Goldman Sachs Remains Bullish on IPPs with PJM Market Exposure: Top Picks Include Talen Energy, NRG Energy, and Vistra

Zhitong Finance APP notes that the U.S. Federal Energy Regulatory Commission (FERC) issued an order on October 9, partially accepting and partially rejecting PJM Interconnection's Interim Resource Adequacy Service (IRAS) proposal. In its report on October 11, Goldman Sachs pointed out that although this decision might trigger a mildly negative reaction in related stocks to the headline news, the fundamentals of independent power producers (IPPs) with PJM market exposure continue to strengthen over a longer time horizon, and the firm remains bullish on the sector.

What FERC Approved and Rejected

Specifically, FERC approved two components of the IRAS proposal: first, defining "large loads" as any end-user with a peak demand of 50 megawatts (MW) or more; second, establishing a "Large Load Registry," requiring load-serving entities (LSEs) to report technical, operational, and location data for qualified large loads to enhance load forecasting. These two measures will take effect on October 12, 2026.

However, FERC rejected four more critical provisions of the proposal:

First, the IRAS curtailment mechanism. PJM had originally proposed that if new data centers failed to secure their own power generation during early-stage grid emergencies, they could be subject to curtailment. FERC rejected this, citing its lack of authority to regulate retail electricity service and noting that mandatory reliability standards prohibit cutting off paying customers before voluntary demand response mechanisms are exhausted.

Second, the mandatory capacity matching requirement. PJM required LSEs to procure new capacity equal to 100% of the peak demand for new large loads, otherwise facing curtailment. FERC believed that PJM's capacity market was already designed for all users to collectively procure sufficient power, rendering this provision unfounded.

Third, the "Bring Your Own New Capacity" (BYONC) certification. This mechanism would allow data centers to introduce new generation resources and freeze their capacity reliability ratings for 10 years. FERC pointed out that freezing certifications would allow data centers to gain credit for "power that does not actually exist," creating hidden deficits, and thus rejected it.

Fourth, excluding new large loads from the Variable Resource Requirement (VRR) demand curve. PJM had planned to exclude new data center demand from the capacity auction demand curve starting from the 2029/2030 delivery year to prevent large loads from driving up auction prices for all users. FERC believed this would cause market distortion and cost mismatch, and similarly rejected it.

Goldman Sachs believes this outcome largely aligns with market expectations, as PJM's previous Reliability Pricing Model (RPM) Base Residual Auction (BRA) process had been paused, and the IRAS was controversial even at the time of submission.

Substantive Impact on Stocks: Short-Term Negative, Long-Term Positive

On the surface, with regulatory uncertainty lingering, stocks may react mildly negatively to the headlines. However, Goldman Sachs emphasizes that the multiple power purchase agreements (PPAs) announced by Constellation Energy (CEG.US) in recent weeks have proven that PPAs can still be executed even without IRAS. Signing bilateral hybrid PPAs with commercial generators has become the most commercially viable path for data centers to lock in power.

More importantly, the fundamentals of IPPs with PJM market exposure continue to strengthen—electricity prices remain firm, potentially bringing positive updates in the third-quarter earnings reports. Meanwhile, FERC rejected PJM's proposal to "exclude large loads from the demand curve," meaning the 2029/2030 annual capacity auction (BRA) held in December 2026 must model all forecasted demand. Electricity prices are expected to clear at or near the cap level, posing upside risks to capacity prices in the medium to long term.

Goldman Sachs summarized that valuations in the IPP sector remain attractive—the stocks covered by the firm are trading at approximately 8x EV/EBITDA overall, with an expected 2027 free cash flow yield of about 10% (excluding CEG.US).

Goldman Sachs' Preferred Targets and Goals

Goldman Sachs believes that Talen Energy (TLN.US) and Constellation Energy have the most direct elasticity to rising PJM electricity prices, followed by NRG Energy (NRG.US) and Vistra (VST.US).

The firm assigns a "Buy" rating to Talen Energy (TLN.US) with a target price of $509: Using a blended valuation of EV/EBITDA and FCF yield, corresponding to a target EV/EBITDA of 9.5x and an FCF yield of 7.5%. Downside risks include regulatory and interconnection risks, electricity prices falling short of expectations, and a slowdown in data center demand.

It assigns a "Buy" rating to Vistra (VST.US) with a target price of $206: Based on an EV/EBITDA of 10.0x and an FCF yield of 7.0%. Downside risks include uncertainty in PJM capacity auctions, electricity prices falling short of expectations, and prospects for the electricity demand theme.

It assigns a "Buy" rating to NRG Energy (NRG.US) with a target price of $169: Based on an EV/EBITDA of 8.75x and an FCF yield of 8.75%. Downside risks include sentiment risks related to AI and data center themes, electricity prices falling short of expectations, and uncertainty in PJM capacity auction prices.

It assigns a "Neutral" rating to Constellation Energy (CEG.US) with a target price of $305: Using a blended valuation of P/E ratio and FCF yield, corresponding to a target P/E ratio of 21.0x and an FCF yield of 5.0%. Risks include regulation and interconnection, two-way volatility in electricity prices, and fluctuations in data center demand.

Goldman Sachs noted that FERC will formally incorporate the approved "large load definition" and "Large Load Registry" into the rules starting October 12. PJM must submit compliance documents within 30 days, revising all provisions related to large loads, IRAS, BYONC, and the VRR curve. Since PJM can no longer exclude new large loads from the VRR curve, it must model all forecasted demand for the 2029/2030 delivery year in the BRA in December 2026. FERC also stated that if PJM wishes to restart the emergency capacity mechanism, it needs to submit a new Section 205 filing, but this process will not be ready in time for the upcoming auction.

Overall, Goldman Sachs believes that while regulatory uncertainties persist, they are no longer the key variable suppressing sector valuations. Supported by the triad of PPA executions, firm electricity prices, and favorable expectations for the December capacity auction, IPP targets with Buy ratings (TLN.US, VST.US, NRG.US) remain Goldman Sachs' preferred direction in the power sector.