Europe's Electricity Demand Set to Rise 1.5-2% Annually from 2026

After a prolonged period of decline lasting 15 years, Europe's electricity demand is now at a critical juncture, marking a significant structural shift. The European power system is grappling with severe challenges due to chronic underinvestment, the emergence of a demand inflection point, and the increasing complexity of the power system, all of which are exacerbating the risk of an electricity crisis.

From 2008 to 2024, electricity demand in Europe cumulatively decreased by approximately 7%. However, from 2026 onwards, the annual growth rate of electricity demand in Europe is expected to reach 1.5% to 2%. This resurgence in demand is primarily driven by the widespread electrification of transportation, households, and manufacturing sectors, the rapid expansion of data centers, and the increasing penetration of air conditioning.

To meet the growing demand and mitigate potential crises, the European power system is expected to require investments totaling 3 trillion euros over the next decade, nearly double the investment levels of the past decade. The report warns that if investment is insufficient, the reserve margin (the difference between available capacity and peak demand) in the European electricity market could drop to zero by around 2029, significantly increasing the risk of energy supply insecurity.

This demand-driven investment "supercycle" is expected to bring significant growth opportunities and profit margins for the entire power industry chain. Under the baseline scenario, leading companies benefiting from the electrification trend are expected to achieve a compound annual growth rate of 9% in earnings per share from 2025 to 2030. In a "scarcity scenario," this growth rate could even reach 11%, potentially driving an expansion in the valuation of the entire sector.

The reversal of the trend in electricity consumption marks the end of a 15-year contraction period. From 1990 to 2008, the electricity demand in the European Union grew by approximately 30% due to robust economic growth and the push for electrification. However, subsequent events such as the global financial crisis, sovereign debt crisis, COVID-19 pandemic, and energy crisis led to accelerated deindustrialization and energy efficiency improvements, causing electricity demand to reverse and decline.

This trend is now reversing. Top-down analysis predicts that by 2026, Europe's electricity demand will resume an annual growth rate of 1.5% to 2%. This transformation is driven by four key pillars: GDP growth and the slowing of energy efficiency measures, the electrification process, data center construction, and the increasing penetration of air conditioning.

The European Union's real GDP growth rate is expected to be 1.2-1.5% until 2028, and 1% thereafter. In terms of data centers, it is projected that the EU-27 will have 200 GW of pipeline transmission projects, with a conversion rate of 20% over the next decade. In the electrification process, the EU is expected to achieve a 30% share of electric vehicles in new car sales by 2030 (below the EU's 55% target), half of the 60 million heat pumps target by 2030, and 15% of the hydrogen development target.

In terms of air conditioning penetration, the current penetration rate is approximately 20%, and it is expected to reach around 25% by 2030.

The aging infrastructure of the European power grid, with an average age of 45-50 years, is one of the oldest in the world. After approximately 20 years of underinvestment, investment in power transmission and distribution began to accelerate from 2020-2021, with a significant increase in 2024, particularly in the transmission sector, which has grown by more than four times over the past decade.

Due to equipment aging, the transition to distributed generation, and the integration of new customers such as electric vehicles, heating systems, industrial boilers, or data centers, power grid investment needs to be significantly accelerated. Capital expenditures for power transmission and distribution could double, with total investment over the next decade estimated at 1.2-1.4 trillion euros. This will drive the power grid business to achieve an annual growth rate of 15% by the end of the century. During the 2024-2029 period, the annual growth rate of the regulatory asset base (RAB) is expected to reach 15%, with transmission growth exceeding distribution. In regions such as Germany or the UK, the annual growth rate is expected to reach 15-20%.

The report also emphasizes the risks of underinvestment, as highlighted by the nationwide blackout in Spain on April 28. Although the blackout was caused by multiple factors, the government emphasized that voltage fluctuations were a major trigger. When the frequency deviates from 50 Hertz by more than 0.15 Hertz, the power grid may not be able to dispatch power, leading to a blackout.

Meanwhile, Europe's power generation structure is undergoing a profound transformation. By the end of the century, approximately 75% of installed capacity is expected to come from renewable energy sources, up from about 45% a decade ago and the current 65%. While this transition helps Europe achieve energy self-sufficiency and emission reduction goals, it also makes the power system increasingly dependent on intermittent energy sources such as wind and solar, making it more fragile.

From 2016 to 2025, the annual new installed capacity of renewable energy sources exceeded 20 GW, with solar installations growing more than twice as fast as onshore wind and six times faster than offshore wind. During the same period, more than 100 GW of thermal power capacity was retired, while new renewable energy capacity added approximately 300 GW. Due to their intermittent nature, the increased share of renewable energy sources has driven up the volatility of electricity prices.

For example, in the fall of 2024, Germany experienced a "Dunkenflaute" (no wind, no light, cold) phenomenon, causing a sharp drop in wind and solar power generation. As a result, spot electricity prices soared to 250-300 euros per megawatt-hour, with intraday peaks reaching nearly 1000 euros per megawatt-hour, and negative electricity prices also occurred.

The European electricity market is entering a phase of supply tightness, with the reserve margin potentially dropping to zero. Based on the assumption of a 1.5-2% annual growth in electricity demand, the report warns that under the dual pressure of rising electricity demand and insufficient reserve capacity construction, the European electricity market is heading towards a supply shortage.

A key indicator of this tightness is the reserve capacity rate, the difference between available capacity and peak demand. The report predicts that this indicator will drop from 15-20% in 2021-2023 to single digits by 2028, and approach zero or negative values by 2029-2030. This level is far below the 10-15% "safety line" required to ensure energy security, indicating an increasing risk of widespread blackouts.

To meet the growing electricity demand, it is estimated that approximately 1 trillion euros will be needed for power generation investments over the next decade, primarily for the construction of renewable energy capacity, with the remainder allocated to battery storage systems and combined-cycle gas turbines as backup power sources.

Under the baseline scenario, the reserve capacity rate will gradually decline. It is believed that Europe needs an additional 150-175 GW of backup capacity (gas-fired power plants, batteries), which means an additional investment of 350-400 billion euros on top of the baseline scenario.

The growth in electricity demand and the prominence of supply bottlenecks will create a "scarcity effect," potentially revaluing the entire power industry chain. This is expected to bring opportunities to multiple sectors:

Power grid business: Benefiting from the massive modernization needs, it is expected to achieve sustained double-digit growth.

Renewable energy: In the context of electricity scarcity, the return on new projects is expected to increase, similar to the higher project internal rates of return (IRR) brought about by the current rise in power purchase agreement (PPA) prices in the U.S. market.

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

Power supply: Increased sales volume will directly drive the profit growth of retail and supply businesses.

Under the "scarcity-driven" scenario, it is expected that the average profit of these companies may enter a "golden age," with a five-year compound annual growth rate of 11%.