Goldman Sachs: European utilities may continue to underperform in the short term, but are nearing a buying point

Overview

This is a Goldman Sachs report on the European utilities sector. The report focuses on the sector's short-term performance and medium- to long-term investment opportunities under a Hormuz reopening scenario. Goldman Sachs believes that expectations of peace or reopening may lead investors to exit defensive and renewable-energy themes in the short term, causing utilities to continue underperforming for some time; however, this underperformance is nearing its end, and the sector may enter an earnings supercycle into the 2030s, supported by electrification, data centers, grid investment, and high renewable returns.

Core views

The core view is short-term caution, long-term optimism. In the short term, lower commodity prices and fund rotation may weigh on independent power producers, renewable developers, and the utilities sector as a whole. In the long term, European power demand is returning to positive growth, data center construction and AI adoption are increasing electricity intensity, and aging grids plus power plant retirements are creating an infrastructure gap. Over the next decade, electrification investment needs are set to rise sharply, which should improve returns for renewables and FlexGen and help key electrification compound-growth companies achieve high-single-digit to low-double-digit earnings growth.

Analysis framework

The report combines macro event shocks, industry supply and demand, cost of capital, infrastructure investment, company valuation, and stock-specific catalysts. It first assesses the short-term impact of a Hormuz reopening on commodity prices, bond yields, and sector rotation, then explains medium- to long-term structural opportunities through power demand, data centers, grid aging, the investment gap, and U.S. renewable returns, and finally provides valuation methods, target prices, and risks for Enel, RWE, EDPR, and Naturgy.

Methodology notes

• Valuation methodsSOTP, DCF, and weighted peer P/E

  Multi-method target price

  For covered companies, the report uses methods such as sum-of-the-parts, discounted cash flow, peer P/E, or existing asset value, and combines them with different weights to form 12-month target prices.

• Industry frameworkElectrification and power infrastructure gap

  Demand growth and investment gap drive the earnings cycle

  The report treats heat pumps, EVs, data centers, AI, grid aging, and power plant retirements together as structural factors that increase electricity consumption, returns, and capital expenditure.

• Goldman Sachs proprietary frameworkGS Factor Profile

  Growth, financial returns, valuation multiples, and composite percentile

  The disclosure section explains that GS Factor Profile compares stocks' positions relative to the market and industry peers using indicators such as growth, financial returns, and valuation multiples.

• M&A assessmentM&A Rank

  Probability score of becoming an acquisition target

  Goldman Sachs rates covered companies from 1 to 3 based on their likelihood of becoming acquisition targets; 1 represents higher probability, 2 medium probability, and 3 lower probability.

Asset mapping & comparison

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

• 欧洲公用事业行业

  Core research subject

  Strengths

  Power demand is returning to growth, data centers and AI are adding new loads, and aging grids plus power plant retirements are driving infrastructure investment demand.

  Weaknesses

  In the short term, it may continue to underperform due to falling commodities, fund rotation, and expectations for interest rates and capital costs.

  Comparison

  Compared with cyclical sectors that benefit more from Hormuz reopening, utilities may be less attractive in the short term; but the long-term earnings growth and asset re-rating logic is stronger.

  Risks

  Rising interest rates, regulatory pressure, falling commodity prices, weaker-than-expected demand, and delays in electrification.

• Enel SpA

  Buy-rated stock, target price €12/sh

  Strengths

  Grid business accounts for more than 40% of EBITDA and is expected to grow 7%-8% annually through 2030; renewable expansion targets 4 GW of additions per year and includes bidding for 15 GW of U.S. renewable assets.

  Weaknesses

  The report notes that current short interest is high within coverage, and the company is affected by domestic regulatory pressure and power price volatility.

  Comparison

  2027E P/E is about 12.5x, which the report sees as a clear discount versus peers.

  Risks

  Lower power prices in Iberia and Italy, lower regulated network returns in Italy, declining retail margins, increased regulatory measures, rising country risk premium, and continued depreciation of Latin American currencies.

• RWE

  Buy-rated stock, target price €68.5/sh

  Strengths

  Benefits from strong U.S. renewable demand and higher returns, with about 25%-30% of EBITDA from the U.S.; a shift toward transmission asset Amprion may lift EPS and lower capital costs.

  Weaknesses

  Still affected by LNG, power prices, and renewable project execution.

  Comparison

  The report says the current share price is about €59/sh below its estimate of the value of operating assets.

  Risks

  Recession and lower power demand, weaker-than-expected LNG and power prices, higher sovereign rates, weaker renewable pipeline execution, and GBP/USD depreciation.

