EU Electrification Plan Reinforces a "New Era of Growth" for European Utilities

Overview

This report assesses the impact of the EU electrification plan on the European utilities sector. Morgan Stanley believes the plan reconnects European energy security with the energy transition by increasing electricity's share of final energy consumption, thereby driving investment demand in grids, renewable energy, offshore wind, flexible generation, and storage. Although the 46% target for 2040 is relatively aggressive and Europe has made slow electrification progress over the past decade, the report emphasizes that the more important role of the policy target is to signal direction and strengthen market confidence in utilities growth beyond 2030.

Core views

The core view is that EU electrification policy has a positive read-through for European utilities. A significant upside in power demand would require much larger generation capacity and grid capital expenditure; given the long construction cycle for nuclear power, most new capacity would likely come mainly from renewables, supplemented by batteries, CCGT, and other flexible generation to balance the system. The report expects near-term EPS upgrades are unlikely to emerge quickly because hard-asset construction cycles are long, but a longer investment cycle and better policy visibility may first be reflected in higher valuation multiples.

Analysis framework

The report uses a combination of policy target scenarios, regional electrification rate comparisons, power demand calculations, generation capacity requirement modeling, and company asset exposure mapping. It translates the EU's 46% electrification target into 2040 power demand and capacity requirements for EU27, compares them with Morgan Stanley's existing forecasts and IEA scenarios, and then evaluates the implications for grids, renewables, offshore wind, and utility valuations.

Methodology notes

• Policy Scenario AnalysisEU Electrification Target Scenario

  Map the target share of electricity in final energy consumption to power demand and system investment needs

  The report treats the EU's 46% electrification target for 2040 as a directional policy signal and estimates the corresponding EU27 power demand, demand growth rate, and generation capacity requirements.

• Valuation MethodologySOTP/DCF/RAB

  Segment valuation of grid and generation assets

  Elia's valuation is based on the SOTP of two network businesses, using 2026 RAB and DCF for future incentives and excess opex performance; E.ON's valuation is based on DCF for network operations, RAB terminal value, and multiples for retail and EIS; Orsted uses project-level offshore wind DCF and onshore business DCF.

• Relative Rating FrameworkMorgan Stanley Overweight/Equal-weight/Underweight and Industry View

  12-18 month relative return and industry performance assessment

  Morgan Stanley's Overweight, Equal-weight, and Underweight indicate expected risk-adjusted total return relative to the industry coverage universe; an Attractive industry view indicates the sector is appealing relative to the broader market benchmark over the next 12-18 months.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• European Utilities

  Sector beneficiary

  Strengths

  Electrification requires continued expansion of power network and clean generation investment, and utilities are the key channel for allocating capital into the power system.

  Weaknesses

  Hard-asset construction cycles are long, so EPS upgrades may not become more visible until later in the decade.

  Comparison

  Europe's electrification rate significantly lags Asia, leaving substantial room for policy-driven progress, though the target is also more aggressive.

  Risks

  Insufficient policy execution, lower regulatory returns, rising bond yields, and supply-chain bottlenecks could weigh on valuations and investment delivery.

• Orsted A/S (ORSTED.CO)

  One of the preferred EU electrification thematic exposures

  Strengths

  Benefits from demand for additional offshore wind capacity; the report values it using project-level offshore wind DCF and onshore business DCF.

  Weaknesses

  Offshore wind projects require heavy capital expenditure and long construction cycles, making them sensitive to financing costs and project execution.

  Comparison

  Compared with network utilities, Orsted is more directly sensitive to clean generation capacity expansion and offshore wind policy.

  Risks

  Higher bond yields, project delays, supply-chain challenges, and regulatory or subsidy changes.

• RWE AG (RWEG.DE)

  One of the preferred EU electrification thematic exposures

  Strengths

  Has exposure to renewable clean generation, power transmission, and gas-fired plants used for system balancing.

  Weaknesses

  Changes in the generation mix and policy environment may create earnings volatility.

  Comparison

  Compared with pure grid companies, RWE is exposed to both clean generation expansion and demand for flexible generation.

  Risks

  Adjustments to renewable energy targets, changes in the role of gas-fired generation, capex execution, and power price volatility.

