced recently it is moving to establish an auction system for some of its Renewables volumes. Whilst not of direct relevance to most of our names, China’s move to lower its FiT produced some anxiety in the market last year.

FIGURE 39 While wind is moving towards competitive markets, we believe the incentive momentum is positive

Source: REN Global Status Report 2015, MNRE India, MME Brazil, IEA, GWEC, BP, DoE and Barclays Research

Country Sector/ Technology Policies Targets for renewable energy Outlook Regulatory Momentum

Wind Production Tax Credit No target; $23/MWh produced in credit Stable regulatory outlook with PTC in place at 100% until 2020 +++

Fossil Power Clean Power Plan Reduce power sector carbon polution by 32%, SO2 by 90% and Nox by 72%, al in 2030 vs 2005.

Facing legal challenges; but expected to start having effect in 2022 =

Wind Renewable Portfolio Standards (RPS) Renewable energy to make up 24% by 2030 across 33 States on average

Being implemented across states =

Wind 2014 Amendment of the Renewable Energy Sources Act -EEG;

2.8-2.9GW onshore p.a. to 20256.5 GW offshore by 202015 GW offshore by 2030

EEG-2016 agreed by cabinet. Ratified July 2016Enters into force for 2018 deliveries +

Wind - onshore Contract for Difference (CfD) Max budget of £50m; £15m post 2016/17 Transition period until 2017 - Energy policy perceived "in limbo". ---

Wind - offshore Contract for Difference (CfD) 10 GW by 2020 Strong political support =

Wind - onshore Energy Transition Act25 GW by 202023% by 2020 from RE 40% by 2030 from RE

Current FiT offers €82/MWh for first 10yrs, then €28/MWh for 5yrs +

Wind - onshore New draft decree issued September 2015 Introducing premium-based system to replace FiT +

Wind - offshoreNREAP, Tax credit for energy transition (CITE)

6 GW offshore wind by 2020 Strong political support =

India Wind COP-21 pledge 60 GW by 2022Targets too ambitious, but support through tax and (partial) new tender system -

Brazil RenewablesTen - year energy expansion plans (PDPEE) 2023 (Sep 2014)

22.6GW by 2023Macro environment non supportive, government financing waning =

China Wind Strategic industry under five-year-plans20GW/year for 200 GW by 2020 (onshore) 10GW by 2020 (offshore)

Cut in FiT has thrown market into some turmoil - shift to low speed regions could be supportive -

Wind - onshoreMexican Renewable Energy Law (LAERFTE)

9GW by 2018 / 12 GW by 2022 Strong fines for non-compliance; up to $200/MWh +

France

US

Germany

Mexico

UK

European incentives were heavily cut during the global financial crisis

China’s move to lower its FiT produced some anxiety in the market last year


1 September 2016 29

The US PTC in detail The Production Tax Credit (PTC) is the main federal incentive scheme in the United States. It grants qualifying projects a tax credit of $23/MWh for the first 10 years of a farm’s operations. The PTC is key in driving an operator’s IRR and hence the investment decision.

Given the wild swings in new installations, the market so far appears to have agreed with this. We believe this may change in future, but for now the PTC is key to understanding the shape of the U.S. market; the PTC is the most direct driver of demand in the U.S. and therefore of orders and earnings for U.S.-exposed wind OEMs, such as Vestas, Nordex, and Gamesa.

Originally enacted in 1992, the PTC has been renewed and expanded numerous times, most recently by the American Recovery and Reinvestment Act (ARRA) in February 2009, the American Taxpayer Relief Act (ATRA) in January 2013, and retrospectively for 2014 in the Tax Increase Prevention Act (TIPA) in December 2014. Line A of the table below shows the acts under which the PTC has existed. The coloured bands running vertically through the chart show the state of various key factors as they relate to the PTC incarnation on line A of the chart.

The PTC, due to expire at the end of 2014, was given a five-year extension on 18 December 2015 as part of an “omnibus spending bill” entitled the Consolidated Appropriations Act (CAA). The bill provides for a gradual step down of the credits over the last three years. In order to understand how the PTC extension will shape future demand it is key to understand not only the provisions in the CAA, but also the relevant guidance issues by the Inland Revenue Service (IRS).

For each of the governing Acts, the IRS has issued specific guidance on how it interprets and applies the law. The IRS issued guidance on the CAA PTC in May 2016. In order to qualify for PTC, the IRS requires that two conditions are met. First, the developer needs to prove that construction has begun before the latest date allowed under the law. This can be proven by either showing that “physical work of a significant nature” has started, or by paying or incurring at least 5% of the total cost of the facility before the date allowed in the law, the so-called “safe-harbour test”. For example, under CAA, the developer would have needed to show either condition was met before 31 December 2016.

Second, the physical work condition requires the developer to maintain a “continuous program of construction”, while the safe-harbour test requires the developer to make “continuous efforts to advance toward completion of the facility”. Together, these rules are known as the “continuity requirement”. Under the CAA-guidance, the IRS deems the continuity requirement to have been met if the facility is placed in service before 31 December 2020, so four years after the latest permitted construction start date.

Finally, the CAA provides for a tapering of the current $23/MWh by 20% p.a. for farms placed in service from 1 January 2021. As can be seen in line D in the table below, this means that farms that meet conditions 1 before 31 December 2016 and condition 2 before 31 December 2020 will qualify for the full $23/MWh of tax credit.

What does it all mean for the turbine OEMs? Under the TIPA PTC, 2014 and 2015 have been two years of very strong order intake in the United States. Deliveries, which typically lag order intake by 4-6 quarters, started accelerating into 2015 and reached 5GW in Q4’15, taking the total installations in 2015 to 8.6GW. Given 2020 will be the last year in which full PTC is available, we expect this to be the peak year in installations and revenue.

Condition 1 dictates that either the “safe-harbour” or “physical work” tests need to be satisfied prior to year-end 2016. As mentioned above, developers can choose to spend 5% of expected total costs or start physical work. Vestas expects that three quarters of

“For example, on wind energy, we get a tax credit if we build a lot of wind farms. That's the only reason to build them. They don't make sense without the tax credit.”– Warren Buffett


1 September 2016 30

developers will opt for the safe-harbour test, whilst the remainder will use the physical work test (up from just 10% under previous PTC iterations). The mechanism through which the safe-harbour test is met is through the placing of framework orders for “qualifying components” with OEMs. We expect therefore that these framework orders will peak in 2016, resulting in subsequent order intake in 2017-2019.

We expect installations (= revenue) will dip in 2017 as the pipeline is rebuilt over the course of the year and there is no “mad rush” as in the prior two years. Installations should then climb to a peak in 2020, the last year in which 100% of the PTC is available. See Figure 40below for our forecasts for the U.S. market (and others).

FIGURE 40 The US PTC scheme is the main and most positive support scheme for Wind globally

Source: US Government, IRS, and Barclays Research

Line PTC extension impact Decision-maker Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 Dec-24 Dec-25

A Name of Act extending PTC US Congress ARRA ARRA Expired ATRA TIPA CAA CAA CAA CAA CAA Expired

BCondition 1: Construction started before

US Congress 2010 2011 2013 2014 2016 2017 2018 2019

CCondition 2: Placed-in-service date before

IRS, May 2016 2011 2012 2013 2016 2020 2021 2022 2023

DTax Credit if Conditions 1 & 2 are met ($/MWh)

US Congress 0 23 23 0 23 23 23 23 23 23 23 18 14 9 0

EWind OEM order intake in year ending

Developers Strong PeakVery Low

StrongVery

StrongVery

Strong

Frame-work orders

Strong Strong Strong Fading Fading Fading Fading Expired

FWind OEM revenue / new installations reported by AWEA in year ending

Developers Strong PeakVery Low

StrongVery

StrongVery

StrongDip Fading Fading Fading Fading Expired

Steadily climbing towards peak in 2020


1 September 2016 31

Solar Policy: Gives & takes The pace of solar demand is highly dependent on governmental policy. This is particularly true in solar because of the rapid cost declines related to higher volume production (more on this in a later section). Policy makers have historically struggled to find reactive policy structures that both stimulate solar demand and maintain coordinated growth as cost declines. Overly generous subsidies can drive exponential solar capacity growth, only to see subsidies paired back to deal with uncoordinated growth and rapidly increasing subsidy costs. This policy support/cost decline/policy roll-back has been a key driver in the boom-bust cycle for solar in many markets, in our view.

As solar policy evolves we expect to see a continued move away from blanket FiT and tax credits to more reactive policy frameworks that can flexibly adapt to changes in solar production cost. For example, moving towards more market-based auctions (India) and determining location-value of distributed solar net metering rates (New York). While subsidies were a key catalyst to sparking solar demand growth, policy uncertainty/volatility has also hindered industry players from scaling appropriately, increasing risk and therefore capital cost for solar developers, in our view.

FIGURE 41 Overview of policy incentives for solar

Source: SEIA, EIA, Government websites, Barclays Research

Incentive battle ground moving to emerging markets We expect future demand growth to largely come from emerging market countries, specifically India and China which have significant renewable energy goals:

• China renewable goal: 20% renewable by 2030

• India solar goal: 100GW installed capacity by 2022

Policy typeCompensation mechanism

Regions employed

Description

Feed in Tariff (FiT) RevenueEurope, Asia,

other non-U.S.

Government-set price per kWh (above market

rates, based on the cost of generation) at which

solar generation will be purchased.

Net Metering Revenue Primarily U.S.

Provides an offset for electricity used based on

amount of generation sent back to the grid,

typically at retail rates.

Renewable portfolio

standards (RPS)Revenue

Europe, Asia,

U.S.

Mandate that specific portion of electric supply be

generated from renewable sources. Burden placed

on utilities to comply by purchasing RECs from

qualified generators.

Renewable energy

credit (REC/SREC)Revenue

Europe, Asia,

U.S.

Energy credit created for every 1 mWh produced

from a given system. The credits are able to be

sold to utilities, who must purchase the credits or

face fines.

Investment Tax

Credit (ITC)Cost U.S.

Income tax credit awarded equal to a percentage

of system cost.

Clean Power Plan

(CPP)Mandate U.S.

