Key Takeaways
- Utility stocks fell in May after Labour leadership hopeful Andy Burnham called for “stronger public control” of utilities, but a broad nationalization is unlikely.
- The direction of interest rates is likely to be a key factor for the sector for the rest of 2026, analysts say.
- Morningstar analyst Tancrede Fulop rates National Grid and United Utilities as top picks in the sector as infrastructure gets upgraded.
Political risk has flared up once again in the UK’s utilities sector, following comments made by Labour leadership hopeful Andy Burnham that unsettled investors over the risk of nationalization.
This anxiety over government interference has been compounded by expectations of higher interest rates, which increase costs for a sector highly sensitive to borrowing costs. At the same time, AI-driven electricity demand, as well as the UK’s drive to upgrade infrastructure for the climate transition, could be long-term drivers of demand for utility stocks, managers say.
Shares in the sector dropped by as much as 8% in a day after the announcement of the Makerfield by-election on May 14, which opened a path for Burnham to return to Westminster as an MP and challenge Keir Starmer as Labour leader, and ultimately, prime minister.
Burnham has called for “stronger public control” of areas including energy, water, and transport. While the path to replacing Starmer is far from straightforward, utilities investors are weighing up the potential for disruption in the sector should the government lean further to the left.
How Likely Is Renationalization?
The sector is no stranger to political risk, with nationalization a feature of former Labour leader Jeremy Corbyn’s 2017 and 2019 general election campaigns.
However, the scale of government debt is likely to prevent utilities from being brought back under direct public ownership.
“It would be a phenomenally expensive exercise to nationalize utilities,” says Justin Lannen, a manager on the Pacific Maple-Brown Abbott Global Infrastructure Fund. “I’d say the chance of a nationalization-type event is low probability, but it’s something we look at seriously.”
He says that there are strong commercial reasons for the government to keep the sector off the public books.
“There are enough positive themes in terms of infrastructure investment that private money is making, which have a multiplier effect on the economy. I don’t think the government would want to upset that investment. And it’s helpful for the government that someone else is paying for that, given debt levels have risen significantly.”
Hargreaves Lansdown’s equity analyst Aarin Chiekrie adds that it’s unclear what bringing utilities under “stronger public control” would look like in practice.
“It’s important to keep in mind that it’s not necessarily the same thing as nationalization,” he says. “A path to renationalizing the country’s water companies is littered with hurdles and would likely impose a substantial financial burden on the government.”
“As a result, it seems very unlikely that water companies will be renationalized, especially in this parliament, and markets are not currently pricing this risk into valuations,” he adds.
Will Interest Rate Hikes Harm Utility Stocks?
Despite the political uncertainty, the sector has been a bright spot for the UK stock market so far in 2026. The Morningstar UK Utilities Index has returned 12.24% this year, almost double the broader Morningstar UK Index.
Utility stocks with exposure to electricity networks, such as National Grid NG. and SSE SSE, have benefited from the buildout of AI infrastructure, which has caused the demand for electricity to soar. Meanwhile, higher energy prices amid the US-Iran war have furthered the agenda for clean, domestic energy. Recently, UK regulator Ofgem has raised the “price cap” for retail customers by 13.5% for a three-month period starting July 1, meaning the typical electricity bill will rise from around £1,600 to nearly £1,900.
Looking ahead, Hargreaves Lansdown’s Chiekrie says the direction of interest rates is likely to be a key factor for the sector for the rest of 2026. As utilities are asset-intensive, higher interest rates can cause the interest on debt to rise faster than revenue growth, which can dampen sentiment in the sector.
Interest rates are predicted to rise this year in the UK, with futures markets currently expecting at least one Bank of England hike to combat rising inflation.
“However, over the longer term, regulators factor in the higher funding costs by allowing utilities to earn more revenue, thereby providing an offset,” says Chiekrie. “Typically, there’s a lag in the process, which can weigh on interim cash flows. But the net impact tends to be broadly neutral over the long term.”
Do Utility Stocks Offer Inflation Protection?
With UK inflation on the rise, investors may be drawn to utilities for their built-in inflation protection.
“In the face of inflation, utilities are able to deliver returns that can rise alongside inflation, which, given the current energy shock and potential for resurgent prices, makes the sector attractive,” says Mark Brennan, portfolio manager at Guinness Global Investors.
“In the context of heightened geopolitical risk, utilities’ regulated business models and provision of critical services make them a defensive source of return for investors,” he says.
“Finally, as we think about AI infrastructure and the energy transition, UK utilities are exposed to a growing, long-term capex boom focused on generation and transmission of electricity, which is driving forecast earnings growth higher,” he adds.
Electricity and water utilities negotiate with the UK regulators like Ofgem and Ofwat to fix the maximum revenue that they can charge consumers over multi-year periods. These agreements often allow inflation “pass-through” clauses that can provide a counterweight to higher borrowing costs.
“While rising rates generally increase financing costs and pose challenges, some utilities benefit from regulatory and inflation protection mechanisms which allow them to partially offset the negative impact,” fund managers at investment firm RedWheel said in a November 2025 paper.
United Utilities and National Grid Are Top Stock Picks
Electricity grid operator National Grid and water company United Utilities are currently Morningstar’s top picks in the European utilities sector.
Shares in United Utilities UU., which operates water networks in the North of England, currently trade in 5-star territory, meaning they are significantly undervalued.
Much of Britain’s water infrastructure is more than 200 years old and requires major upgrades, notably to reduce storm overflows, says Morningstar analyst Tancrede Fulop. The sector is set to benefit from investment over the next five-year regulatory period, which started in April 2025.
Fulop says the market is overly discounting high interest rates while overlooking “strong fundamentals” in National Grid and United Utilities, underpinned by multiple years of growth from investment needs in water infrastructure and the electricity grid.
“Even under a higher-rate scenario using current gilt yields, United Utilities retains upside, while National Grid’s valuation becomes more balanced,” he says.