• EDPR

  Buy-rated stock, target price €17.5/sh

  Strengths

  About 65% of EBITDA comes from U.S. renewables, benefiting from U.S. power demand, weaker competition from oil and gas majors, and improved pricing due to rising equipment costs.

  Weaknesses

  Sensitive to electrification progress in the U.S. and Europe, capacity additions, and power prices.

  Comparison

  Currently around €1.2 million/MW, which the report says is about 50% below replacement value.

  Risks

  Delays in electrification in the U.S. or Europe, lower-than-expected capacity additions, lower-than-expected power prices, higher sovereign rates, and sharp appreciation of foreign currencies.

• Naturgy Energy Group

  Buy-rated stock, target price €32.5/sh

  Strengths

  About €10-12bn of releveraging potential can support mid- to high-single-digit EPS growth through 2030, and a strategic shift toward power operations may support long-term growth and valuation expansion.

  Weaknesses

  Current consensus expectations are relatively muted, and the investment case requires delivery on strategic transition, LNG, and domestic ancillary services.

  Comparison

  2027E P/E is below 13x, and the report sees 20%-40% EPS upgrade potential.

  Risks

  Commodity and power prices below expectations, higher sovereign rates, a weaker-than-expected macro environment, and EBITDA yields on new investments below expectations.

Key data

• Report date2026-06-25Goldman Sachs European utilities sector research.
• European data center capacity under construction or near authorization20 GWThe report says Europe already has about 20 GW of data centers under construction, at FID, or close to full approval.
• Grid connection applicationsabout 500 GWAbout 1.5x EU electricity consumption, indicating strong potential power demand.
• Incremental data center power demandabout 1.5%-2% annually from 2028-29 onwardDriven by data centers and Agentic AI adoption.
• Europe's electrification investment needs over the next decade€2.5-3.5 trillionHigher than about €1.5 trillion over the past decade.
• U.S. renewable project returnsProject IRR about 10%-11%The report says this is currently at a historical high.
• EnelBuy, target price €12/sh, current price €9.90Grids account for more than 40% of EBITDA, expected to grow 7%-8% annually through 2030; renewable target is 4 GW of additions per year.
• RWEBuy, target price €68.5/sh, current price €55.64About 25%-30% of EBITDA comes from the U.S.; the report believes it trades about €59/sh below the value of its operating assets.
• EDPRBuy, target price €17.5/sh, current price €13.55About 65% of EBITDA comes from U.S. renewables, currently around €1.2 million/MW, about 50% below replacement value.
• NaturgyBuy, target price €32.5/sh, current price €28.04It has about €10-12bn of releveraging capacity through 2030, potentially bringing 20%-40% EPS upgrade potential.

Impact & implications

The investment implication is that under a Hormuz reopening or peace-expectation scenario, utilities may continue to face relative return pressure in the short term, but this may provide an entry point for positioning in the long-term electrification theme. The report favors companies with grid growth, U.S. renewable exposure, and FlexGen and power-transition catalysts, and believes earnings upgrades and valuation expansion may gradually emerge around 2030-31.

Risks

• A sharp drop in commodities and power prices after Hormuz reopens may pressure independent power producers and renewable developers in the short term.
• Higher sovereign rates or bond yields would raise capital costs and weaken utility valuations.
• Regulatory measures, lower network returns, or declining retail margins may affect earnings.
• If electrification progress, data center construction, and power demand growth in Europe or the U.S. are below expectations, the long-term investment case would weaken.
• If renewable project pipeline execution, capacity additions, or supply-chain constraints fall short of expectations, company growth will be affected.
• Volatility in LNG, power, and commodity prices may cause earnings deviations.
• FX risks include depreciation of Latin American currencies, GBP/USD depreciation, or sharp moves in exchange rates such as USD/BRL.
• A macro recession or lower power demand may drag on sector earnings and valuations.

What to watch

• The impact of Hormuz reopening or a peace agreement on oil and gas, power, and commodity prices.
• Changes in European bond yields and utilities' cost of capital.
• The actual pace of rollout for European data center projects, AI adoption, and grid connection applications.
• Changes in European grid returns, regulatory policies, and retail margins.
• Whether U.S. renewable pricing, equipment costs, supply-chain constraints, and project IRRs remain at high levels.
• Progress of Enel's bidding for 15 GW of U.S. renewable assets.
• The impact on EPS and capital costs after RWE's shift toward transmission asset Amprion.
• Whether Naturgy's late-July 2026 interim results bring upside surprise and a raise to 2026 guidance.