Federally mandated state-level reductions in

carbon emissions. Implementation currently

delayed by SCOTUS.

Government policy is the key driver of boom/bust solar cycles, in our view

Policy uncertainty increases risk and capital cost for solar developers


1 September 2016 32

However, a key risk to meeting these objectives is that renewable energy targets are unlikely to be achieved if economic growth slows materially in either of these end-markets, in our view, as that would increase risk to the willingness and ability of low-income countries to bear the cost of cleaner electricity generation given other societal demands.

FIGURE 42 Key events to watch

Policy type Key date What to watch

AZ APS Rate Case Aug-16 Hearings expected on APS rate case proposing mandatory residential demand charges

Clean Power Plan Sept. 27, 2016 SCOTUS hearings on the legality of the EPA's CPP expected

NY REV Sept. 30, 2016 Governor's Task Force report due

India NSM Ongoing Progress toward 100GW by 2022 solar goal

China Curtailment Ongoing Progress toward managing high levels of curtailment of renewable generation

Source: Barclays research

Personal ownership increases political nature of the solar debate The distributed nature of solar tends to make it a relatively more political issue than other forms of renewable incentives. Solar can, relatively easily, be scaled down and attached to individual roofs, making solar policy structures much more visible and tangible to individuals. Solar policies can become political “hot-button” issues, as we have seen in the U.S. and Europe. Currently in the U.S., there is an ongoing state policy debate on creating residential roof-top policies that fully value distributed roof-top solar generation in a manner equitable to stakeholders. The outcome of these individual state policy reviews will be a key determinant for future U.S. solar demand.

FIGURE 43 State net metering rates and RPS goals for 10 largest U.S. markets

Source: DSIRE, SEIA, Barclays Research

State Net metering tariff Excess generation tariff RPS goal

Largest current markets

California Retail Average spot price 33% by 2020

Arizona Retail Avoided cost 15% by 2025

North Carolina Below resi. retail Granted to utility 12.5% by 2021

New Jersey Retail Avoided cost 22.5% by 2020

Nevada Avoided cost Avoided cost 25% by 2025

Massachusetts Below resi. retail Below resi. retail 15% by 2020

New York Retail Avoided cost 30% by 2015

Texas Avoided cost Avoided cost 5.9GW by 2015

Colorado Retail Avg. incremental cost 30% by 2020

Hawaii Wholesale Wholesale 100% by 2045

Solar is increasingly becoming a “hot button” issue


1 September 2016 33

INDUSTRY MARKET STRUCTURE

The primary difference between the wind and solar industries is that wind has been characterized by consolidation, while the solar module market has been much more fragmented with constant shuffling at the top. In our view, this is driven by solar module manufacturing having relatively lower barriers to entry with a focus on cost, whereas wind turbine manufacturing is focused more on reliability and quality. We expect solar business models to continue to evolve as companies try to establish a firmer foothold in a volatile industry.

Evolution versus revolution The wind and solar industries have evolved very differently over the past 15 years despite overall demand for each being driven by similar GHG reduction policies and cost declines. Understanding the basic industry dynamic might be a better predictor of future growth than the growth of the wind and solar markets.

The wind turbine industry has seen considerable consolidation with Vestas and General Electric (covered by Barclays’ U.S. multi-industry analyst, Scott Davis) controlling nearly half the ex-China market. In contrast, the solar module manufacturing industry has experienced significant turnover in leadership. Since 2010, eight different firms have occupied a top-three annual market share position in global module manufacturing. Suntech, the market leader in 2010-11, has since declared bankruptcy. The 2012-13 market share leader, Yingli, fell to second place in 2014 and 7th in 2015.

FIGURE 44 2015 wind turbine market share

FIGURE 45 2015 solar module market share

Source: BTM, Company reports and Barclays Research Source: Company reports and Barclays Research estimates.

In our view, the root cause of this variance in market structure flows from the nature of the technologies themselves. Wind is a large, mechanical piece of capital equipment that needs substantial life-time service. The lifetime servicing costs for wind could amount to 35-40% of the initial turbine capex. On the other hand, a solar module is a static piece of equipment, in which the lifetime servicing cost might be 0-10% of the total investment. We are only discussing the modules, not the entire solar project which includes inverters, which is a separate market.

In addition, the failure of a single cell in a solar module is less catastrophic than a mechanical failure of a wind turbine or blade. In our view, this makes for relatively higher barriers for new, unproven entrants in the wind turbine space compared to solar modules.

47%

12%

12%

9%5%5%5%5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Wind

Guodian

Siemens

Gamesa

Enercon

GE (incl. Alstom)

Vestas

Goldwind

Other

53%

10%

8%8%6%6%4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Solar

Yingli

First Solar

Hanwha

JA Solar

Jinko

CSIQ

Trina

Other

Wind is a high-barrier-to-entry market, solar is not


1 September 2016 34

The evidence is in the absence of Chinese players on the global wind market.

Let us be clear, quality matters in solar. But on a relative basis, the wind market is more focused on quality and reliability while solar is more focused on cost of the initial investment, providing an opening for new solar competition, in our view.

FIGURE 46 Vestas vs Trina ROA – much improved

FIGURE 47 Vestas vs Trina gross margin

Source: Thomson One, Barclays Research Source: Thomson One, Barclays Research

Wind: consolidation under way Outside of China, the Wind industry today is relatively concentrated, with just under three quarters of the market in the hands of the top 5 players. There have been only a handful of bankruptcy-driven exits, e.g. Schuler and WinWinD. Most bankrupt players have been taken over by other players, such as German-based Tacke by General Electric and DeWind by Daewoo. Both these players were relatively small, however.

In the early 2000s, a first round of acquisitions produced most of the landscape we know today: GE bought Enron Wind when the parent was bankrupted in 2002, whilst Siemens bought Denmark-based Bonus in 2004, marking its entry in the wind space. Earlier that year, Vestas bought local rival NEG Micon, which merged the then number 1 and 2.

Last year, a new consolidation round began with Nordex acquiring Acciona Wind Power and GE buying Alstom Wind. In addition, in mid-2016, Siemens and Gamesa announced their intention to merge their Wind operations. Assuming this goes ahead, the number of players controlling 75% of the market will have been reduced from eight to five in the space of a year. We see little scope for further immediate consolidation among Western players as the current wave is being digested. Further afield, particularly among the smaller players in India, Brazil and China, the industry is still relatively fragmented.

-15%

-10%

-5%

0%

5%

10%

15%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

ROA Trina Solar Vestas

10 yr average:Trina: 1.3%Vestas: 1.6%

0%

5%

10%

15%

20%

25%

30%

35%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Gross margin Trina Solar Vestas

Further consolidation is unlikely in the near term, in our view


1 September 2016 35

FIGURE 48 Vestas and GE control almost half the world’s Wind market

FIGURE 49 Two consolidation waves have driven the number of players from c20 to 8 (ex China and India)

Source: BTM, Company reports and Barclays Research Source: Company reports and Barclays Research. Not showing China and India.

Vestas23%

GE (incl. Alstom)

20%Enercon

11%

Gamesa9%

Nordex (incl. AWP)

9%

Siemens4%

Goldwind2%

Other22%

Onshore wind market share (2015, ex-China) Wind Industry Consolidation

Wave 1 (2000-14)

Wave 2 (2015-16)

Vestas Vestas Vestas

NEG Micon

Enron GE GE

Tacke Wind

Scanwind

Alstom Alstom

EcoTecnia

Enercon Enercon Enercon

Gamesa Gamesa Gamesa

Siemens WP Siemens WP

Bonus

Nordex Nordex Nordex / AWP

Acciona WP

Samsung Samsung Exit

DeWind Daewoo Exit

Suzlon Suzlon Suzlon

RePower Senvion

Clipper UTX / PE Exit

Mitsubishi HI Exit

Hitachi Hitachi Hitachi

Fuji


1 September 2016 36

Solar: Evolving business models Solar is not a single industry but a series of industries in the value chain that convert raw materials (sand/silicon) into a sellable product: clean electricity. Despite the strong global growth in solar demand, business failures are not uncommon, most notably Sunedison (2016), Suntech (2014) and Solyndra (2011). In Figure 50 we provide a simplified value chain for the solar industry with key players.

FIGURE 50 Solar value chain

Segment Risk Description Dynamic Key Players

Modules High Manufacturing of the solar wafer, cell and/or modules.

Increasingly commoditized with low cost manufacturing centered in China.

First Solar, Sunpower, Canadian Solar, Yingli, Trina

Balance of systems

Moderate - High

Manufacturing of the other components in a solar project: inverters, racking cable

Exposed to technological innovation and low-cost Chinese competitors.

Solaredge, Huawei, Sungrow SMA Solar, ABB, Enphase

Project Development

Moderate - High

Developing and building the solar project, including locating, permitting and connection.

Significant opportunity for learning and execution differentiation. Local knowledge, relationships might not be scalable in other geographies.

First Solar, Sunpower, SolarCity, Sunrun

Asset Ownership Low- Moderate

Owning, typically with long-term PPA or for self consumption.

Given, a high quality off-taker there is limited risk in cash flow. Risk subject to return on investment and changes in interest rates. Curtailment a risk in emerging markets.

8point3 Energy, Yield Co's, Utilities, Pension, home and business owners.

Financing Low - High Providing project level debt or equity financing.

Providing capital to finance solar projects. Risk correlated to place in the capital stack.

Hannon Armstrong, securitization market (ABS), tax equity investors, banks.

Source: Company reports, Barclays Research.

We think it is fair to say that business models are still evolving in the solar industry with new players entering the market and existing players pivoting or fine-tuning strategies. Below we outline some of the key broad trends the industry is employing to deal with some of the structural issues in turning sunlight not just into electricity, but into sustainable profits.

• Vertical integration: The evolution has been for module manufacturers to forward-integrate into project development and even asset ownership.

• Geographic diversification: Given the policy-driven volatility in specific markets, industry players attempt to have multiple sales/development channels in multiple markets. Residential solar is broadly the exception to this trend.

