Investing.com — J.P. Morgan adopted a more cautious stance on European utilities in a note dated Friday, saying potential reforms to the EU Emissions Trading System represent a greater near-term risk to the sector than power market restructuring, while flagging incremental LNG supply and weak power demand growth as additional headwinds through the rest of 2026.
The brokerage top picks are , rated “overweight” at 2,550p, and , rated “overweight” at €51.26, both as of the Feb. 19 market close.
EU carbon futures dropped 23% from a mid-January 2026 peak, according to the note.
J.P. Morgan said the decline followed political commentary on possible reforms to the EU ETS Linear Reduction Factor, which determines the annual pace at which emissions allowances are reduced and was planned to reach full phase-out by 2034 in line with the Carbon Border Adjustment Mechanism.
German MEP Peter Liese stated the LRF could be cut to 3.4% from a previously planned 4.4%, with changes possible as early as 2029, though no official EU Commission proposal has been filed.
An official proposal on EU ETS reform is expected by July 2026, per the note.
French President Emmanuel Macron separately said speculation from financial participants is driving the ETS price to around €80/t when it should be around €30-40/t.
J.P. Morgan said ETS reform is more actionable than power market restructuring because relevant legislation is easier to enact, for example by increasing the number of allowances or banning speculative participants.
Power market reform, by contrast, faces significant legal barriers and would be difficult to implement quickly.
The brokerage also noted that carbon prices had already risen approximately 20% to a mid-January 2026 peak from the start of 2025 before the subsequent 23% decline, and that a carbon price approaching €100/t was most likely what prompted calls for political intervention.
The concern over carbon is compounded by a broader downward trajectory for power prices.
Power forward curves throughout Europe are in backwardation, and J.P. Morgan said power prices should decline over time even without intervention.
Power demand growth is running at approximately 1% for both 2026 and 2027, with heavier demand growth weighted toward the end of the decade, and incremental LNG supply coming online later this year is expected to weigh further on gas and power prices.
All generators under J.P. Morgan’s coverage are negatively exposed to carbon price declines because their average carbon intensity falls below that of the marginal plant.
The impact varies by country. J.P. Morgan estimated a €10/t drop in CO2 prices would reduce Italian wholesale power prices by approximately €3.5/MWh given Italy’s reliance on gas-fired generation as the marginal price setter, while the same move would drive only a €1-1.5/MWh reduction in Iberia, France and Nordpool, markets more dominated by nuclear and renewables.
On earnings sensitivity, a €10/MWh lower power price in FY28 would reduce Fortum’s net income by 42%, Endesa’s by 17.5%, ’s by 4.7% and RWE’s by 7%, based on J.P. Morgan estimates using company reports.
FY28 was chosen as the reference year because hedging policies mean 2026 and 2027 output is largely locked in, making 2028 the first year of material sensitivity to power price changes.
Italy has moved further than any other Western European country, with the government approving a decree to remove CO2 costs from the marginal bids of combined-cycle gas turbines in the wholesale power market, with carbon costs to be paid directly by the consumer instead.
J.P. Morgan estimated this would reduce Italian wholesale power prices by approximately €25/MWh. The brokerage said EU approval of the mechanism is far from granted and that shares in Italian utilities including have been weak since the policy leaked to the press.
The Italian government also decided to increase by 200 basis points the marginal rate of the IRAP, a component of the corporate tax rate, for energy companies.
SSE is preferred for its networks-driven above-average growth story. RWE is favored for an upcoming strategic update expected to highlight growth driven predominantly by long-term contracted revenues.
Among network companies, at 1,343p and at €18.60 are both rated “overweight,” with J.P. Morgan describing the category as a safe haven in the current uncertain environment despite high valuations.