Jefferies Names Top Picks in EU Utilities as Power Prices Surge

Jefferies turned bullish on European utilities post-summer, citing rising power prices and accelerating regulated capex as the core drivers for earnings into 2027. The firm’s key catalyst is October’s publication of Germany’s Network Development Plans (NAP 2026), which it expects to unlock a meaningful upgrade to E.ON’s German grid capex and faster RAB/earnings growth. It also highlights RWE for a projected double-digit EPS CAGR into the early 2030s and EDP for strong sensitivity to power prices alongside accelerating network growth, arguing valuation remains attractive after recent corrections.

Analysis

The most important mechanism is not the current power-price move but the translation of higher nominal rates into a larger regulated asset base. If German grid plans are upgraded, EONGY benefits from a visible capital cycle that can compound for years; the second-order winners are the European equipment and services names that sell into that capex wave, while the losers are power-intensive industrials that cannot fully pass through higher electricity costs.

RWE is the cleaner expression of sustained tight power markets, but it is also the most fragile if gas/storage conditions normalize over the next 1-3 months. Multi-year high sovereign yields are a mixed signal for utilities: they can support inflation-linked allowed returns, yet they also raise funding costs and suppress valuation multiples, so the market may keep earnings estimates but refuse to pay up for them.

Consensus looks a bit too focused on near-term EPS upgrades and not enough on discount-rate pressure. The best setup is names with the clearest capex-to-RAB conversion and the least refinancing risk; the thesis is falsified if forward power prices roll over, the October network plan disappoints, or regulators signal lower allowed returns than the market expects.

Key Decisions for Investors

• Long EONGY into the October network-plan catalyst; use weakness to build. Target 10-15% relative upside over 1-3 months if capex guidance is upgraded; cut if the plan underdelivers or allowed returns are compressed.
• Long RWEOY as a 6-12 month power-price beta, but only on pullbacks. Risk/reward is attractive if European gas stays tight; invalidate if winter demand softens or storage refills push forward power prices materially lower.
• Pair long EONGY / short BASF to isolate higher power-pricing and grid-capex benefits versus energy-intensive margin pressure. This is the cleaner trade if you want to hedge broad Europe equity beta.
• Overweight European grid-capex beneficiaries such as Prysmian and ABB as second-order winners from utility spend. This is a structural 6-18 month trade with better risk/reward than chasing the utilities themselves.
• For a higher-conviction but more volatile expression, buy a medium-dated call spread in RWEOY only if TTF power forwards remain firm; stop if the forward curve breaks down or if German gas policy turns more supportive of supply.