• De-risking asset ownership: Increasing reliance on long-term Power Purchase Agreements (PPA) in which the off-taker (utility, commercial customer or homeowner) agrees to pay a fixed price for a certain volume of solar electricity. This has two advantages for the solar generation asset owner. First, PPAs avoid having to price competitively based on time-of-use pricing which is a positive given solar generation’s near zero marginal cost and risk of high solar penetration depressing day-time wholesale rates. Second, PPAs push the cost of night-time reliability onto other parties.

• Evolving financing: Given the high upfront capital cost of renewable relative to fossil fuel generation, the ability to monetize projects and recycle capital is imperative. U.S. listed yield co’s were an attempt to find a cost advantaged monetization avenue and it remains unclear when (if) that market will re-open to new capital raises. Several large listed developers have asset portfolio’s they intended to drop-down into captive yield co’s.

Solar business models are still evolving...


1 September 2016 37

FIGURE 51 Business model choices

Source: Company Reports, IRENA, Barclays Research estimates


1 September 2016 38

INDUSTRY PROFITABILITY

Although solar is expected to grow faster than wind in the next five years, it is important to note differences in profitability between the two business models. Wind technology is well-established with high barriers to entry (turbine manufacturing is dominated by large, experienced players, some of which are part of big conglomerates), creating a near impossible game of catch-up for new entrants (GE and Siemens have been making wind turbines for 15 years). Solar has been a story of volume, rather than profitability. Margins are small and the competition is fierce. The industry is littered with dramatic bankruptcies. We expect weakness in 2017 for utility scale solar and continued uncertainty around government policy – investors should plan to weather the storm in companies with pristine balance sheets

Wind: Balanced capacity utilisation drives margin expansion To our minds, there are three long-term drivers of pricing and, hence, margins in Wind. First, capacity utilisation has historically been the driver of negative pricing. As Figure 52 below shows, the industry came out of an oversupply situation of c60% in 2013, when demand dropped sharply in the U.S. and capacity reduction actions hadn’t fully kicked in yet.

Since then, however, the industry has drastically rationalised capacity, taking out almost 15GW of capacity by our reckoning between 2012 and 2014. As demand grows into 2018, we see supply and demand being balanced. We also note that the capacity has become far more flexible, with Vestas, for instance, alluding to setting up blade molds in tented parking lots. The industry has also moved to lower vertical integration, outsourcing casting and forging completely, and making far more use of third-party component suppliers for towers and blades.

Second, pricing is driven by regulatory change. For example, the transition from FiTs to auctions in Brazil is typically cited as having led to strong price erosion. We acknowledge this was a factor, but believe there was more at play in Brazil (e.g., local content rules, politics, concentrated buyers). Nonetheless, regulatory change is a key driver, but at present we see that, among the key markets, Germany is the only country moving to an auction system. Prices in Germany will be affected, but we do not believe by enough to disrupt the global pricing balance.

Finally, the advent of the Chinese players on the global scene has often been touted as a risk to global pricing. From our recent channel checks with Chinese OEMs we conclude that their incursion will be slow and initially limited to only one or two of China’s 30-odd turbine manufacturers. As a result we forecast margin expansion for the main turbine OEMs to continue the upward trend, albeit more modestly than in recent years.

We expect supply and demand to remain balanced into 2018

We do not expect Chinese capacity to have a material impact on turbine pricing


1 September 2016 39

FIGURE 52 We see supply and demand broadly balanced to 2018

FIGURE 53 We forecast continued margin expansion across the industry

Source: Barclays Research Source: Company reports and Barclays Research. Includes VWS, NDX, GAM

Solar: 2017 module supply/demand imbalance expected For more detail on our industry profitability outlook, please see our 24 August 2016 note: “Solar outlook; playing the long game”

Module manufacturing profitability likely to be under pressure While we expect near-term module manufacturing profit margins to be supported by strong global demand in 2016, we see risk to longer-term profitability. We expect module manufacturing utilization to weaken in 2017, driven by a 30% y/y increase in manufacturing capacity by YE2016. The increase, which is driven partly by the expansion of Chinese manufacturers into SE Asia to circumvent U.S. import tariffs, is expected to pressure 2017E margins given our expectations for flat y/y global demand in 2017E.

FIGURE 54 Module capacity utilization and gross margins

FIGURE 55 Module manufacturing capacity

Source: Company reports, Barclays Research Source: Company reports, Barclays Research

0%10%20%30%40%50%60%70%80%90%100%

05

101520253035404550

2010

2011

2012

2013

2014

2015

2016

E

2017

E

2018

E

Global WTG market supply / demand balance (GW, ex-China)

Demand Supply % Overcapacity

-0.1%

4.0%

6.4%

8.5%

9.9% 10.0% 10.3%

2012 2013 2014 2015 2016E 2017E 2018E

Wind Industry average Adj. EBITA margin

60%

70%

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Overcapacity driving risk to 2017 profitability



1 September 2016 40

Challenging 2017 for U.S. utility-scale demand We expect the U.S. focused developers to experience a challenging 2017 with utility scale demand declining 40% y/y. This decline is expected to be driven by the significant pull-forward demand into 2016 created prior to the ITC extension. Compared to three months prior, I/B/E/S consensus FY2017 EBITDA estimates for the developer group have declined by 9.5%.

FIGURE 56 2009-2018E solar average gross margin

Source: Company reports, Barclays Research estimates Note: Average includes FSLR, SPWR, CSIQ

Asset ownership stabilizing We expect further stabilization in the yield co markets and view the space as particularly attractive, with financial performance not strongly correlated to module demand or new project development (in the short run). We believe equity capital funding for new drop-downs is not out of the question in 2017. The relatively stable, predictable cash generation profile of yield co assets will remain an attractive option in a persistently low-yield environment, in our view.

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1 September 2016 41

TECHNOLOGY FUNDAMENTALS

Similar, yet different Both wind and solar implementation have grown and become the dominant form of new clean energy capacity installation globally. Both technologies have similar attributes that separate them from traditional fossil fuel or nuclear generating capacity. Broadly, both wind and solar are clean (great), getting cheaper (good), are non-dispatchable (bad).

• Common positive attributes: Both wind and solar produce very low GHG emissions through their life cycle; have experienced rapid cost declines over time; and both act as a hedge against rising cost for fossil fuels.

• Common challenges: They are non-dispatchable resources (generate when they can, not whenever you want); both still have higher than lowest cost fossil fuel generation in most locations; and both require significant upfront capital investment relative to fossil fuels.

Despite, the challenges of integrating these non-dispatchable resources into existing utility systems wind and solar have become the majority of new renewable electricity generation additions globally; a trend we expect to continue.

FIGURE 57 Renewable cumulative installed capacity

FIGURE 58 Annual new renewable installations

Source: IRENA, Barclays Research Source: : IRENA, Barclays Research

Wind vs. Solar: the battle for the 21st century In this section we will address the relative positioning of each technology and note that this is separate, but related to, an investment recommendation in each sector. Ultimately, we view both technologies as long-term winners relative to traditional fossil fuel generation due to climate change policies and increased investment and innovation in modernizing the grid and battery technology to enable higher renewable penetration rates of intermittent resources longer-term.

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What’s the better technology? Depends on whose asking . . . . . . or more precisely, where you are asking


1 September 2016 42

FIGURE 59 Wind & Solar comparison

Source: Barclays Research

Wind basics – how does a wind farm work? At the risk of going back to basics a bit too far, a wind turbine is a machine that harvests energy contained in wind by converting it first into rotational movement (through the rotor), which in turn drives a generator, mostly indirectly through a gearbox. The electricity generated is alternating current (AC), which means it can be fed directly into the grid. Wind farms typically consist of a number of wind turbines (up to several hundreds, though more commonly 10-50).

Turbines typically consist of several thousand mechanical parts that are assembled by the OEM. Once produced, the turbine is erected onsite, with the tower typically arriving in 5-7 parts. Blades usually ship in one piece and are assembled to form the rotor on site, though some OEMs have blades that are shipped in segment so as to facilitate easier logistics. The nacelle typically needs little additional work once it arrives on site. Standard cranes and other construction equipment are required to physically erect the turbine in a process that typically takes 1-3 weeks.

In addition to the turbine, a wind farm “balance of plant” consists of foundations, MV switchgear, cables and other auxiliary equipment. Depending on the market, planning and permitting costs may constitute a considerable portion of costs also. Wind turbine foundations typically have a size of 20-22m2, allowing for productively used land to retain its current purpose (e.g., agriculture).

Comparison Wind Solar Advantage

Cost LCOE ~$50/MWh LCOE ~$70/MWh Wind

Load factorTargeted siting drives 30%+ load factors

High regional variability; generally 10%-25% load factor

Wind

Resource availability Geographically limited, but predictable Globally available and predictable Solar

ScalabilityNot suitable for small (residential) applications

Easily scaled; small rooftop up to multi MW solar farm

Solar

Dispachability Generation independent of demand Generation independent of demand Neutral

Adaptability Limited Highly customizable Solar

MechanicsMoving parts, "old tech", may be considered intrusive in some locations

No moving parts, "new" tech, can be integrated into existing structures

Solar


1 September 2016 43

FIGURE 60 Main wind turbine components

FIGURE 61 Onshore farm costs de-composed

Source: Barclays Research Source: Barclays, company reports

The turbines usually make up two-thirds of the costs of a typical onshore wind farm. In turn, the turbine breaks down in the drivetrain, which represents a third of the turbine’s costs and includes the gearbox, converter and generator. The tower and blades represent a further 20-25% of the turbine cost each, whilst other equipment in the nacelle is 20% also. Assembly, mainly labour costs, represents just 3% of the turbine bill.

Once up and running, a wind turbine needs regular servicing, typically at six months intervals to ensure mechanical and electrical parts keep functioning properly. Remote monitoring of the turbine makes this relatively easy. Over the lifespan of a wind turbine, the servicing costs should amount to no more than 0.5-0.6x the initial capex. This is quite low compared to other rotating equipment, in particular gas turbines, which require at least >1x the initial capex in servicing costs.

Wind – technical challenges Wind turbine technology’s technical challenges focus on making turbines bigger and more efficient. Making turbines bigger involves dealing with the wind’s so-called scaling rules. Scaling rules imply that for each squaring of the swept area of a rotor, the turbine’s weight and loading forces increase by a factor equal to the power of three. In other words, increasing the size of a turbine disproportionally increases the weight of the turbine and the stresses on the turbine components.

