- EU power demand back in the black in 2024, with growth expected to accelerate to 1.5-2.5% pa from 2025-2027
- Despite possible downside risks amid the tariff war, power demand demonstrates inherent defensive characteristics during economic downturns, supported by its essential service nature and structural electrification trends
- The EU is accelerating renewable installations, targeting a record 89 GW (+14% y/y) in 2025, though there could be delays
- Grid investments a bright spot with rapid growth, anchored by regulated returns and policy tailwinds
- Europe utilities a defensive play; prefer grid and integrated utilities companies
Resilient power demand. European Union (EU) power demand finally saw a positive 1.4% growth in 2024, bucking the trend of two consecutive years of decline (c.-3% p.a.) in 2022-23 due to slowdown in industrial activities and high natural gas prices following the Russia-Ukraine crisis. Demand growth is expected to accelerate to 1.5-2.5% p.a. in 2025-2027, driven by the commercial (data centres), residential and transport industries (EVs, heat pumps). Although escalating tariff wars and a potential global economic slowdown could pose some downside risk to growth, power demand tends to possess resilient and defensive characteristics during downturns, driven by its essential service role and ongoing structural electrification tailwinds. For instance, during the Covid-19 recession, EU electricity demand fell a mere 4% in 2020 despite lockdowns and industrial shutdowns, cushioned by stable residential consumption and electrification trends. On the renewables front, the EU is accelerating renewable installations, targeting a record 89 GW (70 GW solar, 19 GW wind) in 2025 (+14% y/y), but faces some headwinds like permitting delays and cost inflation.
Grid: A fast-growing segment that offers predictable cashflows and returns. EU’s power grid investments are an emerging bright spot, anchored by regulated returns, inelastic demand for critical infrastructure, and policy tailwinds (i.e. the proposed EU Grids Package policy aims to streamline funding and permits). With EUR584bn needed by 2030 to modernise grids for renewables and electrification, network operators are accelerating investments. Annual spending is surging, with EUR54bn allocated for 2025 (+12% y/y), prioritising cross-border interconnectors, offshore wind links, and smart grid tech. Regulated asset base (RAB) models ensure 5–8% annual EBITDA growth via inflation-linked tariffs, offering stability amid volatility. However, permitting delays (7–10 years for high-voltage lines in Germany) and labour shortages (500,000+ skilled workers needed by 2030) pose risks.
Stay with integrated utilities and grid players. We remain constructive on grid players and network investments within the European utilities sector. Regulated and integrated utilities are preferred defensive sub-sectors amid tariff war uncertainties, with the utilities index outperforming the broad European index by 12% YTD. Operators of Europe's largest energy distribution networks offer recession-proof income, with c.75% of EBITDA derived from stable, regulated network businesses. Major integrated utilities are increasingly shifting focus toward grid investments, allocating about 60% of 2025 capex to these projects, while maintaining significant renewable portfolios, where regulated asset growth is expected to help offset the volatility in generation margins. We continue to favour companies ramping up smart grid investments, which contribute c.40% of EBITDA, although recent strong share price performance has somewhat reduced their relative upside compared to peers.
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