Rising Capital Costs And Regulatory Risks Will Derail Renewables

Key Takeaways

• Shifting policy, regulatory, and economic environments threaten AES’s project pipeline, funding access, and long-term earnings amid mounting industry uncertainty and inflationary pressures.
  
• Heavy reliance on key corporate clients and legacy assets leaves AES vulnerable to concentration risk, compliance costs, and technological disruption, impacting revenue and profitability.
  
• Strategic growth in renewables, robust contracting, supply chain resilience, and supportive policy environments position AES for stable earnings, strong margins, and increased financial flexibility.

Catalysts

Operates as a power generation and utility company in the United States and internationally.

• Despite AES’s extensive efforts to de-risk exposure to tariffs and policy changes, ongoing uncertainty around the future of renewable energy tax credits and the possibility of accelerated sunset provisions or the elimination of transferability under the Inflation Reduction Act may lead to a less favorable investment environment, potentially resulting in shrinking project pipelines, rising capital costs and lower future EBITDA growth.
  
• AES’s heavy reliance on long-term contracted generation with corporate hyperscaler clients exposes the company to concentration risk, while technological advances in distributed generation or shifts in data center energy strategies could erode future demand, reducing anticipated revenue streams and hampering top-line growth.
  
• Although AES has worked to minimize supply chain risks, the broader industry’s ongoing supply chain disruptions and persistent inflation in equipment and labor may result in higher-than-expected project costs and margin compression, particularly as competition intensifies and overcapacity in renewables increases, threatening long-term profitability and net margins.
  
• As global interest rates remain elevated and public finances become more constrained, AES’s capital-intensive growth strategy and high financial leverage could lead to increased interest expenses and diminished access to low-cost funding, putting pressure on earnings and constraining the company’s ability to execute on ambitious expansion plans.
  
• Stricter and rapidly evolving decarbonization mandates may force early retirement or costly retrofitting of AES’s remaining legacy fossil fuel assets and expose the company to additional compliance costs, potentially resulting in asset write-downs, higher operating costs and volatility in net income over the long term.

AES Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on AES compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming AES's revenue will decrease by 3.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.8% today to 14.7% in 3 years time.
• The bearish analysts expect earnings to reach $1.6 billion (and earnings per share of $2.21) by about July 2028, up from $1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 3.7x on those 2028 earnings, down from 7.6x today. This future PE is lower than the current PE for the US Renewable Energy industry at 38.5x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

AES Future Earnings Per Share Growth

Risks

• The accelerating demand for renewable energy from large corporate clients, especially data centers like Amazon and Microsoft, along with strong, long-term contracted generation agreements, provides AES with revenue stability and visibility, which could support sustained revenue and earnings growth.
  
• AES’s proactive supply chain management—such as onshoring equipment, securing U.S.-made components, and de-risking tariff exposure—greatly reduces the impact of policy shifts and trade tensions on project costs, supporting healthy net margins over the long term.
  
• Ongoing grid modernization and strategic investments in large-scale energy storage position AES as a major beneficiary of electrification trends and advanced grid services, which could drive above-market growth in both revenue and earnings.
  
• The company’s execution of significant cost savings measures and the rapid growth of its renewables and utilities businesses, alongside accretive asset sales and innovative capital partnerships, bolsters financial flexibility and enhances net margins and free cash flow.
  
• Regulatory developments such as multiyear, forward-looking rate cases and the constructive policy framework in key service territories provide supportive environments for utility rate base investments, which could lead to higher long-term earnings and improvement in overall profit margins.

Valuation

• The assumed bearish price target for AES is $5.88, which represents two standard deviations below the consensus price target of $13.72. This valuation is based on what can be assumed as the expectations of AES's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $23.0, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $10.8 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 3.7x, assuming you use a discount rate of 11.6%.
• Given the current share price of $13.94, the bearish analyst price target of $5.88 is 137.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.