In order to challenge these scaling rules, Vestas has recently installed a concept turbine that has four sets of rotors instead of only 1. While currently designed as a 4x 225kW prototype, Vestas is exploring the feasibility of scaling the turbine up to exceed the current 3MW onshore standard.

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Typical Wind Farm & Turbine Cost breakdown


1 September 2016 44

FIGURE 62 Vestas’ four-rotor concept

FIGURE 63 Logistics are the limiting factor for onshore wind

Source: Vestas Source: Vestas

A further technical challenge for wind centres around logistics. As the above image shows, the bigger/longer components, and in particular blades, become, the more challenging the logistics become. The above picture is from Europe; clearly the U.S. Mid-West or Indian deserts will suffer less from this issue. Nevertheless, also in those places existing road infrastructure such as bridges, gas stations etc form strong barriers to size increases.


1 September 2016 45

Solar basics – Direct conversion of solar energy Solar photovoltaics (or solar cells) are arranged in solar modules to capture energy from the nuclear fusion of the Sun and directly convert sunlight into electricity. We say directly, because the vast majority of electric generation is already indirectly derived from the sun’s energy via photosynthesis (fossil fuels), surface temperature differentials (wind), and water evaporation (hydro power). Solar modules effectively shortcut the process of capturing the sun’s energy greatly reducing the time to harvest the energy and carbon emissions relative to fossil fuel–based generations.

Part of solar’s allure, in our view, is the simplified concept that solar is using two seemingly free resources (sand and sunlight) to produce clean, sustainable energy. There are two predominant solar technologies on the market today:

• Crystalline Silicon: c-Si solar cells are the dominant technology employed today. c-Si solar cells are silicon based, making them relatively inexpensive and non-toxic. However, c-Si is a poor absorber of light, which necessitates the use of thicker wafers and limits design flexibility.

• Cadmium Telluride thin-film: CdTe is the primary technology used by First Solar (FSLR, OW/Neu), the largest player in the CdTe market. The benefits of thin-film solar cells include better light absorption, stronger performance in dusty or humid climates. However, efficiency remains below that of the more common c-Si cells at around 16% compared to roughly 20% for c-Si.

FIGURE 64 Solar module market share by technology type

Source: GTM, Barclays Research

Solar positive attributes Solar generation is scalable, which can be deployed in both large 1GW solar farms or small 5kW residential systems. This scalability enables distributed generation (roof-top solar). This drives two key advantages for solar: first, the ability to locate generation where most valuable to the existing grid, and second, it opens a direct-to-consumer sales channel (the residential solar market). Solar doesn’t have any moving parts and is generally less intrusive to the surrounding environment, particularly on existing roof-tops, which might not even be visible. Lastly, solar is the most dispersed renewable asset, it’s everywhere in broadly predictable quantities.

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Solar power is everywhere in broadly predictable quantities


1 September 2016 46

Solar technological challenges The key challenge for increasing penetration of solar is the intermediate nature of generation which is dependent on sunlight. In our view, end customers put significant value on the reliability (consistent availability) of power. The challenge with solar is not just reducing the LCOE, but also integrating solar in a way that minimizes the overall system cost of providing reliable and affordable electricity for consumers.

Solar saturation A general rule of thumb it that intermittent generating resources become increasingly expensive to integrate at capacity penetration rates above their capacity factors; generally 14-22% for solar. There is a rapidly declining marginal benefit to adding more solar capacity beyond a certain threshold, in our view. Solar saturation can be mitigated through four approaches:

• Storage: Batteries allow for the distribution of solar energy to be deployed during periods of off-peak generation

• Transmission: A more interconnected grid allows for the instantaneous movement of solar energy to areas with higher demand or lower solar penetration

• Customer load shifts: Shifting energy use to periods of peak solar production can mitigate the impact of intermittent generation

• Increased government subsidies: Supporting increased caps on retail-rate net metering and mandating RPS can continue to fuel solar demand and installations

FIGURE 65 Solar saturation S-curve

Source: EIA, IRENA, Government statistics Note: Year one represents the year solar capacity exceeded 0.5% of total generating capacity in a market

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1 September 2016 47

North America Alternative Energy & Environmental Services Industry View: NEUTRAL

First Solar Inc. (FSLR) Stock Rating: OVERWEIGHT

Income statement ($mn) 2015A 2016E 2017E 2018E CAGR Price (30-Aug-2016) USD 38.25Price Target USD 50.00Why Overweight? We view FSLR as well positioned to survive a 2017 US solar demand downturn which should position the company to take market share as demand recovers under the Clean Power Plan. Our price target of $50 is based on 15x our 2017 EPS estimate plus $20/share in YE2016 net cash.

Upside case USD 62.00Our upside case is based on a rerating of alternative energy shares driven by stronger than expected US solar demand due to faster CPP approval. Upside based on the 3-year peak P/E multiple of 19x 2018E plus net cash.

Downside case USD 31.00Our downside case is based on 5x 2018E P/E plus cash and would be driven by a substantial slowdown in emerging market solar demand in addition to the anticipated US slow down. Furthermore, additional delays or changes to the Clean Power Plan could impact FSLR's long-term earnings

Upside/Downside scenarios

Revenue 3,579 3,387 2,705 2,658 -9.4% EBITDA (adj) 774 542 453 494 -13.9% EBIT (adj) 517 285 168 205 -26.5% Pre-tax income (adj) 520 332 196 229 -23.9% Net income (adj) 546 410 250 257 -22.3% EPS (adj) ($) 5.37 4.39 1.93 2.18 -25.9% Diluted shares (mn) 101.8 101.6 101.6 101.6 -0.1% DPS ($) 0.00 0.00 0.00 0.00 N/A

Margin and return data Average EBITDA (adj) margin (%) 21.6 16.0 16.8 18.6 18.2 EBIT (adj) margin (%) 14.4 8.4 6.2 7.7 9.2 Pre-tax (adj) margin (%) 14.5 9.8 7.2 8.6 10.0 Net (adj) margin (%) 15.3 12.1 9.2 9.7 11.6 ROIC (%) 9.0 3.9 2.2 2.6 4.4 ROA (%) 9.8 6.8 4.0 3.9 6.1 ROE (%) 9.8 6.8 4.0 3.9 6.1

Balance sheet and cash flow ($mn) CAGR Net PP&E 1,284 1,427 1,442 1,653 8.8% Total net assets 5,548 5,997 6,280 6,569 5.8% Capital employed 5,800 6,249 6,532 6,820 5.5% Shareholders' equity 5,548 5,997 6,280 6,569 5.8% Net debt/(funds) -1,579 -2,054 -2,185 -2,047 N/A Cash flow from operations -361 581 431 362 N/A Capital expenditure -166 -400 -300 -500 N/A Free cash flow -527 181 131 -138 N/A Pre-dividend FCF N/A N/A N/A N/A N/A

Valuation and leverage metrics Average P/E (adj) (x) 7.1 8.7 19.8 17.5 13.3 EV/EBITDA (adj) (x) 3.0 3.4 3.8 3.7 3.5 EV/EBIT (adj) (x) 4.5 6.5 10.2 9.0 7.5 P/BV (x) 0.7 0.6 0.6 0.6 0.6 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 Total debt/capital (%) 4.3 4.0 3.8 3.7 4.0 Net debt/EBITDA (adj) (x) N/A N/A N/A N/A N/A

Selected operating metrics Average Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 Interest cover (x) 74.1 18.0 42.0 51.4 46.4 Regulated (%) N/A N/A N/A N/A N/A

Source: Company data, Barclays Research Note: FY End Dec

https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=FSLR�


1 September 2016 48


SunPower Corp (SPWR) Stock Rating: EQUAL WEIGHT

Income statement ($mn) 2015A 2016E 2017E 2018E CAGR Price (30-Aug-2016) USD 10.28Price Target USD 12.00Why Equal Weight? We expect the US utility-scale segment to face a 42% y/y decline in 2017 following robust demand in 2016. However, we view SPWR’s diverse end-market exposure and relatively robust balance sheet as positioning the company to gain market share through a downturn. However, the recent guidance downgrade means this will likely be a slow climb back.

Upside case USD 26.00Upside case driven by stronger than expected international margins to off-set a US slowdown. Upside target based on 23x 2017E EPS.

Downside case USD 8.00Downside case is driven by the potential that the DG market is not sufficient to meet FY2017 guidance and would face further downside risks if US utility-scale weakness lingers well into 2018. Downside target based on 2017E P/E of 7x.


Revenue 2,613 3,005 2,901 3,181 6.8% EBITDA (adj) 557 319 342 406 -10.0% EBIT (adj) 242 -115 28 79 -31.1% Pre-tax income (adj) 222 -155 -22 27 -50.8% Net income (adj) 338 90 158 222 -13.1% EPS (adj) ($) 2.63 0.90 1.13 1.58 -15.5% Diluted shares (mn) 156.4 143.2 140.0 140.0 -3.6% DPS ($) 0.00 0.00 0.00 0.00 N/A

Margin and return data Average EBITDA (adj) margin (%) 21.3 10.6 11.8 12.8 14.1 EBIT (adj) margin (%) 9.2 -3.8 1.0 2.5 2.2 Pre-tax (adj) margin (%) 8.5 -5.2 -0.8 0.8 0.9 Net (adj) margin (%) 12.9 3.0 5.4 7.0 7.1 ROIC (%) 10.6 1.6 3.8 4.9 5.2 ROA (%) 7.0 1.8 2.9 3.7 3.8 ROE (%) 22.4 5.6 9.0 11.2 12.1

Balance sheet and cash flow ($mn) CAGR Net PP&E 731 857 1,031 1,206 18.2% Total net assets 1,509 1,598 1,756 1,978 9.5% Capital employed 2,165 2,596 3,058 3,559 18.0% Shareholders' equity 1,509 1,598 1,756 1,978 9.5% Net debt/(funds) 656 998 1,302 1,581 34.0% Cash flow from operations -726 -210 -83 -66 N/A Capital expenditure -328 -220 -250 -250 N/A Free cash flow -580 -57 5 52 N/A Pre-dividend FCF -580 -57 5 52 N/A

Valuation and leverage metrics Average P/E (adj) (x) 3.9 11.4 9.1 6.5 7.7 EV/EBITDA (adj) (x) 3.8 7.6 8.0 7.4 6.7 EV/EBIT (adj) (x) 8.7 -21.3 99.3 38.3 31.2 P/BV (x) 1.1 0.9 0.8 0.7 0.9 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 Total debt/capital (%) 33.2 35.6 37.0 37.8 35.9 Net debt/EBITDA (adj) (x) 1.2 3.1 3.8 3.9 3.0

Selected operating metrics Average Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 Interest cover (x) 12.7 5.9 5.9 6.7 7.8 Regulated (%) 0.0 0.0 0.0 0.0 0.0


https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=SPWR�


1 September 2016 49


Canadian Solar Inc. (CSIQ) Stock Rating: EQUAL WEIGHT

Income statement ($mn) 2015A 2016E 2017E 2018E CAGR Price (30-Aug-2016) USD 13.18Price Target USD 14.00Why Equal Weight? Our $14 PT is based on 9.0x 2017E EPS. We now see unavoidable risks to 2017E fundamentals driven by module overcapacity driving margin pressure, coupled with softening 2017 U.S. utility-scale demand. While the stock valuation is compelling, CSIQ's 5.9x 2016E net-debt/EBITDA cause us to stay on the sidelines.

