Goldman Sachs Group, Inc. continues to be bullish on IPPs with PJM exposure: top picks are Talen Energy (TLN.US), NRG Energy (NRG.US), and Vistra (VST.US).

Note that the U.S. Federal Energy Regulatory Commission (FERC) issued an order on October 9 partially accepting and partially rejecting PJM's Interim Resource Adequacy Service (IRAS) proposal. In its October 11 report, Goldman Sachs Group, Inc. noted that although this decision may cause related stocks to react mildly negatively to the headline news, from a longer time horizon the fundamentals of independent power producers (IPPs) with PJM exposure continue to strengthen, and the firm remains bullish on the sector. What FERC approved and what it rejected Specifically, FERC approved two elements of the IRAS proposal: first, defining "large load" as any end user with 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 qualifying large loads to strengthen load forecasting. These two provisions will take effect on October 12, 2026. But FERC rejected the four more critical provisions of the proposal: First, the IRAS curtailment mechanism. PJM originally proposed that if new data centers failed to have self-supply generation during early emergency grid conditions, they could be curtailed. FERC rejected this on the grounds that it lacks authority to regulate retail electric service and 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 their peak demand for new large loads, or face curtailment. FERC held that PJM's capacity market was already designed for all users to collectively procure sufficient power, and that this provision lacked basis. Third, the "Bring Your Own New Capacity" certification (BYONC). This mechanism allowed data centers to introduce new generation resources and freeze their capacity reliability rating for 10 years. FERC pointed out that freezing the certification would allow data centers to obtain credit for "power that does not actually exist," creating a hidden shortfall, and rejected it. Fourth, excluding new large loads from the Variable Resource Requirement (VRR) demand curve. PJM originally planned, starting from the 2029/2030 delivery year, to remove new data center demand from the capacity auction demand curve to prevent large loads from driving up auction prices for all users. FERC deemed this a market distortion and cost misallocation, and likewise rejected it. Goldman Sachs Group, Inc. believes this outcome is broadly in line with market expectations, since PJM's prior RBP process had already been suspended and IRAS was controversial at the time of submission. Substantive impact on stocks: short-term negative, long-term positive On the surface, with regulatory uncertainty unresolved, stocks may react mildly negatively to the headline. But Goldman Sachs Group, Inc. emphasizes that several power purchase agreements (PPAs) announced by Constellation Energy (CEG.US) in recent weeks have already proven that even without IRAS, PPAs can still get done. Signing bilateral hybrid PPAs with commercial power producers has become the most commercially viable path for data centers to lock in power. More importantly, the fundamentals of PJM-exposed IPPs continue to strengthenpower prices remain firm and are expected to bring positive updates in third-quarter earnings. At the same time, FERC rejected PJM's proposal to "exclude large loads from the demand curve," meaning the 2029/2030 Base Residual Auction (BRA) to be held in December 2026 must model all forecast demand, and power prices could clear at or near the cap level, posing upside risk to capacity prices over the medium to long term. Goldman Sachs Group, Inc. concludes that IPP sector valuations remain attractivestocks under its coverage trade at roughly 8x EV/EBITDA and about a 10% 2027 estimated free cash flow yield (excluding CEG.US). Goldman Sachs Group, Inc.'s preferred names and targets Goldman Sachs Group, Inc. believes Talen Energy (TLN.US) and Constellation Energy have the most direct upside leverage to PJM power prices, followed by NRG Energy (NRG.US) and Vistra (VST.US). The firm gives Talen Energy (TLN.US) a "Buy" rating with a $509 price target: using a blended EV/EBITDA and FCF yield valuation, corresponding to 9.5x target EV/EBITDA and a 7.5% FCF yield. Downside risks include regulatory and interconnection risks, power prices below expectations, and slowing data center demand. It gives Vistra (VST.US) a "Buy" rating with a $206 price target: based on 10.0x EV/EBITDA and a 7.0% FCF yield. Downside risks include PJM capacity auction uncertainty, power prices below expectations, and the outlook for the power demand theme. It gives NRG Energy (NRG.US) a "Buy" rating with a $169 price target: based on 8.75x EV/EBITDA and an 8.75% FCF yield. Downside risks include sentiment risks related to the AI and data center theme, power prices below expectations, and uncertainty over PJM capacity auction prices. It gives Constellation Energy (CEG.US) a "Neutral" rating with a $305 price target: using a blended P/E and FCF yield valuation, corresponding to 21.0x target P/E and a 5.0% FCF yield. Risks include regulation and interconnection, two-way power price volatility, and increases or decreases in data center demand. Goldman Sachs Group, Inc. notes that FERC will formally incorporate the approved "large load definition" and "Large Load Registry" into the rules effective October 12. PJM must submit compliance filings 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 forecast demand for the 2029/2030 delivery year in the December 2026 BRA. FERC also stated that if PJM wishes to restart the emergency capacity mechanism, it must submit a new Section 205 filing, but that process would not be completed in time for the upcoming auction. Overall, Goldman Sachs Group, Inc. believes regulatory uncertainty remains, but it is no longer the key variable suppressing sector valuations. Supported by the triple tailwinds of PPAs getting done, firm power prices, and positive expectations for the December capacity auction, Buy-rated IPP names (TLN.US, VST.US, NRG.US) remain Goldman Sachs Group, Inc.'s top picks in the power sector.