European Utilities Lose Momentum in Q2—but New Buying Opportunities Emerge

European utilities lost their footing in the second quarter of 2026, ending a prolonged period of outperformance. Rising interest rates, shifting energy market dynamics, and uneven demand growth weighed on the sector. Yet, the pullback is also revealing compelling opportunities for long-term investors. 

While the sector now appears broadly fairly valued, Morningstar Equity Research sees notable pockets of undervaluation, especially among regulated utilities. At the same time, structural themes—from electrification to US-driven energy demand—continue to reshape the outlook. 

Download the full European Utilities report for deeper analysis, including detailed valuations, company rankings, and sensitivity insights across 19 European utilities.

This shift highlights a core reality of the sector: Utilities are highly sensitive to interest rates due to their capital-intensive business models and reliance on debt financing. Despite the weak performance, fundamentals were not the primary issue. First-quarter earnings remained solid, but they lacked the extraordinary tailwinds seen during past energy shocks, such as the trading gains recorded during the 2022 energy crisis. 

Instead, the selloff appears largely macro-driven, creating what may be a more favorable starting point for investors. 

By contrast:

• Renewables appear relatively expensive
• Diversified utilities sit closer to fair value

Morningstar estimates that 7 of the 19 utilities under coverage currently fall into 4- or 5-star territory, signaling potential buying opportunities.

Income has traditionally been central to the utilities landscape, but that dynamic is shifting. The sector’s dividend yield premium over government bonds sits at just 0.3%, well below its historical average of 2.1%. This reflects a market increasingly focused on growth prospects rather than income alone. 

Meanwhile, the utilities’ median dividend yield of around 4% remains below its long-term average. Taken together, these trends point to a market that is repricing utilities through a growth lens, rather than a purely income-oriented one.

Wholesale power markets were relatively stable in the second quarter, but that stability masks a more complex set of underlying forces. 

German forward power prices held steady at elevated levels, as a 10% decline in gas prices was offset by a 9% increase in CO₂ prices. The net effect: prices remained broadly unchanged. 

At the same time, electricity demand continues to underwhelm. Morningstar estimates that EU electricity consumption grew just 0.6% year over year in Q2, with no clear signs of acceleration despite long-term electrification trends. 

Power price movements are not uniform across Europe. Countries like France and Spain have seen relatively muted price reactions, while markets more exposed to gas-fired generation (such as Germany, the UK, and Italy) have experienced higher prices. These differences create clear winners and losers at the company level, depending on geographic exposure.

One of the most important developments this quarter is a shift in where value is being created in renewables. For the first time, US power purchase agreement (PPA) prices have exceeded those in Europe, driven by strong electricity demand—particularly from artificial intelligence-related infrastructure. 

In Europe, by contrast, solar and wind PPA prices declined. This divergence means European utilities with US exposure are increasingly positioned to benefit from higher returns abroad. 

The broader renewables landscape is also evolving:

• Capacity additions declined year over year
• Total investments fell, driven by lower renewables spending
• Network investments increased, reflecting long-term grid needs

This suggests a shift toward greater capital discipline in a higher-rate environment.

Regulation remains a central pillar of the utilities investment case—and recent developments have been supportive. Concerns that the EU might weaken its Emissions Trading System have eased, reaffirming climate policy stability. In the UK, policy changes aimed at encouraging renewable generators to shift to contracts for difference were less aggressive than expected, improving sentiment for exposed companies. 

Overall, the regulatory environment is shifting from a source of uncertainty to a modest tailwind for the sector. 

United Utilities stands out as one of the most undervalued names in the sector. The company recently announced a 28% increase in investment for its upcoming regulatory period alongside higher expected returns. Despite this improved outlook, the stock trades below its historical valuation range. 

Morningstar believes the market is overestimating the company’s sensitivity to interest rates, creating a potential entry point.

National Grid offers a different but equally compelling profile. The company has increased its expected earnings growth, supported by steady expansion of its regulated asset base. 

The UK’s regulatory framework—particularly its inflation-linked returns—provides a strong foundation for long-term growth. Despite these strengths, shares remain undervalued, reflecting broader macro concerns rather than company-specific fundamentals.

Looking ahead, several factors will determine how the sector evolves:

• The path of interest rates, which remain the primary driver of valuations
• Whether electricity demand begins to accelerate, particularly from structural trends like AI and electrification
• Continued divergence between US and European energy markets, especially renewables pricing
• The outcome of upcoming EU Emissions Trading System reforms, expected in July
• How effectively utilities balance growth investments with capital discipline in a higher-cost environment