Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
European utilities rose 12% in the second quarter, surpassing the market by 10% thanks to lower interest rates, solid results in the second quarter, higher electricity prices and Goldilocks scenarios with spreading generation.
Forward power prices rose 4%. Meanwhile, after a cold winter, gas prices fell by 5% as the US dollar weakened, more than a ceasefire between Iran and Israel offset depleted gas storage. Overall, this supported clean spark spread – a key factor in the price difference between electricity and natural gas, a utility profitability.
The addition of capacity fell 11%, reflecting a reduction in corporate ambitions over the past few years. The cancellation of the Hornsea 4 Offshore Wind Project in May hit the UK’s 2030 renewable energy ambitions. This could lead the government to offer higher subsidy prices at its next auction in September.
Networks Investments rose 6% in the first quarter. Growth is expected to accelerate in the coming quarters, supporting revenue and dividend growth.
Seven of the 19 European utilities we cover are still buying territory. The forward dividend yield of 4.4% is attractive.
Morningstar’s European Utility Top Picks
RWE RWE
Financial headroom from material investment cuts announced in March 2025, and the ongoing campaign from Elliott Management should pave the way for additional stock buybacks. The 2027-29 UK capacity auction and additional renewable capacity will increase revenues, with product price exposures falling over the next few years. This is positive for the group if the new German government implements a capacity market.
Veolia environment V
The market cannot assess the targeted shift of Veolia to high quality businesses such as dangerous waste management and water technology. This conversion now allows you to upgrade your mote evaluation. This new mix should provide a higher, more stable return over time. In preparation for guidance in 2027, we project the EPS CAGR over the past eight years, 8.2%, or 8.2%. While France’s political uncertainty since June 2024 weighed the stock, the group only made 20% of its sales in France.
SSE SSE
SSE is our favorite play to benefit from higher investments in the power grid. It is fully exposed to the UK, which has the most favorable regulatory background in Europe. Higher returns and investments in RIIO-3’s transmit network support revenue. An attractive pipeline of UK renewable energy projects will boost interim revenue. Its CCGT is a great hedge against poor renewable energy conditions and benefits from increased capacity payments at the latest auctions.
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