Upside case USD 32.00Our upside valuation is based on 15.0x 2017E P/E target multiple plus a potential $9/sh in value for a successful spin-off of the CSIQ solar project assets. Stronger-than-expected global module demand, potential US tariff reductions, and a spin of the power assets are key drivers.

Downside case USD 6.00Downside based on 3-yr trough P/E of 4.0x applied to 2017E EPS, and no value for a successful asset spin-out. Our downside case would likely be driven by worse-than-expected pricing pressure should global demand stall and continued "flight to safety" in less-levered names.


Revenue 3,468 3,166 3,223 3,536 0.7% EBITDA (adj) 342 411 512 653 24.1% EBIT (adj) 247 182 194 221 -3.6% Pre-tax income (adj) 223 170 130 141 -14.2% Net income (adj) 173 121 94 101 -16.3% EPS (adj) ($) 2.94 2.00 1.54 1.66 -17.3% Diluted shares (mn) 60.4 60.2 61.0 61.0 0.3% DPS ($) 0.00 0.00 0.00 0.00 N/A


Balance sheet and cash flow ($mn) CAGR Net PP&E 1,526 2,119 2,874 3,732 34.7% Total net assets 833 959 1,058 1,165 11.9% Capital employed 3,219 3,908 4,768 5,788 21.6% Shareholders' equity 833 959 1,058 1,165 11.9% Net debt/(funds) 1,833 2,414 3,099 3,712 26.5% Cash flow from operations 414 403 507 540 9.3% Capital expenditure -643 -836 -1,086 -1,304 N/A Free cash flow -280 -460 -565 -735 N/A Pre-dividend FCF -280 -460 -565 -735 N/A

Valuation and leverage metrics Average P/E (adj) (x) 4.5 6.6 8.6 7.9 6.9 EV/EBITDA (adj) (x) 7.7 7.8 7.6 6.9 7.5 EV/EBIT (adj) (x) 10.6 17.6 20.1 20.4 17.2 P/BV (x) 1.0 0.8 0.8 0.7 0.8 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 Total debt/capital (%) 74.1 75.5 77.8 79.9 76.8 Net debt/EBITDA (adj) (x) 5.4 5.9 6.1 5.7 5.7



https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=CSIQ�


1 September 2016 50


SolarCity Corp. (SCTY) Stock Rating: UNDERWEIGHT

Income statement ($mn) 2015A 2016E 2017E 2018E CAGR Price (30-Aug-2016) USD 20.69Price Target USD 20.00Why Underweight? Given the market's intense focus on funding needs we see as unlikely a re-rating in SCTY shares in the near-term given SCTY's near-constant need to access capital to fund growth should the TSLA merger not be completed.

Upside case USD 33.00Upside risk case is based on Barclays' upside case for TSLA of $301 and the announced merger ratio of 0.11 TSLA shares for every SCTY share.

Downside case USD 11.00Our downside case is based on YE 2018E residual value per share, should the merger not close. We would expect SCTY to face significant financing challenges if the deal fails to gain shareholder approval.


Revenue 400 674 1,014 1,367 50.7% EBITDA (adj) -481 -501 -189 -24 N/A EBIT (adj) -648 -773 -539 -451 N/A Pre-tax income (adj) -765 -996 -778 -742 N/A Net income (adj) -710 -840 -651 -621 N/A EPS (adj) ($) -7.91 -9.92 -7.67 -7.31 N/A Diluted shares (mn) 97.2 99.5 99.5 99.5 0.8% DPS ($) 0.00 0.00 0.00 0.00 N/A

Margin and return data Average EBITDA (adj) margin (%) -120.4 -74.2 -18.7 -1.7 -53.8 EBIT (adj) margin (%) -162.1 -114.6 -53.2 -33.0 -90.7 Pre-tax (adj) margin (%) -191.6 -147.7 -76.7 -54.3 -117.6 Net (adj) margin (%) -177.8 -124.5 -64.2 -45.4 -103.0 ROIC (%) -12.7 -11.5 -6.4 -4.5 -8.8 ROA (%) -5.8 -5.3 -3.2 -2.4 -4.2 ROE (%) -47.9 -57.1 -39.9 -33.1 -44.5

Balance sheet and cash flow ($mn) CAGR Net PP&E 4,638 6,014 7,283 8,512 22.4% Total net assets 1,414 1,566 1,763 1,964 11.6% Capital employed 3,324 4,365 5,463 6,500 25.1% Shareholders' equity 879 880 879 885 0.2% Net debt/(funds) 1,910 2,799 3,700 4,536 33.4% Cash flow from operations 2,395 2,079 1,689 1,656 -11.6% Capital expenditure -1,666 -1,484 -1,380 -1,376 N/A Free cash flow -1,920 -1,715 -1,380 -1,242 N/A Pre-dividend FCF -1,323 -1,243 -1,210 -1,137 N/A

Valuation and leverage metrics Average P/E (adj) (x) N/A N/A N/A N/A N/A EV/EBITDA (adj) (x) -8.2 -9.6 -30.1 -278.0 -81.5 EV/EBIT (adj) (x) -6.1 -6.2 -10.6 -14.5 -9.3 P/BV (x) 2.3 2.3 2.3 2.3 2.3 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 Total debt/capital (%) 70.2 73.2 73.1 73.8 72.6 Net debt/EBITDA (adj) (x) -4.0 -5.6 -19.5 -192.6 -55.4



https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=SCTY�


1 September 2016 51


Sunrun Inc. (RUN) Stock Rating: EQUAL WEIGHT

Income statement ($mn) 2015A 2016E 2017E 2018E CAGR Price (30-Aug-2016) USD 6.01Price Target USD 7.00Why Equal Weight? We view RUN as a conservative and prudent residential solar installer. However, we expect increased competition and pricing pressure in the residential solar market in 2017.

Upside case USD 15.00Upside risk would be faster than expected spread of net-metering policies to new states and international markets, which is not our base case. Our upside case is based on a 4x multiple of 2018E new value creation plus 2017YE residual value per share.

Downside case USD 3.00Interruption in external financing or less supportive DG subsidies would reduce growth, while increased competition from purchased, not leased, systems could reduce incremental retained value. Our downside case is based on YE 2016E residual value per share.


Revenue 305 384 529 699 31.9% EBITDA (adj) -144 -136 -155 -178 N/A EBIT (adj) -216 -229 -271 -323 N/A Pre-tax income (adj) -251 -274 -316 -368 N/A Net income (adj) -249 -275 -314 -364 N/A EPS (adj) ($) -2.46 -2.72 -3.11 -3.60 N/A Diluted shares (mn) 101.0 101.0 101.0 101.0 0.0% DPS ($) 0.00 0.00 0.00 0.00 N/A

Margin and return data Average EBITDA (adj) margin (%) -47.3 -35.5 -29.3 -25.5 -34.4 EBIT (adj) margin (%) -70.7 -59.6 -51.2 -46.1 -56.9 Pre-tax (adj) margin (%) -82.2 -71.3 -59.8 -52.7 -66.5 Net (adj) margin (%) -81.7 -71.6 -59.4 -52.0 -66.2 ROIC (%) -14.8 -10.7 -9.2 -8.4 -10.8 ROA (%) -5.1 -4.4 -4.2 -4.1 -4.5 ROE (%) -25.3 -27.4 -33.2 -40.3 -31.6

Balance sheet and cash flow ($mn) CAGR Net PP&E 2,037 2,551 3,182 3,922 24.4% Total net assets 660 1,179 1,817 2,556 57.1% Capital employed 947 1,393 1,909 2,505 38.3% Shareholders' equity 554 543 531 520 -2.1% Net debt/(funds) 287 214 92 -51 N/A Cash flow from operations -105 -78 -54 -42 N/A Capital expenditure -627 -607 -747 -885 N/A Free cash flow -690 -645 -771 -907 N/A Pre-dividend FCF -565 -536 -671 -787 N/A

Valuation and leverage metrics Average P/E (adj) (x) N/A N/A N/A N/A N/A EV/EBITDA (adj) (x) -6.2 -6.0 -4.5 -3.1 -5.0 EV/EBIT (adj) (x) -4.2 -3.6 -2.6 -1.7 -3.0 P/BV (x) 0.9 0.5 0.3 0.2 0.5 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 Total debt/capital (%) 51.9 35.7 26.4 20.2 33.5 Net debt/EBITDA (adj) (x) -2.0 -1.6 -0.6 0.3 -1.0



https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=RUN�


1 September 2016 52


SolarEdge Technologies Inc. (SEDG) Stock Rating: OVERWEIGHT

Income statement ($mn) 2016A 2017E 2018E 2019E CAGR Price (30-Aug-2016) USD 17.60Price Target USD 22.00Why Overweight? SEDG’s inverter/optimizer solution is well positioned for further share gains in the residential/commercial solar segments and we forecast adj. EPS to grow 16.6% FY17-19E 3-yr CAGR. SEDG’s inverter/optimizer solution has rapidly taken market share since its launch in 2010 and we expect SEDG’s FY18E market share to expand to 11% from below 5% (FY15A).

