How Europe Can Replace Russian Gas and Still Achieve Its Net-Zero Emissions Goals

The tensions between Russia and the rest of Europe over natural gas flows have underscored the unsustainability of the continent’s energy system. But with the right mix of infrastructure investment, Europe can emerge from the upheaval with a system that is cheaper, achieves the continent’s net-zero carbon emissions goals and is more secure. The spending is estimated to eventually pay for itself from savings on energy imports, according to Goldman Sachs Research.

It will take €10 trillion of investment by 2050 for Europe to transform its energy infrastructure, according to Goldman Sachs’ Carbonomics framework. That amounts to around €350 billion each year, around 2% of gross domestic product by 2030.

The overhauled system would dramatically shore up energy independence though it wouldn’t eliminate imports entirely. The continent would still need to buy some fossil fuels for chemicals manufacturing and to import some of its green hydrogen. Goldman Sachs Research estimates that the region can cut its dependency on energy imports from 58% to 15% by 2050.

The new system would be more affordable. The energy costs for the average European consumer could be cut by 40% versus prices in 2021 (and by 60% compared to the expected peak this year) through improved energy efficiency, lower-cost liquefied natural gas (LNG), cheaper renewables and better regional connectivity.

Natural gas is going to be a key part of Europe’s energy supply for the next 20 years, according to Goldman Sachs Research. The region has historically been reluctant to sign up to long-term LNG contracts, and the result is a heavy reliance on gas imports via pipeline. Given the tensions between western powers and Russia over the war in Ukraine, that system isn’t sustainable.

For Europe to hit its goals to cut and eventually eliminate its reliance on Russian gas, the EU will need to increase LNG imports, according to modelling by Goldman Sachs Research. A series of 10- and 15-year contracts would strengthen energy security and allow a new generation of LNG projects to be developed for Europe.

While natural gas will remain important for decades, renewable power — such as solar and onshore and offshore wind — will be at the heart of the future energy system. Goldman Sachs’ Carbonomics research shows that electrification is the most important driver of lower emissions and reduced dependence on energy imports. That effort will also require major investments in domestic battery production.

Seasonality and the energy requirements for transportation and heavy industry mean that green hydrogen will also be a key component and will eventually make up 15% of the energy system. The EU will need an interconnected system of power networks and hydrogen pipelines to substitute hydrocarbon imports with clean energy flows from low cost producers such as Iberia, parts of Southern Europe and the U.K. to the rest of Europe.

It will take time and investment, but there is a way forward for European leaders: modelling by Goldman Sachs Research indicates that the EU can strengthen its energy independence in the face of the Russia-Ukraine crisis without compromising its climate change ambitions.