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Since 2026 kicked off, National Grid (LSE:NG.) shares have already jumped by over 10%, reaching a new 52-week and overall record high!
But what’s driving this momentum? And can the stock continue to surge throughout the rest of the year?
Inspecting double-digit gains
There are a variety of forces driving National Grid shares higher right now. However, this latest rally was actually triggered by an important regulatory announcement late last year. In December, energy regulator Ofgem published its final determination for the RIIO-T3 price control framework. This is where things get a little complicated, so let’s break it down.
But first, as a quick reminder, National Grid’s a regulated monopoly. That means limits are put in place to protect consumers from runaway energy prices while still aiming to enable National Grid to earn a respectable profit. After all, without any earnings to fund investment, UK energy infrastructure will be left to crumble.
The previous pricing framework’s expiring in April. RIIO-T3 is the succeeding contract that will span five years until April 2031. And to the relief of many, it essentially permits National Grid to achieve a 6.12% real return on equity.
After inflation, that’s enough to support roughly 6%-8% annual earnings growth over the next five years. While that pales in comparison to some high-growth enterprises, it’s more than sufficient for institutional investors, particularly pension funds, seeking stable, consistent cash flows supporting a steadily increasing dividend.
Consequently, with this regulatory uncertainty now lifted, investor sentiment’s improved, driving National Grid shares much higher.
What happens now?
It’s important to note that the new framework hasn’t been formally accepted by National Grid yet. The company has until March to make that decision, or appeal for modifications. But let’s assume RIIO-T3 is accepted as-is. How much higher could National Grid shares realistically climb?
Sadly, the answer might disappoint. The average consensus from expert analysts has put the share price target at around 1,254p – roughly in line with where shares trade today.
There’s always the possibility that better terms for RIIO-T3 are negotiated. But even under this scenario, the most optimistic share price forecast is around 1,400p – 8.7% higher than where the stock’s currently trading.
In other words, most of the anticipated growth already seems to be baked into the share price. And that opens the door to some volatility if targets are unexpectedly missed due to poor execution or operational disruptions. The impact of this would only be amplified by the group’s enormous outstanding debts.
The bottom line
For growth investors, the opportunity to capitalise on the momentum surrounding National Grid shares is likely nearing its end for now. So it’s likely that this stock would be a poor fit. But for more conservative income-oriented individuals, a further investigation might still be worthwhile.
After all, even if the share price doesn’t have much room left to move, National Grid’s cash flows continue to support a decent 3.7% dividend yield.
Of course, there are also plenty of other income opportunities for investors to explore today.
