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Europe’s power grid is in dire need of an upgrade, Goldman Sachs says, naming two stocks it expects to benefit from the network’s expansion and modernization. Referencing data from the EU Grids Action Plan , the investment bank noted that over 40% of the region’s power distribution systems are over 40 years old. “As a result, over the coming ten years, Europe will have to significantly modernize its ageing power distribution grid infrastructure,” Goldman’s analysts led by Alberto Gandolfi wrote in a Jan. 23 note. The process is estimated to cost around 650 billion euros ($707.69) between 2021 and 2030, implying “a strong double-digit acceleration in the annual capex-run rate by the end of the decade, vs current levels,” the analysts said. They expect the funds to be channeled into things like connection requests from renewable energy firms, new electrification infrastructure, as well as the creation of a more interconnected European power market. “We believe that stocks with a large exposure to power grids will benefit from a solid growth driver, for at least the coming ten years,” they wrote. “Power grids sit in the sweet spot of electrification: besides an accelerating top line, we highlight attractive risk-adjusted returns, which are usually set on a ‘cost plus’ basis.” Stock picks Goldman Sachs said the way to play this theme is through pure plays and green energy majors. The green energy industry has had a tough time of it since 2021 as global central banks hiked interest rates in an effort to combat inflation. The iShares Global Clean Energy ETF and First Trust Nasdaq Clean Edge Green Energy Index Fund, for example, are both down over 50% from their peak in early 2021. “We believe power network activities represent an incremental leg in our re-rating thesis for Green Energy Majors,” Goldman’s analysts added, naming Enel and SSE as buy-rated stocks. Goldman’s buy call on Italian oil and gas manufacturer Enel stems from” positive earnings momentum, mostly supported by cost savings, higher returns from renewables and a resilient integrated margin in the domestic business,” the analysts said. They expect Enel’s share price to hit 8.80 euros ($9.58) over the next 12 months, giving it around 39% potential upside. Similarly, its target price of £2,430 ($3,092) on Scottish energy player SSE also gives it around 39% upside. Goldman likes the stock because it has “accelerated its story of renewed growth.” The company has previously set aside £20.5 billion for capital expenditure between 2023 and 2027 on the back of higher investment in renewables and networks, the bank highlighted. Shares of Enel are traded on the Milan Stock Exchange, while SSE is traded on the London Stock Exchange. Both stocks are held in the TrueShares Eagle Global Renewable Energy Income ETF, accounting for 8.1% and 8.6% of the fund respectively. — CNBC’s Michael Bloom contributed to this report
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