Utilities companies Drax PLC (LON:DRAX), SSE PLC (LON:SSE) and National Grid PLC (LON:NG.) offer “considerable potential upside” as the sector invests trillions to achieve ‘net zero’ emissions targets, analysts at Barclays believe.

“We believe the EU’s and UK’s ambitious targets to achieve ‘net zero’ emissions by 2050 are achievable,” Barclays said, “placing utilities at the forefront of a €3.7 trillion investment boom, and making the sector a key beneficiary of the coming industrial revolution.”

Analysts at the bank see four major positive themes for European utilities becoming an increasingly positive focus for investors: “decarbonising power, electrification of the economy, decarbonisation of other fuels and storing/removing carbon”.

Expecting renewables to dominate the power markets of the future, the analysts forecast a total capex need in renewables of up to €1.64 trillion.
Reflecting the positive valuation impact for the renewable growth pipelines, the analysts said this drives the significant increase in the Drax share price target to 535p from 333p before and for SSE to 1,650p from the prior 1,300p.

Drax is also expected to enjoy a “major benefit” from strategies to make up carbon shortfalls, including carbon capture and storage (CCS), the potentially “gamechanging” bioenergy carbon capture and storage (BECCS) and from land use, land change and forestry (LULCF).

As electricity is currently just around a fifth of final energy consumption in Europe, with fossil fuels making up most of the rest, the analysts see increasing electrification of transport and heating leading to 2-4% annual electricity growth for the next 30 years.

Forecasting that national governments will therefore increasingly look to include the required investment in the capex budgets of the regulated distribution companies, “this should benefit” National Grid in the UK. Its target price was nudged up to 1,115p from 1,010p.

The distribution company is also expected to benefit from the ‘decarbonisation’ of other fuels, namely converting conventional methane pipelines into hydrogen or blending pipelines.

With the hikes in target price, Drax and SSE were both upgraded to ‘overweight’ from ‘equal weight’, while National Grid remained at ‘overweight’.

Germany’s E.ON is Barclays’ top pick in the sector, however.

Source:Proactive Investors