Morningstar is forecasting revenue growth two times higher than expected GDP during the next five years for electrical equipment suppliers as regulation continues to drive the energy transition.
According to Morningstar, modernising an outdated electrical grid built over 40 years ago and reducing emissions in buildings remain the two major obstacles to achieving net zero by 2050.
The investment research firm said suppliers of electrical equipment earn the majority of their revenues from the power sector and buildings, which collectively contribute half of global greenhouse gas emissions and are being targeted by regulators to improve their energy efficiency. As such, suppliers are poised for “once-in-a-generation” growth as both sectors decarbonise to meet environmental targets, supporting an average 10% earnings per share growth through 2028 across the electrical sector.
Matthew Donen, senior equity analyst at Morningstar, said: “Ahead of COP29, we expect to see a renewed focus on modernising the electrical grid, representing the biggest bottleneck to achieving the tripling of renewable energy by the 2030 target set last year.
“This presents a multi-decade growth driver for electrical equipment suppliers, who will benefit from the modernisation of the grid to accommodate the energy transition, as well as record growth in electricity demand. Many of these same electrical equipment suppliers will also benefit from increasing investment into building energy efficiency.”
Modernising the grid with new electrical equipment and digital enhancements to accommodate an influx of renewable energy sources and protect the grid from weather-related events will require $600 billion of annual investment before the end of the decade.
Investment plans by US and European utilities indicate over 20% investment growth in the electric grid during the next three years, which will underpin record profitability for suppliers of critical equipment, Morningstar said.
Donen added: “Government stimulus and strict regulations are set to drive significant investment into decarbonising buildings and modernising critical electrical to enable the energy transition. With global stimulus packages in motion and stringent building regulations on the horizon, action is imminent. The buildings and power sectors collectively contribute half of global greenhouse gas emissions and are two industries we believe present the most accessible paths to decarbonisation.”
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