Goldman Sachs continues to be bullish on PJM exposure IPP: Preferred Talen Energy (TLN.US), NRG Energy (NRG.US), and Vistra (VST.US)

Zhihu Finance APP noted that the Federal Energy Regulatory Commission (FERC) in the United States issued an order on October 9, partially accepting and partially rejecting PJM Interconnection’s Interim Resource Adequacy Service (IRAS) proposal. According to a report by Goldman Sachs on October 11, while the decision may cause relevant individual stocks to have a mildly negative reaction to the headline news, in the longer term, the fundamentals of independent power producers (IPPs) with PJM exposure are still strengthening, and Goldman continues to be bullish on the sector.

What did FERC approve and reject?

Specifically, FERC approved two items in the IRAS proposal: First, defining “large load” as any end-user with peak demand of 50 megawatts (MW) or above; and second, establishing a “large load registry” requiring load-serving entities (LSEs) to report the technical, operational, and location data of qualifying large loads to enhance load forecasting. These two provisions will take effect from October 12, 2026.

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

First is the IRAS load curtailment mechanism. PJM had originally proposed that if a newly constructed data center was unable to self-supply power during early grid emergencies, it could be subject to curtailment. FERC rejected this on the grounds that it lacks authority over retail electric service and that mandatory reliability standards prevent cutting off paying customers before all voluntary demand response mechanisms are exhausted.

Second is the mandatory capacity matching requirement. PJM required LSEs serving new large loads to procure new capacity equal to 100% of their peak demand, or face curtailment. FERC argued that PJM’s capacity market is already designed for collective procurement of sufficient power for all users, so this provision lacks justification.

Third is the “Bring Your Own New Capacity” (BYONC) certification. This mechanism would allow data centers to introduce new generation resources and lock in the reliability rating for 10 years. FERC pointed out that freezing certification would allow data centers to gain credit for “power that doesn’t actually exist,” creating a hidden gap, and thus rejected it.

Fourth is excluding new large loads from the Variable Resource Requirement (VRR) demand curve. PJM initially planned to remove the demand from new data centers from the capacity auction demand curve for the 2029/2030 delivery year onwards to prevent large loads from driving up auction prices for all users. FERC considered this move to cause market distortions and cost mismatches and similarly rejected it.

Goldman Sachs believes that the outcome is largely in line with market expectations, as PJM’s previous RBP process had already been suspended and the IRAS was controversial upon submission.

Practical impact on stocks: Short-term negative, long-term positive

On the surface, regulatory uncertainty remains, and stocks may mildly react negatively to the headline. However, Goldman highlights that Constellation Energy (CEG.US) has announced multiple PPAs in recent weeks, demonstrating that PPAs can still be secured without IRAS. Signing bilateral blended PPAs with commercial generators has become the most commercially viable path for data centers to secure power supply.

More importantly, the fundamentals of PJM-exposed IPPs remain robust—power prices continue to strengthen and are expected to deliver positive updates in Q3 results. Meanwhile, FERC has rejected PJM’s proposal to exclude large loads from the demand curve, which means that the 2029/2030 Base Residual Auction (BRA) in December 2026 must model all forecast demand, and prices may settle at or near the cap level, creating upside risk for capacity prices over the medium and long term.

Goldman concludes that IPP sector valuations remain attractive—the stocks under its coverage are overall trading at about 8x EV/EBITDA and an expected free cash flow yield of about 10% in 2027 (excluding CEG.US).

Goldman’s favored stocks and targets

Goldman believes that Talen Energy (TLN.US) and Constellation Energy have the most direct exposure to rising 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 target price of $509: Based on a blended EV/EBITDA and FCF yield valuation, corresponding to 9.5x target EV/EBITDA and 7.5% FCF yield. Downside risks include regulatory and grid connection risks, lower-than-expected power prices, and a slowdown in data center demand.

Vistra (VST.US) also receives a “Buy” rating, target price $206: Based on 10.0x EV/EBITDA and 7.0% FCF yield. Downside risks include PJM capacity auction uncertainty, weaker-than-expected power prices, and power demand theme outlook.

NRG Energy (NRG.US) is rated “Buy,” target price $169: Based on 8.75x EV/EBITDA and 8.75% FCF yield. Downside risks include sentiment risk related to AI and data center themes, lower-than-expected power prices, and uncertain PJM capacity auction prices.

Constellation Energy (CEG.US) is rated “Neutral,” with a target price of $305: Using a blended P/E and FCF yield valuation, corresponding to a target P/E of 21.0x and 5.0% FCF yield. Risks include regulatory and grid connection issues, power price volatility, and changes in data center demand.

Goldman notes that FERC will formally incorporate the approved “large load definition” and “large load registry” into the rules starting October 12. PJM must submit compliance filings within 30 days to revise all provisions related to large loads, IRAS, BYONC, and the VRR curve. Because PJM can no longer exclude new large loads from the VRR curve, it must now model all forecast demand for the 2029/2030 delivery year in the BRA in December 2026. FERC also stated that if PJM wishes to reinstate the emergency capacity mechanism, it must submit a new Section 205 filing, though this process cannot be completed before the upcoming auction.

Overall, Goldman believes that while some regulatory uncertainty remains, it is no longer the key variable suppressing sector valuations. With PPA implementation, strengthening power prices, and positive expectations for the December capacity auction, Buy-rated IPP stocks (TLN.US, VST.US, NRG.US) remain Goldman’s top choices in the power sector.