Upside case USD 37.00Our upside case is based on a P/E multiple of 18x applied to our CY2017E adj. EPS. A key driver of our upside case would be faster than expected market share gains in the US residential market.

Downside case USD 8.00Our downside case is based on a 4x P/E applied to our CY2017E adj. EPS. Our downside would be driven by faster than expected inverter price declines and declining gross margins.


Revenue 490 568 639 709 13.1% EBITDA (adj) 79 114 140 175 30.5% EBIT (adj) 74 104 126 159 28.7% Pre-tax income (adj) 75 99 120 152 26.5% Net income (adj) 86 95 102 129 14.5% EPS (adj) ($) 1.74 2.08 2.21 2.76 16.6% Diluted shares (mn) 45.5 45.9 46.2 46.6 0.8% DPS ($) 0.00 0.00 0.00 1.00 N/A


Balance sheet and cash flow ($mn) CAGR Net PP&E 25 33 42 51 26.2% Total net assets 253 348 450 579 31.8% Capital employed 31 42 53 84 39.0% Shareholders' equity 253 348 450 579 31.8% Net debt/(funds) -221 -306 -397 -495 N/A Cash flow from operations 88 103 112 124 12.1% Capital expenditure -15 -18 -22 -26 N/A Free cash flow 52 77 95 138 38.5% Pre-dividend FCF 68 84 90 132 24.6%

Valuation and leverage metrics Average P/E (adj) (x) 10.1 8.5 8.0 6.4 8.3 EV/EBITDA (adj) (x) 7.3 4.3 2.9 1.7 4.1 EV/EBIT (adj) (x) 7.8 4.8 3.2 1.9 4.4 P/BV (x) 3.2 2.3 1.8 1.4 2.2 Dividend yield (%) 0.0 0.0 0.0 5.7 1.4 Total debt/capital (%) 0.0 0.0 0.0 0.0 0.0 Net debt/EBITDA (adj) (x) -2.8 -2.7 -2.8 -2.8 -2.8

Selected operating metrics Average Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 Interest cover (x) -152.3 19.7 18.7 21.1 -23.2 Regulated (%) N/A N/A N/A N/A N/A

Source: Company data, Barclays Research Note: FY End Jun

https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=SEDG�


1 September 2016 53


8point3 Energy Partners LP (CAFD) Stock Rating: OVERWEIGHT

Income statement ($mn) 2015A 2016E 2017E 2018E CAGR Price (30-Aug-2016) USD 15.71Price Target USD 18.00Why Overweight? CAFD is a relatively stable yield co with strong development sponsors. Investors are likely to prefer CAFD's prudent, consistent execution on the stated dividend growth strategy given ongoing market volatility.

Upside case USD 31.00Upside case would be driven by faster than or more accretive than expected acquisitions. Upside target based on 4% 2018E dividend yield.

Downside case USD 11.00Downside case driven lack of access to fund growth. Downside target based on no growth, 8% discount DDM.


Revenue 11 61 76 112 119.2% EBITDA (adj) 17 60 74 87 70.7% EBIT (adj) -8 19 20 37 N/A Pre-tax income (adj) -21 7 3 13 N/A Net income (adj) 19 22 18 28 14.9% EPS (adj) ($) 0.26 0.49 0.22 0.29 3.5% Diluted shares (mn) 71.0 45.5 82.7 97.1 11.0% DPS ($) 0.16 0.95 1.09 1.24 99.1%

Margin and return data Average EBITDA (adj) margin (%) 163.7 98.3 98.2 77.3 109.4 EBIT (adj) margin (%) -71.6 31.9 26.1 32.7 4.8 Pre-tax (adj) margin (%) -192.9 11.7 4.4 12.0 -41.2 Net (adj) margin (%) 175.7 36.3 24.2 25.3 65.4 ROIC (%) -0.8 1.9 1.4 2.1 1.1 ROA (%) 1.8 1.9 1.2 1.5 1.6 ROE (%) 4.6 5.7 3.5 3.8 4.4

Balance sheet and cash flow ($mn) CAGR Net PP&E 487 623 1,061 1,460 44.2% Total net assets 1,018 1,160 1,539 1,892 23.0% Capital employed 933 1,019 1,432 1,791 24.3% Shareholders' equity 408 387 529 738 21.8% Net debt/(funds) 240 348 619 770 47.4% Cash flow from operations 2 111 93 137 320.9% Capital expenditure -224 -159 -466 -441 N/A Free cash flow -222 -48 -373 -304 N/A Pre-dividend FCF -422 0 -279 -179 N/A

Valuation and leverage metrics Average P/E (adj) (x) 59.5 32.3 70.8 53.8 54.1 EV/EBITDA (adj) (x) 104.3 32.2 30.8 30.2 49.4 EV/EBIT (adj) (x) -238.4 99.1 115.9 71.4 12.0 P/BV (x) 2.7 1.8 2.5 2.1 2.3 Dividend yield (%) 1.0 6.0 6.9 7.9 5.5 Total debt/capital (%) 42.1 52.2 55.1 51.1 50.1 Net debt/EBITDA (adj) (x) 13.8 5.8 8.3 8.9 9.2

Selected operating metrics Average Payout ratio (%) 59.6 195.6 489.8 424.4 292.3 Interest cover (x) -19.6 1.6 1.2 1.6 -3.8 Regulated (%) 0.0 0.0 0.0 0.0 0.0

Source: Company data, Barclays Research Note: FY End Nov

https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=CAFD�


1 September 2016 54

European Capital Goods Industry View: NEUTRAL

Vestas Wind Systems A/S (VWS.CO) Stock Rating: OVERWEIGHT

Income statement (€mn) 2015A 2016E 2017E 2018E CAGR Price (31-Aug-2016) DKK 553.50Price Target DKK 590.00Why Overweight? Vestas offers a combination of growth (msd market cagr to 2018), margin expansion (balanced supply/demand; low regulatory impact; slow Chinese entry), balance sheet strength (c€1.5bn of "own" net cash) and quality management. The company is most exposed to the favourable US market, which provides a 2016 cash catalyst.

Upside case DKK 640.00Upside comes from cash re-deployment in the form of M&A or buy-backs. Order intake beyond our (reasonably conservative) estimates is positive, too. Further efficiency gains in turbines and services add too. A further re-rating beyond the sector average is upside too.

Downside case DKK 450.00We would see M&A into adjacencies (e.g. large scale wind development or solar) as value-destroying. A government-financed Chinese incursion into core European markets would be negative too. A 2017 US slowdown to below 7GW would imply material downside.


Revenue 8,423 9,598 9,432 9,902 5.5% EBITDA (adj) 1,165 1,589 1,563 1,630 11.8% EBITA (adj) 860 1,229 1,190 1,264 13.7% Pre-tax income (adj) 879 1,120 1,213 1,311 14.3% Net income (adj) 651 832 898 970 14.3% EPS (adj) (€) 2.92 3.84 4.24 4.68 17.1% Diluted shares (mn) 223 217 212 207 -2.4% DPS (€) 0.91 1.14 1.26 1.39 15.1%

Margin and return data Average EBITDA (adj) margin (%) 13.8 16.6 16.6 16.5 15.9 EBITA (adj) margin (%) 10.2 12.8 12.6 12.8 12.1 Pre-tax (adj) margin (%) 10.4 11.7 12.9 13.2 12.1 Net (adj) margin (%) 7.7 8.7 9.5 9.8 8.9 ROIC (%) 11.6 15.2 14.5 14.5 13.9 ROE (%) 30.3 36.4 37.0 37.4 35.3

Balance sheet and cash flow (€mn) CAGR Tangible fixed assets 1,279 1,433 1,502 1,570 7.1% Intangible fixed assets 687 824 892 968 12.1% Cash and equivalents 2,765 3,227 3,086 3,250 5.5% Total assets 8,443 9,544 9,502 9,989 5.8% Short and long-term debt 495 496 496 496 0.1% Pension liabilities 2 2 2 2 0.0% Other long-term liabilities 440 489 489 489 3.6% Total liabilities 5,599 6,467 6,223 6,479 5.0% Net debt/(funds) -2,270 2,731 2,590 2,754 N/A Shareholders' equity 2,899 3,077 3,279 3,511 6.6% Cash flow from operations 1,472 1,665 1,016 1,341 -3.1% Capital expenditure -368 -510 -510 -510 N/A Free cash flow 1,104 1,155 506 831 -9.0% Change in working capital 397 215 -207 77 -42.2%

Valuation and leverage metrics Average P/E (adj) (x) 25.5 19.3 17.5 15.9 19.6 EV/EBITDA (adj) (x) 11.9 8.4 8.6 8.2 9.3 EV/EBITA (adj) (x) 16.1 10.8 11.3 10.5 12.2 Equity FCF yield (%) 6.0 7.2 3.2 5.4 5.4 EV/sales (x) 1.6 1.4 1.4 1.3 1.5 P/BV (x) 5.7 5.2 4.8 4.4 5.0 Dividend yield (%) 1.2 1.5 1.7 1.9 1.6 Total debt/capital (%) 14.6 13.9 13.1 12.4 13.5 Net debt/mkt cap (%) -13.7 16.5 15.6 16.6 8.8

Selected operating metrics Average FCF/NI (x) 1.6 1.4 0.6 0.9 1.1 Capex/sales (%) 4.4 5.3 5.4 5.1 5.1 D&A/sales (%) 3.6 3.9 4.0 3.7 3.8


https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=VWS.CO�


1 September 2016 55


Gamesa (GAM.MC) Stock Rating: EQUAL WEIGHT

Income statement (€mn) 2015A 2016E 2017E 2018E CAGR Price (30-Aug-2016) EUR 20.72Price Target EUR 20.00Why Equal Weight? We call into question key elements of the financial and industrial logic of the announced take-over by Siemens. Specifically, Gamesa's attractiveness to investors as a Siemens-controlled entity may diminish and so may liquidity. We see little merit to combining onshore and offshore businesses, and think onshore synergies are somewhat overstated.

