Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

European utilities rose by 12% in the second quarter, outperforming the market by 10% thanks to a goldilocks scenario of declining interest rates, solid second-quarter results, higher power prices and generation spreads.

Forward power prices increased by 4%. Meanwhile, gas prices declined by 5% as the US dollar weakening and the ceasefire between Iran and Israel more than offset depleted gas storage after a cold winter. All in all, this supported clean spark spreads– the price difference between electricity and natural gas, a crucial factor in utilities’ profitability.

Capacity additions decreased by 11% reflecting the reduction of companies’ ambitions over the last years. The cancellation of the Hornsea 4 offshore wind project in May was a blow to UK’s 2030 renewables ambitions. This might push the government to offer higher subsidy prices at the next auctions due in September.

Networks investments increased by 6% in the first quarter. We expect the growth to accelerate in coming quarters, supporting earnings and dividend growth.

Seven out of the 19 European utilities we cover are still in buying territory. The forward dividend yield of 4.4% is attractive.

Morningstar’s Top Picks in European Utilities

RWE RWE

Financial headroom from the material investment reduction announced in March 2025 and ongoing campaign of Elliott Management should pave the way for additional share buybacks. The high price of the UK capacity auctions for 2027-29 and renewable capacity additions will boost earnings, while the exposure to commodity prices will decline in the coming years. Should the new German government implement a capacity market, this would be positive for the group.

Veolia Environnement VIE

The market fails to appreciate Veolia’s targeted shift toward higher-quality businesses like hazardous waste management and water technology. This transformation prompted us to upgrade our moat rating to narrow from none. This new mix should deliver higher, steadier returns over time. We project a five-year EPS CAGR of 8.2% with upside to the 2027 guidance. The French political uncertainty since June 2024 has weighed on the shares, while the group makes only 20% of its turnover in France.

SSE SSE

SSE is our favorite play to benefit from higher investments in the electricity grid. It is fully exposed to the UK, which has the most favorable regulatory backdrop in Europe. Higher returns and investments in transmission networks in RIIO-3 will support earnings. An appealing pipeline of renewables projects in the UK will boost midterm earnings. Its CCGTs are a good hedge against poor renewables conditions and benefit from capacity payments, which have increased at the latest auctions.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.