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Stock Markets March 10, 2026

Citi Says UK Water Utilities Provide Stronger Inflation Shield Than Energy Networks

Analysts highlight regulatory pass-through differences as uncertainty over Middle East conflict clouds inflation and rate outlook

By Marcus Reed
Citi Says UK Water Utilities Provide Stronger Inflation Shield Than Energy Networks

Citi analysts argue that listed UK water utilities offer more robust protection against inflation for equity holders than energy network companies. The bank points to structural differences in how inflation is allowed to pass through to the Regulatory Asset Base (RAB) for water versus energy networks, and notes persistent uncertainty over how the Middle East conflict may affect inflation and long-term interest rates.

Key Points

  • Citi finds listed UK water utilities provide stronger inflation protection for equity holders than energy network companies due to differences in regulatory inflation pass-through.
  • Water utilities’ pass-through allows inflation to be retained on both debt and equity RAB, while energy networks are permitted inflation only on equity RAB.
  • Sectors affected include regulated utilities broadly, with particular implications for water companies and energy network operators, and for investors assessing inflation exposure in regulated assets.

Citi analysts on Monday said that water utilities in the UK present superior protection against inflation for equity investors compared with energy network companies, amid heightened market concern about the potential inflationary effects of the Middle East conflict and corresponding moves in long-dated interest rates.

The bank emphasised that the duration and macroeconomic consequences of the conflict remain highly uncertain. That uncertainty has increased attention on how inflation and higher interest rates would interact with regulated utilities through their regulatory frameworks.

Pass-through mechanics matter

Citi noted that over the long run, any sustained increase in interest rates typically passes through to regulatory returns, while inflation itself is also passed through but with a lag. Crucially, the analysts drew a distinction between how inflation is handled within the Regulatory Asset Base for different utility sub-sectors.

According to the bank, water utilities’ inflation pass-through structure enables equity holders to retain inflationary adjustments on both debt and the equity portion of the RAB. By contrast, for energy network utilities, inflation is permitted only on the equity portion of the RAB. Citi said this structural asymmetry implies that if inflation persists, equity holders in listed water companies should enjoy better protection than those invested in energy network firms.

Market pricing and investment view

Citi added that market pricing appears to have overlooked this distinction given recent share price behaviour among regulated UK utilities. Based on their analysis, the bank continues to see value in UK water utilities.

Context limits

The analysts explicitly point to uncertainty around the conflict’s duration and its ultimate impact on inflation and long-term interest rates. They also note the timing difference in how inflation passes through regulatory frameworks, which affects the realisation of any protection for investors.

This assessment focuses on regulatory design and its implications for equity returns within the utilities sector rather than presenting forecasts about inflation or rates themselves.

Risks

  • The duration and economic impact of the Middle East conflict are highly uncertain, which affects the outlook for inflation and long-term interest rates and therefore regulatory returns.
  • Inflation passes through to regulated returns with a delay, meaning any protection for equity holders may materialise only over time and depends on regulatory timing.
  • Market pricing may not fully reflect structural regulatory differences between water and energy networks, creating valuation risk for investors if assumptions about inflation persistence change.

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