Upside case EUR 23.00Whilst most likely trading sideways to deal closure, stronger order intake (i.e. >1.1GW p.q.) and better margin execution (ahead of the >9.0% guidance) provide upside. We see limited re-rating potential pending deal closure.

Downside case EUR 16.00Downside comes from slower order intake (particularly in India) and mishaps on execution. Should the Siemens deal be cancelled, this would result in the non-payment of the special dividend, suggesting further €3.75 downside.


Revenue 3,504 4,460 4,463 4,676 10.1% EBITDA (adj) 389 552 579 650 18.7% EBITA (adj) 294 433 444 482 17.9% Pre-tax income (adj) 284 376 412 461 17.6% Net income (adj) 174 285 299 327 23.4% EPS (adj) (€) 0.62 1.02 1.07 1.17 23.4% Diluted shares (mn) 278.9 279.3 279.3 279.3 0.0% DPS (€) 0.15 0.28 0.36 0.41 39.1%


Balance sheet and cash flow (€mn) CAGR Tangible fixed assets 495 601 637 681 11.2% Intangible fixed assets N/A N/A N/A N/A N/A Cash and equivalents 869 945 1,132 1,318 14.9% Total assets 4,641 5,338 5,562 5,908 8.4% Short and long-term debt 548 477 477 477 -4.5% Pension liabilities N/A N/A N/A N/A N/A Other long-term liabilities 425 454 454 454 2.3% Total liabilities 3,113 3,651 3,653 3,770 6.6% Net debt/(funds) -356 -505 -692 -878 N/A Shareholders' equity 1,527 1,686 1,909 2,137 11.9% Cash flow from operations 560 373 424 498 -3.9% Capital expenditure -168 -214 -170 -213 N/A Free cash flow 182 167 264 285 16.2% Change in working capital 44 -9 0 2 -62.2%

Valuation and leverage metrics Average P/E (adj) (x) 33.2 20.3 19.3 17.7 22.6 EV/EBITDA (adj) (x) 14.0 9.4 8.7 7.4 9.9 EV/EBITA (adj) (x) 18.5 12.0 11.3 10.0 13.0 Equity FCF yield (%) 3.1 2.9 4.6 4.9 3.9 EV/sales (x) 1.5 1.2 1.1 1.0 1.2 P/BV (x) 3.8 3.4 3.0 2.7 3.2 Dividend yield (%) 0.7 1.4 1.8 2.0 1.5 Total debt/capital (%) 26.4 22.1 20.0 18.3 21.7 Net debt/mkt cap (%) -6.1 -8.7 -12.0 -15.2 -10.5

Selected operating metrics Average FCF/NI (x) 1.1 0.6 0.9 0.9 0.9 Capex/sales (%) 4.8 4.8 3.8 4.6 4.5 D&A/sales (%) 2.7 2.7 3.0 3.6 3.0


https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=GAM.MC�


1 September 2016 56


Nordex (NDXG.DE) Stock Rating: OVERWEIGHT

Income statement (€mn) 2015A 2016E 2017E 2018E CAGR Price (30-Aug-2016) EUR 25.22Price Target EUR 29.50Why Overweight? Some of Nordex's core European markets are slowing, which it should offset through share gains. At the same time, the acquisition of AWP will give it more exposure to stronger growth from EM and the US. High operational leverage, deal synergies and solid pricing should see margins expand by 200bps. A post-deal net cash BS gives further optionality.

Upside case EUR 32.00Upside comes from large orders, incoming M&A (e.g. from China) and better execution on margins and cash, something which Nordex has historically achieved.

Downside case EUR 20.00Regulatory risk in Germany and recession risk in Brazil are the main market risks. Poor execution, an even lower gas price, rising interest rates and a Chinese incursion pose downside risk too.


Revenue 2,430 3,351 3,870 4,088 18.9% EBITDA (adj) 224 313 374 406 21.9% EBITA (adj) 168 236 285 312 23.0% Pre-tax income (adj) 139 165 167 196 12.0% Net income (adj) 94 120 120 139 14.0% EPS (adj) (€) 1.21 1.57 1.86 2.06 19.6% Diluted shares (mn) 81.0 90.9 97.0 97.0 6.2% DPS (€) 0.00 0.00 0.00 0.00 N/A


Balance sheet and cash flow (€mn) CAGR Tangible fixed assets 146 282 298 305 28.0% Intangible fixed assets 127 877 787 697 76.6% Cash and equivalents 349 543 786 1,080 45.8% Total assets 1,460 2,796 3,067 3,288 31.1% Short and long-term debt 235 733 733 733 46.2% Pension liabilities 2 2 2 2 -0.4% Other long-term liabilities 3 5 5 5 13.9% Total liabilities 1,005 1,855 2,016 2,103 27.9% Net debt/(funds) -294 189 -54 -348 N/A Shareholders' equity 456 941 1,051 1,185 37.5% Cash flow from operations 168 41 347 395 33.0% Capital expenditure -79 -80 -104 -101 N/A Free cash flow 89 -40 243 294 48.8% Change in working capital -11 -120 58 78 N/A

Valuation and leverage metrics Average P/E (adj) (x) 20.9 16.0 13.6 12.2 15.7 EV/EBITDA (adj) (x) 9.7 8.5 6.4 5.2 7.5 EV/EBITA (adj) (x) 13.0 11.2 8.4 6.8 9.8 Equity FCF yield (%) 6.8 14.7 9.9 12.0 10.9 EV/sales (x) 0.9 0.8 0.6 0.5 0.7 P/BV (x) 4.5 2.4 2.3 2.1 2.8 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 Total debt/capital (%) 34.0 43.8 41.1 38.2 39.3 Net debt/mkt cap (%) -12.0 7.7 -2.2 -14.2 -5.2

Selected operating metrics Average FCF/NI (x) 1.7 -0.4 2.2 2.2 1.4 Capex/sales (%) 3.2 2.4 2.7 2.5 2.7 D&A/sales (%) -2.3 -2.3 -2.3 -2.3 -2.3


https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=NDXG.DE�


1 September 2016 57


Senvion SA (SENG.DE) Stock Rating: OVERWEIGHT

Income statement (€mn) 2015A 2016E 2017E 2018E CAGR Price (30-Aug-2016) EUR 14.25Price Target EUR 18.00Why Overweight? Senvion faces headwinds in Germany and elsewhere, causing onshore growth to lag behind peers. Senvion's valuation however, implies a level of distress that is unwarranted. This is a clear mispricing in our view and forms the basis of our OW case. Senvion's new C-team should be able to improve earnings materially over time.

Upside case EUR 24.00A strong German pre-buy, better execution versus targets and higher order intake (particularly from the 600MW Australian Ceres project) provide upside to our Price Target.

Downside case EUR 10.00FY16 margin and cash guidance is fairly cautious and could drive investor disinterest until mid to long-term targets are established. A failure to establish a consistent quarterly earnings delivery and the omission of a regulatory installation floor in Germany is downside too.


Revenue 2,139 2,254 2,111 2,373 3.5% EBITDA (adj) 219 215 212 245 3.9% EBITA (adj) 154 150 154 180 5.3% Pre-tax income (adj) 90 -7 53 116 8.8% Net income (adj) 63 65 84 103 17.7% EPS (adj) (€) 0.97 1.05 1.38 1.69 20.2% Diluted shares (mn) 65.0 62.0 61.0 61.0 -2.1% DPS (€) 0.00 0.00 0.00 0.00 N/A

Margin and return data Average EBITDA (adj) margin (%) 10.2 9.5 10.1 10.3 10.0 EBITA (adj) margin (%) 7.2 6.7 7.3 7.6 7.2 Pre-tax (adj) margin (%) 4.2 -0.3 2.5 4.9 2.8 Net (adj) margin (%) 2.9 2.9 4.0 4.3 3.5 ROIC (%) -128.4 26.0 29.4 31.8 -10.3 ROE (%) -91.4 47.3 23.7 25.5 1.3

Balance sheet and cash flow (€mn) CAGR Tangible fixed assets 193 248 286 330 19.5% Intangible fixed assets 687 609 568 567 -6.2% Cash and equivalents 419 338 393 447 2.2% Total assets 2,126 2,053 2,034 2,180 0.8% Short and long-term debt 408 402 402 402 -0.5% Pension liabilities N/A N/A N/A N/A N/A Other long-term liabilities 1,055 586 195 195 -43.0% Total liabilities 2,195 1,708 1,672 1,735 -7.5% Net debt/(funds) -11 64 9 -45 N/A Shareholders' equity -69 346 362 445 N/A Cash flow from operations 318 105 196 189 -15.9% Capital expenditure -48 -128 -120 -135 N/A Free cash flow 269 -24 76 54 -41.4% Change in working capital 101 113 161 109 2.5%

Valuation and leverage metrics Average P/E (adj) (x) 14.7 13.5 10.3 8.4 11.7 EV/EBITDA (adj) (x) 4.2 4.6 4.4 3.6 4.2 EV/EBITA (adj) (x) 5.9 6.6 6.1 4.9 5.9 Equity FCF yield (%) 29.1 -3.4 8.7 6.2 10.2 EV/sales (x) 0.4 0.4 0.4 0.4 0.4 P/BV (x) -13.4 2.6 2.4 2.0 -1.6 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 Total debt/capital (%) 120.4 53.8 52.6 47.4 68.5 Net debt/mkt cap (%) -1.2 6.9 0.9 -4.9 0.4

Selected operating metrics Average FCF/NI (x) -1.7 1.3 2.0 0.7 0.6 Capex/sales (%) 2.2 5.7 5.7 5.7 4.8 D&A/sales (%) 2.6 2.9 2.8 2.8 2.8


https://live.barcap.com/go/BC/composite/GER_COMPANY?ticker=SENG.DE�


1 September 2016 58

APPENDIX 1 - WHAT IS THE LCOE?

To state the obvious, wind farm operators make money by selling the electricity produced by their turbines. In some countries, such as Germany, wind energy has priority over fossil fuels in the so-called merit order. This allows a farm owner to sell all electricity generated to the transmission grid operator at a pre-determined price at any point in time. In other markets such as the United States, a Power Purchase Agreement (PPA) is typically used. Under a PPA, the operator agrees to sell his output to another party for a fixed period of time and a fixed price. The other party is typically a utility, but increasingly corporates are also concluding PPAs. A third form, operators acting as “merchant” sell electricity to the grid at spot price.

