A second energy crunch in five years, triggered by the war in Iran, could accelerate Europe’s shift toward electrification and away from fossil fuels, according to Goldman Sachs Research.

Increased electrification, along with rising energy needs tied to artificial intelligence (AI), will likely boost power demand by 1.5-2% per year in 2026 and 2027 before accelerating to 2-4% per year by the end of the decade, Alberto Gandolfi, head of the European Utilities Research team, writes in a report. Under a potential “hyper-electrification scenario,” power demand growth could reach 5% per year starting in 2030. Utilities are expected to be at the core of this shift.

Electricity (renewables and nuclear) accounts for about 20% of Europe’s energy consumption, and fossil fuels (oil, gas, coal) provide the other 80%. Estimates by the International Energy Agency suggest electricity’s share of the mix could more than double by 2050. “The need to boost energy security could accelerate electrification targets, providing an additional tailwind to electricity consumption,” Gandolfi writes.

How is Europe changing its power infrastructure? 

Higher investment in power generation capacity and electrification infrastructure would strengthen the continent’s energy security and help keep power prices in check, according to Goldman Sachs Research estimates. They would also translate into stronger organic earnings growth for utilities going forward.

“Strong power demand and incremental electrification spending are likely to support an earnings super-cycle” for utilities, Gandolfi writes.

How is the Iran war impacting energy prices in Europe? 

The nature of the supply disruption emanating from the Middle East is different than the one Europe faced when the war in Ukraine began in 2022. Before that conflict, Russia supplied 35-40% of Europe’s natural gas needs. That share plunged to just 10% in 2023, resulting in a significant jump in liquefied natural gas (LNG) prices in the region. “In terms of gas prices, this was a particularly severe crisis for Europe,” Gandolfi writes.

“Although the current energy crunch is more global in nature, when it comes to gas, Europe appears less affected,” he adds. Only about 12% of European gas consumption in 2024 came from Qatar through the Strait of Hormuz, compared to 17% on a global basis. But the energy crunch is much more pronounced when it comes to oil. The area impacted by the war provides about 30% of daily global oil supplies.

This latest crisis could push Europe to increasingly pivot its energy policy towards electrification. The European Commission released a communication in late April that underscores the continent’s dependency on fossil fuel imports. The crisis is a “strong reminder of the need to accelerate electrification, the roll out of additional domestic clean energy production and the energy transition,” according to the communication.

Our analysts’ “hyper-electrification scenario” assumes Europe meets most of its existing 2030 goals detailed in the current National Energy and Climate Plans, but it also adds in faster adoption rates for AI agents versus its base case. To meet such a surge in consumption, utilities would need to invest more in electricity infrastructure and accelerate the development of power generation capacity. Under this scenario, Goldman Sachs Research estimates that power generation investment would reach €2 trillion ($2.3 trillion) over the coming decade, roughly three times the level of spending over the past 10 years. When including spending to upgrade power grids, total electrification investments over this period would total around €3.5 trillion.

How can Europe reduce electricity prices? 

The experience of EU member countries who have led the charge in transitioning away from fossil-fuel generation shows promise for containing electricity prices even as demand grows, Gandolfi points out. 

In countries where gas plants are price setters for power the majority of the time—such as Italy, Germany, and the UK—forward power prices have increased precipitously since the start of the Middle East conflict. In contrast, countries that derive a larger share of their electricity needs from renewables and nuclear—such as Spain, France, and the Nordics—have been able to keep their power prices largely unchanged.

“While this was evident before the energy crisis, the current crunch is exacerbating the regional divergence in power prices across Europe,” Gandolfi writes.

Which companies are likely to benefit from European electrification? 

Goldman Sachs Research expects there to be opportunities among companies with large exposure to power generation activities and a strong balance sheet to fund an expansion of the power fleet. Renewables will continue to stand out in this respect, owing to their lower levelized cost of electricity (LCOE) and faster time to market, which enables them to respond to rising power demand needs from electrification and AI.

While Europe’s coal phase-out could be temporarily halted to meet the surge in power demand, nuclear could re-enter Europe’s generation mix as a strategic pillar, the researchers find. Nuclear’s share of European power generation has slipped to about 15%, from roughly a third in the late 1990s, and the majority of existing nuclear plants are approaching the end of their useful life. In addition, only about 4 gigawatts of new nuclear capacity is currently under construction in Europe, representing projects in the UK and Slovakia.

Our researchers estimate that proprietary technologies such as small modular reactors (SMRs) could play a role in Europe’s energy future given their speed to market, flexibility, and ease of refueling. While SMRs have yet to see significant deployment at scale, faster deployment could see SMR capacity grow to 10 gigawatts by 2040 in Europe.

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