J.P. Morgan said in a note published on Friday that the looming prospect of EU ETS reform constitutes the most immediate policy risk to European utilities, outweighing the potential impact of power-market restructuring. The brokerage argued policy action to alter the EU carbon market could be implemented more readily than changes to wholesale market design and warned that carbon-price volatility, together with weak demand growth and an uptick in LNG availability, will act as persistent headwinds for the sector through the remainder of 2026.
Top picks and positioning
As of the Feb. 19 market close, J.P. Morgan's preferred utility names are SSE, rated "overweight" with a 2,550p target, and RWE, also rated "overweight" with a €51.26 target. The bank favors SSE for its above-average growth trajectory driven by regulated networks, while RWE is singled out ahead of an expected strategic update that the brokerage says will underline growth coming chiefly from long-term contracted revenues.
Carbon market moves and political pressure
Carbon futures in the EU fell roughly 23% from a mid-January 2026 peak, the note said. J.P. Morgan attributed the drop to political discourse over potential amendments to the EU ETS Linear Reduction Factor, which dictates the annual rate at which allowances are removed from the market and had been set to reach a full phase-out by 2034 in alignment with the Carbon Border Adjustment Mechanism.
The note references comments from German MEP Peter Liese indicating the LRF could be reduced to 3.4% from a previously planned 4.4%, with changes possibly taking effect as early as 2029, though no official European Commission proposal has been tabled. J.P. Morgan said an official EU ETS reform proposal is expected by July 2026.
French President Emmanuel Macron is cited in the note as saying that financial market speculation is pushing the ETS price toward approximately €80 per tonne when he believes it should be closer to €30-40 per tonne. The bank interpreted the risk of ETS reform as more immediate than wholesale market reform because policymakers could act by, for example, increasing the number of allowances or restricting participation by speculative traders, steps that are comparatively easier to legislate.
By contrast, J.P. Morgan noted that power-market restructuring faces substantial legal obstacles and would be difficult to roll out quickly.
Price dynamics and demand outlook
The brokerage pointed out that carbon prices had already climbed about 20% from the start of 2025 to a mid-January 2026 high before the subsequent 23% decline. J.P. Morgan added that a carbon price approaching €100 per tonne was likely the proximate trigger for the political intervention debate.
On the power side, forward curves across Europe are in backwardation, and the bank expects power prices to trend lower over time even without policy intervention. J.P. Morgan cited power demand growth running at around 1% for both 2026 and 2027, with stronger growth weighted toward the latter part of the decade. In addition, the brokerage expects incremental LNG supply coming online later in the year to exert downward pressure on both gas and power prices.
Exposure and sensitivity across markets
J.P. Morgan emphasized that all generators under its coverage are negatively exposed to falling carbon prices because their average carbon intensity is below that of the marginal plant, meaning a decline in carbon costs reduces the price-setting power of those marginal units.
The magnitude of the wholesale-price response varies by market, according to the note. The bank estimated that a €10 per tonne fall in CO2 prices would lower Italian wholesale power prices by about €3.5 per MWh, reflecting Italy's reliance on gas-fired plants to set marginal prices. The same €10 per tonne decline would translate into roughly €1 to €1.5 per MWh reductions in Iberia, France and Nordpool, where nuclear and renewables have a greater share of generation.
Using company reports and its own modelling, J.P. Morgan quantified earnings sensitivity to a lower power-price environment in FY28. A €10 per MWh decline in FY28 power prices would, in the bank's view, reduce Fortum's net income by 42%, Endesa's by 17.5%, Engie's by 4.7% and RWE's by 7%. The note explains that FY28 is the relevant reference because hedging policies at many utilities mean 2026 and 2027 output is largely protected, making 2028 the first year with material exposure to market-price changes.
Italy's measures and corporate implications
Italy has taken steps that J.P. Morgan described as further-reaching than other Western European countries. The government approved a decree to strip CO2 costs out of the marginal bids of combined-cycle gas turbines in the wholesale power market, instead requiring consumers to pay carbon costs directly. J.P. Morgan estimated this mechanism would lower Italian wholesale power prices by approximately €25 per MWh.
The brokerage cautioned that EU approval of the Italian mechanism is far from assured. It also noted that shares in Italian utilities, including Enel, had weakened following press leaks about the policy. Separately, Italy has increased the marginal rate of the IRAP corporate tax component for energy companies by 200 basis points.
Sector positioning and safe havens
Beyond SSE and RWE, J.P. Morgan also lists network operators among its preferred exposures. National Grid, at 1,343p, and E.ON, at €18.60, are both rated "overweight." The bank characterised network companies as a relative safe haven amid the policy uncertainty and market pressures, even though valuations in that cohort are elevated.
J.P. Morgan's overall stance signals caution across the utility sector while highlighting select stocks with either regulated earnings growth or long-duration contracted revenues that may better withstand carbon-policy volatility and softer wholesale power prices.
Key takeaways
- EU ETS reform is judged a nearer-term policy risk to utilities than power-market restructuring.
- Carbon-futures volatility and incremental LNG supply are expected to weigh on power and gas prices through 2026.
- Networks and long-term contracted revenue streams are preferred defensive exposures; J.P. Morgan favours SSE and RWE.
Sectors affected
- Utilities and power generators
- Gas and LNG markets
- Regulated network operators