A farm’s generation depends on the hours and speeds of the wind conditions. The load factor expresses these conditions versus the baseline of energy produced at the theoretical annual maximum of 365 x 24 hours at full output. Thus, a load factor of 35% for a 3MW turbine means it generates 35% x 24 x 365 x 3 = 9,198 MWh per year.

A wind farm’s input costs are capex, operation and maintenance and financing costs. The concept of Levelised Cost of Energy (LCOE) expresses these costs relative to the farm’s production. It is simply the present value sum of all costs incurred divided by the farm’s energy production over its lifespan and expressed in €/MWh or $/MWh. It can also be used for other modes of electricity generation, where the main difference is the inclusion of fuel costs. Thus, it allows for comparison across the different modes.

As can be seen below in Figure 66, the wind LCOE is most sensitive to changes in capex and load factor. LCOE is least sensitive to changes in O&M as it makes up a relatively small portion of the overall bill. The key for wind turbine OEMs is therefore to either lower the cost of the turbine, or to improve its average load factor, or both.

FIGURE 66 Wind LCOE is most sensitive to changes in capex and load factor

FIGURE 67 Solar LCOE Sensitivity

Source: Agora, Barclays Research Source: Barclays Research estimates

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1 September 2016 59

APPENDIX 2: DEMAND OUTLOOK BY REGION

FIGURE 68 Annual Wind installations in North America

FIGURE 69 Annual Solar installations in North America

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FIGURE 70 Annual installations of wind energy in Europe

FIGURE 71 Annual installations of solar energy in Europe

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1 September 2016 60

FIGURE 72 Annual installations of wind energy in China

FIGURE 73 Annual installations of solar energy in China


FIGURE 74 Annual installations of wind energy in India

FIGURE 75 Annual installations of solar energy in India


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1 September 2016 61

FIGURE 76 Annual installations of wind energy in LatAm

FIGURE 77 Annual installations of solar energy in LatAm


FIGURE 78 Annual installations of wind energy in RoW

FIGURE 79 Annual installations of solar energy in RoW


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1 September 2016 62

ANALYST(S) CERTIFICATION(S):

We, David Vos, CFA, James Stettler, CFA, Lars Brorson, Andrew Hoyle, Jon Windham, CFA and Daniel Ford, CFA, hereby certify (1) that the viewsexpressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

Barclays Research is a part of the Investment Bank of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays").

Availability of Disclosures:

Where any companies are the subject of this research report, for current important disclosures regarding those companies please refer to http://publicresearch.barclays.com or alternatively send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 13th Floor, New York, NY 10019 or call +1-212-526-1072.

The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's totalrevenues, a portion of which is generated by investment banking activities, the profitability and revenues of the Markets business and the potential interest of the firm's investing clients in research with respect to the asset class covered by the analyst.

All authors contributing to this research report are Research Analysts unless otherwise indicated.

The publication date at the top of the report reflects the local time where the report was produced and may differ from the release date provided in GMT.

Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. Such non-US research analysts may not be associated persons of Barclays Capital Inc., which is a FINRA member, and therefore may not be subject toFINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’s account.

Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays policy prohibits them from accepting payment or reimbursement by any covered company of their travel expenses for such visits.

In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer tohttp://publicresearch.barcap.com/static/S_ResearchDissemination.html. In order to access Barclays Research Conflict Management Policy Statement, please refer to: http://publicresearch.barcap.com/static/S_ConflictManagement.html.

The Investment Bank’s Research Department produces various types of research including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendationscontained in other types of research, whether as a result of differing time horizons, methodologies, or otherwise.

Primary Stocks (Ticker, Date, Price)

8point3 Energy Partners LP (CAFD, 30-Aug-2016, USD 15.71), Overweight/Neutral, D/J/K/L/M/N

Canadian Solar Inc. (CSIQ, 30-Aug-2016, USD 13.18), Equal Weight/Neutral, CD/CE/E/J/K/L/M

First Solar Inc. (FSLR, 30-Aug-2016, USD 38.25), Overweight/Neutral, CE/J

Gamesa (GAM.MC, 30-Aug-2016, EUR 20.72), Equal Weight/Neutral, D/J/K/L/M/N

Nordex (NDXG.DE, 30-Aug-2016, EUR 25.22), Overweight/Neutral, J

Senvion SA (SENG.DE, 30-Aug-2016, EUR 14.25), Overweight/Neutral, A/D/FA/J/L

SolarCity Corp. (SCTY, 30-Aug-2016, USD 20.69), Underweight/Neutral, CD/CE/FC/J

SolarEdge Technologies Inc. (SEDG, 30-Aug-2016, USD 17.60), Overweight/Neutral, J

SunPower Corp. (SPWR, 30-Aug-2016, USD 10.28), Equal Weight/Neutral, CD/CE/D/J/K/L/M/N

Sunrun Inc. (RUN, 30-Aug-2016, USD 6.01), Equal Weight/Neutral, J

Terraform Global Inc. (GLBL, 30-Aug-2016, USD 3.57), Rating Suspended/Neutral, CE/D/J/L

Vestas Wind Systems A/S (VWS.CO, 31-Aug-2016, DKK 553.50), Overweight/Neutral, CD/J

Prices are sourced from Thomson Reuters as of the last available closing price in the relevant trading market.

Disclosure Legend:

A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of the issuer in theprevious 12 months.

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Risk Disclosure(s)

Master limited partnerships (MLPs) are pass-through entities structured as publicly listed partnerships. For tax purposes, distributions to MLPunit holders may be treated as a return of principal. Investors should consult their own tax advisors before investing in MLP units.

Guide to the Barclays Fundamental Equity Research Rating System:

Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the "industry coverage universe").

In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral or Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.

Stock Rating

Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon.

Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the industry coverage universe over a 12-month investment horizon.

Underweight - The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon.

Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or tocomply with applicable regulations and/or firm policies in certain circumstances including where the Investment Bank of Barclays Bank PLC isacting in an advisory capacity in a merger or strategic transaction involving the company.

Industry View

Positive - industry coverage universe fundamentals/valuations are improving.


1 September 2016 64


Neutral - industry coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.

Negative - industry coverage universe fundamentals/valuations are deteriorating.

Below is the list of companies that constitute the "industry coverage universe":

European Capital Goods

ABB Ltd. (ABBN.S) Alfa Laval AB (ALFA.ST) Alstom (ALSO.PA)

Assa Abloy AB (ASSAb.ST) Atlas Copco AB (ATCOa.ST) Electrolux AB (ELUXb.ST)

Gamesa (GAM.MC) GEA Group AG (G1AG.DE) Kone OYJ (KNEBV.HE)

Kuka AG (KU2G.DE) Legrand SA (LEGD.PA) Metso OYJ (MEO1V.HE)

Nexans SA (NEXS.PA) Nordex (NDXG.DE) OSRAM Licht AG (OSRn.DE)

Philips Lighting NV (LIGHT.AS) Prysmian SpA (PRY.MI) Rexel SA (RXL.PA)

Royal Philips N.V. (PHG.AS) Sandvik AB (SAND.ST) Schindler Holding (SCHN.S)

Schneider Electric SA (SCHN.PA) Senvion SA (SENG.DE) Siemens AG (SIEGn.DE)

SKF AB (SKFb.ST) Vestas Wind Systems A/S (VWS.CO)

North America Alternative Energy & Environmental Services

8point3 Energy Partners LP (CAFD) Canadian Solar Inc. (CSIQ) Clean Harbors (CLH)

Covanta Holding Corp. (CVA) First Solar Inc. (FSLR) Republic Services (RSG)

SolarCity Corp. (SCTY) SolarEdge Technologies Inc. (SEDG) SunPower Corp. (SPWR)

Sunrun Inc. (RUN) Terraform Global Inc. (GLBL) US Ecology, Inc. (ECOL)

Waste Connections (WCN) Waste Connections (WCN.TO) Waste Management (WM)

Distribution of Ratings:

Barclays Equity Research has 1759 companies under coverage.

39% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 59% ofcompanies with this rating are investment banking clients of the Firm; 78% of the issuers with this rating have received financial services from the Firm.

41% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 50% of companies with this rating are investment banking clients of the Firm; 75% of the issuers with this rating have received financial services from the Firm.

16% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 44% of companies with this rating are investment banking clients of the Firm; 68% of the issuers with this rating have received financial services from theFirm.

Guide to the Barclays Research Price Target:

Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price target over the same 12-month period.

Top Picks:

Barclays Equity Research's "Top Picks" represent the single best alpha-generating investment idea within each industry (as defined by the relevant"industry coverage universe"), taken from among the Overweight-rated stocks within that industry. Barclays Equity Research publishes "TopPicks" reports every quarter and analysts may also publish intra-quarter changes to their Top Picks, as necessary. While analysts may highlightother Overweight-rated stocks in their published research in addition to their Top Pick, there can only be one "Top Pick" for each industry. To view the current list of Top Picks, go to the Top Picks page on Barclays Live (https://live.barcap.com/go/keyword/TopPicks).

To see a list of companies that comprise a particular industry coverage universe, please go to http://publicresearch.barclays.com.

Explanation of other types of investment recommendations produced by Barclays Equity Research:

Trade ideas, thematic screens or portfolio recommendations contained herein that have been produced by analysts within Equity Research shall remain open until they are subsequently amended or closed in a future research report.

Disclosure of previous investment recommendations produced by Barclays Equity Research:

Barclays Equity Research may have published other investment recommendations in respect of the same securities/instruments recommended in this research report during the preceding 12 months. To view previous investment recommendations published by Barclays Equity Research in the preceding 12 months please refer to https://live.barcap.com/go/research/ResearchInvestmentRecommendations.

Barclays legal entities involved in publishing research:

Barclays Bank PLC (Barclays, UK)

Barclays Capital Inc. (BCI, US)

Barclays Securities Japan Limited (BSJL, Japan)

https://live.barcap.com/go/research/ResearchInvestmentRecommendations�


1 September 2016 65


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