• Elia (ELI.BR)

  One of the preferred EU grid growth exposures

  Strengths

  Its grid business benefits from the network investment required to deliver generation to demand centers, and valuation is based on RAB and future incentives/excess opex performance.

  Weaknesses

  Valuation depends on the regulatory framework, RAB returns, and long-term capex delivery.

  Comparison

  Compared with generation assets, Elia is more directly exposed to transmission network expansion and regulatory support.

  Risks

  Rising bond yields, insufficient regulatory support in Belgium and Germany, and failure to complete expansionary capex plans.

• E.ON (EONGn.DE)

  One of the preferred EU grid growth exposures

  Strengths

  Grid capex, improved German regulation, and its retail and EIS businesses together support valuation.

  Weaknesses

  Retail margins and regulated returns may fluctuate.

  Comparison

  Compared with Elia, E.ON has broader exposure across networks, retail, and EIS.

  Risks

  Rising bond yields triggering valuation de-rating, supply-chain obstacles to capex deployment, changes in German energy policy, falling retail margins, and declining regulatory returns.

Key data

• EU electrification target23% to 46%The draft plan targets doubling electricity's share of final energy consumption by 2040.
• Estimated EU27 power demand in 2040about 5,000TWh/5,206TWhThe report text cites about 5,000TWh, while the chart cites 5,206TWh, both significantly above Morgan Stanley's current forecast.
• EU27 power demand in 20252,529TWhUsed as the baseline for the 2040 target calculation.
• Morgan Stanley current 2040 power demand forecastabout 3,400TWhThe EU target implies demand about 50% above this forecast.
• Implied demand growth rate2025-2040 CAGR 4.9%Above Morgan Stanley's forecast of 2.1%, and also above the roughly 2% YoY growth rate in 1H26.
• Required EU27 generation capacityabout 3,000GWAbove 1,132GW in 2026 and the current 2035 forecast of 1,470GW.
• Reduction in fossil fuel import costs€260bn by 2040The EU plan mentions lowering import costs for fossil fuels such as natural gas and oil by 2040.
• Comparison of electrification progress between Europe and AsiaChina and Japan near 30%; EU up only about 1 percentage point over roughly a decadeIEA 2024 data show Europe's electrification progress materially lags ASPAC.
• Latest historical E.ON price target€22Price target history shows 22 on 2026-07-02; the coverage table shows E.ON rated O with a price of €18.90.
• Latest historical Orsted A/S price targetDKr 150Price target history shows 150 on 2026-03-18; the coverage table shows Orsted A/S rated O with a price of DKr 148.00.

Impact & implications

The investment implication is that European electrification policy may extend the capital expenditure and asset growth cycle for utilities, especially for grid operators, clean generators, and renewable energy developers. Near-term earnings upgrades may be constrained by construction lead times, but greater policy certainty, energy security needs, and long-term demand growth can support valuation multiples. If gas loses its marginal pricing power, wholesale electricity prices and pressure on customer bills may also improve.

Risks

• The EU's 46% electrification target is relatively aggressive and may be difficult to fully achieve within 15 years.
• Europe's electrification progress has been slow over the past decade, so the market may not fully capitalize the target at face value.
• Rising bond yields may pressure utilities' valuation multiples and DCF valuations.
• If regulatory frameworks in Belgium and Germany are not sufficiently supportive, returns on grid investment will be affected.
• Supply-chain challenges may delay capex deployment and new capacity construction.
• If German energy policy lowers renewable energy targets or grid capex growth, the bullish thesis for related stocks would weaken.
• Declining retail margins, lower regulated returns, or project execution failures may weigh on assets such as E.ON and Elia.

What to watch

• Next policy details for the EU electrification plan in 4Q26.
• Whether the EU and member states introduce clearer support mechanisms for investment in grids, renewable energy, and flexible generation.
• Whether EU27 power demand growth continues to exceed Morgan Stanley's current long-term forecast of 2.1%.
• The pace at which Europe's electrification rate catches up with China, Japan, and ASPAC.
• The extent of improvements in German regulatory frameworks for cost of debt, opex, and redispatch cost mechanisms.
• Bond yield trends and their impact on RAB/DCF valuation multiples.
• Changes in capex plans, project delivery, and ratings/target prices for companies such as Orsted, RWE, Elia, and E.ON.