After experiencing a continuous decline for 15 years, European electricity demand is reaching a critical structural turning point.

According to Goldman Sachs analysts Alberto Gandolfi, Ajay Patel and others in their latest report, Europe's power system is facing severe challenges. Chronic underinvestment, an emerging turning point in electricity demand, and increasing complexity of power systems are escalating Europe's risk of facing an electricity crisis.

Following a cumulative 7% decline in electricity demand between 2008 and 2024, Goldman Sachs expects European electricity demand to grow at an annual rate of 1.5% to 2% starting from 2026. This demand recovery is primarily driven by widespread electrification in transportation, households and manufacturing, rapid expansion of data centers, and rising air conditioning penetration rates.

To address demand growth and prevent potential crises, Europe's power system may require up to €3 trillion in investment over the next decade - nearly double the investment level of the past decade. The report warns that insufficient investment could see Europe's electricity market reserve margin (the difference between available capacity and peak demand) drop to zero around 2029, significantly increasing energy supply security risks.

Goldman Sachs believes this demand-driven investment "super cycle" will bring significant growth opportunities and profit margins to the entire power industry chain.

The report projects that under the base case scenario, leading companies benefiting from electrification trends could achieve annual earnings per share compound growth rates of 9% between 2025 and 2030, potentially reaching 11% under a "scarcity scenario," which could drive valuation expansion across the entire sector.

**Historic Turning Point in Power Demand**

European electricity consumption is bidding farewell to a 15-year contraction period.

Citing Eurostat data, the report indicates that between 1990 and 2008, EU electricity demand increased by approximately 30% cumulatively, driven by robust economic growth and electrification.

However, subsequently affected by a series of events including the global financial crisis, sovereign debt crisis, COVID-19 pandemic, and energy crisis, Europe experienced accelerated "deindustrialization" and energy efficiency improvements, leading to a downward reversal in electricity demand.

This trend is now reversing. Goldman Sachs' top-down analysis predicts that by 2026, European electricity demand will resume annual growth of 1.5% to 2%. This transformation is primarily driven by four pillars: GDP growth and slowing energy efficiency measures, electrification processes, data center construction, and air conditioning adoption.

The report expects EU real GDP growth rates of 1.2-1.5% before 2028, and 1% thereafter. For data centers, the EU27 pipeline transmission projects are expected to reach 200GW, with a 20% conversion rate within 10 years.

Regarding electrification, the report expects electric vehicles to account for 30% of new car sales in the EU by 2030 (below the EU's 55% target), heat pump numbers to reach half of the EU's 2030 target of 60 million units, and hydrogen development to achieve only 15% of EU targets.

For air conditioning penetration rates, Goldman Sachs states that current penetration is approximately 20%, expected to reach about 25% by 2030.

**Trillion-Euro Investment Launches "Super Cycle"**

Europe's grid infrastructure is severely aging. According to Nexans data, European grids have an average age of 45-50 years, making them the world's oldest grid systems. After approximately 20 years of underinvestment, transmission and distribution investment began accelerating from 2020-2021, with particularly notable increases in 2024, especially in transmission sector investment which has grown more than fourfold over the past decade.

Goldman Sachs estimates that due to equipment aging, transition to distributed generation, and connection of new customers such as electric vehicles, heating systems, industrial boilers, or data centers, grid investment needs to accelerate significantly. Transmission and distribution capital expenditure could double, with total investment of approximately €1.2-1.4 trillion over the next decade.

This will drive grid business to achieve 15% annual growth rates through the end of this century. During 2024-2029, the Regulated Asset Base (RAB) will grow at 15% annually, with transmission growth exceeding distribution. By region, areas like Germany or the UK will achieve annual growth rates of 15-20%.

The report also emphasizes that Spain's nationwide blackout on April 28 highlighted the risks of underinvestment. Although the blackout involved multiple factors, the government emphasized that voltage oscillations were one of the main triggering factors. When frequency deviates from 50 Hz by more than 0.15 Hz, the grid may be unable to dispatch power, leading to blackouts.

**Rising Renewable Share but More "Fragile" System**

Meanwhile, Europe's power generation structure is undergoing profound transformation.

Goldman Sachs expects that by the end of this century, approximately 75% of installed capacity will come from renewable energy, compared to about 45% a decade ago and currently about 65%. While this transformation helps Europe achieve energy self-sufficiency and emission reduction goals, it also makes the power system increasingly dependent on intermittent energy sources like wind and solar, making it more "fragile."

Between 2016-2025, renewable energy added more than 20 GW of new capacity annually, with solar installation growth exceeding onshore wind by 2x and offshore wind by 6x. Simultaneously, over 100 GW of thermal power capacity was retired, while new renewable capacity additions reached approximately 300 GW.

Due to intermittent characteristics, the rising share of renewable energy has increased electricity price volatility.

For example, in autumn 2024, Germany experienced the "Dunkelflaute" (no wind, no sun, cold) phenomenon, causing wind and solar power generation to plummet sharply. Spot electricity prices soared to €250-300/MWh, with intraday peaks approaching €1,000/MWh, while negative prices also occurred.

**Power Market Enters Supply Tension, Reserve Margin May Drop to Zero**

Based on the assumption of 1.5-2% annual electricity demand growth, Goldman Sachs warns that under the dual pressure of recovering electricity demand and insufficient backup facility construction, European electricity markets are heading toward supply shortages.

The key indicator measuring this tension is the reserve capacity rate - the difference between available capacity and peak demand. The report expects this indicator to decline from 15%-20% levels in 2021-2023 to low single digits by 2028, approaching zero in 2029-2030. This level is well below the 10-15% "safety line" needed to ensure energy security, meaning the risk of widespread blackouts is rising.

Analysis shows that Europe's reserve capacity rate will decline from 15%-20% in 2021-2023 to high single digits in 2025, expected to drop to low single digits in 2028, and to zero or negative values in 2029-2030.

To meet growing electricity demand, Goldman Sachs estimates that approximately €1 trillion in power generation investment will be needed over the next 10 years, mainly for renewable energy capacity construction, with the remainder for battery energy storage systems and combined cycle gas turbines and other backup power technologies.

Under the base case scenario, reserve capacity rates will steadily decline. Goldman Sachs believes Europe needs an additional 150-175 GW of backup capacity (gas plants, batteries), meaning an additional €350-400 billion investment above the base case scenario.

**"Scarcity" Revaluation of Entire Power Industry Chain**

The growth in electricity demand and the emergence of supply bottlenecks will create a "scarcity" effect, potentially revaluing the entire power industry chain. Goldman Sachs believes this will bring opportunities to multiple areas:

Grid Business: Benefiting from massive modernization renovation demand, expected to achieve sustained double-digit growth.

Renewable Energy: Against the backdrop of electricity scarcity, returns on new projects are expected to improve, similar to higher project internal rates of return brought by current rising Power Purchase Agreement (PPA) prices in the US market.

Flexible Generation: Flexible assets such as natural gas power plants will earn higher profits due to their key role in balancing the grid and responding to price volatility.

Electricity Supply: Increased electricity sales will directly drive profit growth in retail and supply businesses.

Under the "scarcity-driven" scenario, Goldman Sachs expects these companies' average profits may enter a "golden age," with five-year compound annual growth rates reaching 11%.

Goldman Sachs specifically favors companies including Enel, RWE, SSE, EON, Iberdrola, Elia, National Grid, EDPR, and Engie.

The report also notes that European utilities sector forward price-to-earnings ratios are currently near 10-year -1 standard deviation levels and show significant valuation discounts compared to US peers, indicating potential for valuation repair and expansion in the sector.