Key Takeaways
- European utilities stocks are on track for their best performance since 2006
- UK energy regulator has recently signed off a massive increase on spending on electricity transmission grids.
- Eight of the 19 utilities stocks under Morningstar coverage are undervalued.
The European utilities sector increased in value by nearly 8% since the end of September, outperforming the market by 5% due to stabilizing interest rates, solid third-quarter results, and hopes that AI growth will boost electricity consumption in Europe.
The sector is on track to achieve its best year since 2006 in absolute performance and 2007 in relative performance. Fundamentals are overall supportive, with stabilizing power prices well above pre-energy crisis levels.
- On Dec. 4, Ofgem approved a massive increase in spending on UK electricity transmission grids under the next regulatory regime, with higher returns, although still below the companies’ requests.
- In Spain, the CNMC granted a limited improvement in its October determination compared with July. While the allowed weighted average cost of capital will increase by 1%, the incentives mechanism will be much less favorable than previously. The most affected company is the transmission grid operator, Redeia RED.
The bottom line: We view the sector as slightly undervalued with a median price/fair value estimate ratio of 0.96 and a median dividend yield of 4.4%. Eight of the 19 companies we cover are undervalued. Tepid power-demand recovery in the coming years could weigh on Spanish utilities that rallied on expectations of a stronger rebound.
- We recommend SSE SSE and National Grid NG. as both will benefit from the secular electricity grid investment growth in the UK, along with the higher returns of the 2026-31 RIIO-T3 regulatory regime.
- EDP EDP and narrow-moat Veolia VIE are significantly undervalued. Shares of the former have excessively sold off after the company released 2028 targets that were slightly below consensus in early November. The market is overlooking Veolia’s capacity to cope with an adverse macroeconomic environment.
This article is taken from the European Utilities Pulse for Q4 2025.
