SSE and National Grid: Two different routes to the same long-term upside

Bernstein analysts maintain a positive outlook on UK utilities SSE and National Grid, projecting 21-24% upside for both, despite their diverging strategic paths. SSE is favored for its exposure to the UK's energy transition through domestic renewables and significant transmission network build-out, while National Grid offers transatlantic diversification via its U.S. regulated assets and has bolstered its balance sheet for its large RIIO-T3 plan. The recent 'largely positive' draft determination for the RIIO-T3 regulatory cycle is expected to define sentiment for both stocks through 2025, making any macro-driven pullback a buying opportunity.

Analysis

According to Bernstein analysts, both SSE and National Grid present compelling investment cases within the UK regulated utilities sector, each with a projected upside of 21-24%. Despite comparable exposure to UK power networks, which will constitute approximately 55% of earnings for both by 2031, their strategic paths diverge significantly. National Grid offers transatlantic diversification, with its remaining earnings derived from regulated U.S. operations that are achieving about 95% of allowed returns. The company has also fortified its balance sheet with a recent £7 billion equity raise to support its £35 billion RIIO-T3 investment plan. Conversely, SSE provides more concentrated exposure to the UK's energy transition, with its other earnings stemming from domestic renewables and thermal generation. SSE leads on growth prospects for regulated asset value (RAV), earnings, and dividends, and its renewable projects have consistently beaten hurdle rates. The key sentiment driver for both stocks through 2025 is the RIIO-T3 regulatory review, for which the recent draft determination was deemed "largely positive," aiding SSE's funding concerns and lifting National Grid's earnings outlook.

Key Decisions for Investors

• Investors could view any macro-driven pullback in UK utility stocks as a buying opportunity, given the 21%-24% upside potential identified for both SSE and National Grid.
• Portfolio allocation should align with strategic risk appetite: consider SSE for higher growth and direct exposure to the UK's energy transition, or National Grid for transatlantic diversification and a strengthened balance sheet.
• Monitor the final outcome of the RIIO-T3 regulatory review as a primary catalyst for both stocks through 2025, and watch SSE's performance in the upcoming AR7 renewables auction for further indicators.
• For National Grid, attention should be paid to management succession plans, as this is emerging as a key investor focus area now that its U.S. rate cases are locked in until late 2026.