Goldman Sachs believes electrification and AI-driven electricity demand growth in Europe will not significantly raise power costs and instead support a utility profitability supercycle.

Overview

This report discusses the cost implications of European electrification and the expansion of data centers supporting artificial intelligence. Goldman Sachs believes market concerns that electrification-related capital spending will cause electricity prices to rise sharply are exaggerated: even after accounting for additional electricity use from AI and data centers, European electricity prices could remain in a 2%-4% average annual range over the next decade, below the typical household electricity CAGR of about 5% in the last ten years.

Core views

Key views include: first, European electricity-system investment demand over the next decade is around €2.2-3.5 trillion, but approximately 35%-40% is considered non-inflationary or deflationary, such as grid maintenance, onshore wind, and incremental solar capacity; second, power demand growth will dilute fixed costs like grid charges, easing pressure on per-unit electricity costs; third, while household electrification would significantly raise electricity consumption, total household energy spend may decline by around 30% because EVs and heat pumps are more efficient; fourth, there is around €1 trillion per year of European fossil-fuel spending that could be displaced by electrification; fifth, utilities, renewable energy, and energy-security infrastructure companies are expected to enter a profitability supercycle.

Analysis framework

The report uses scenario analysis, estimating European power demand, data-center capacity, electrification capex, electricity price growth, and household energy bills under both base and high-uptake scenarios, while comparing grid fees, energy prices, and policy support across countries. It also splits capex into three categories by inflation impact—non-inflationary, deflationary, and inflationary—to explain why large-scale investment does not necessarily translate into proportionate electricity price increases.

Methodology notes

• Scenario analysisBase case and high-uptake case

  Derive power demand and electricity price paths through different electrification paces and AI data-center expansion speeds.

  The base case assumes EU electrification targets are substantially delayed and data centers are rolled out gradually; the high-uptake case assumes higher penetration of EVs, heat pumps, and AI Agents, and faster data-center buildout.

• Capex attributionInflation impact decomposition

  Classify electrification capex into non-inflationary, deflationary, and inflationary categories.

  Grid maintenance is treated as non-inflationary, onshore wind and incremental solar are treated as deflationary, while offshore wind, backup generation, storage, nuclear, and grid expansion are more inflationary investments.

• Unit cost analysisFixed-cost dilution

  Additional electricity demand increases the power-consumption base, thereby diluting fixed costs such as grid charges.

  Electricity growth from EVs, heat pumps, industrial electric boilers, air conditioning, and data centers spreads fixed power-system costs over more MWh, reducing per-unit fixed-cost pressure.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Electrification-transition companies: Naturgy, Enel, Engie, PPC

  Benefit from faster electrification capex and asset-portfolio transformation.

  Strengths

  The portfolio is likely to undergo meaningful transformation over the next 3-5 years, with grid and power-asset growth supporting earnings.

  Weaknesses

  Requires sustained capital spending, and rising grid charges in some regions may trigger regulatory scrutiny.

  Comparison

  Compared with traditional defensive utilities, this group emphasizes organic growth and repricing potential.

  Risks

  Insufficient policy support, higher cost of capital, project approval delays, or consumer affordability disputes.

• Renewable developers and equipment suppliers: RWE, EDPR, Solaria, Orsted, Vestas, Nordex

  Benefit from rising power demand, additional renewable capacity additions, and improving returns.

  Strengths

  Onshore wind and solar are viewed as having deflationary effects, helping lower power prices and expand investment capacity.

  Weaknesses

  Some offshore wind and manufacturing segments remain exposed to supply chains, order cycles, and margin volatility.

  Comparison

  Developers benefit directly from project growth, while equipment suppliers are more exposed to order recovery and margin normalization.

  Risks

  Power-price declines, subsidy policy shifts, construction-cost swings, grid-connection bottlenecks, and execution risk.

• Energy security infrastructure providers: Siemens Energy, EON, Snam

  Benefit from grid expansion, backup generation, transmission/distribution, and energy security spending.

  Strengths

  Grid, gas, and energy-security infrastructure are critical under both electrification and data center expansion.

  Weaknesses

  Some investments are capital-intensive, and returns depend on regulatory frameworks and allowed yield levels.

  Comparison

  Compared with renewable assets, this group is more infrastructure- and system-reliability oriented.

  Risks

  Regulatory reduction in allowed returns, longer project timelines, cost overruns, and weaker-than-expected fiscal support from governments.

Key data

• Forecast for European annual electricity price growthBaseline case about +2%, high-uptake case about +4%, forecast window 2026-2035EBelow the roughly +5% annual average growth for a typical European household electricity bill over the past decade.
• Electrification capex requirementAround €2.2-3.5 trillionCovers 2026-2035 and is materially above the roughly €1.4 trillion capex level in 2016-2025.
• Share of non-inflationary or deflationary capexAround 35%-40%Includes grid maintenance and onshore wind, solar, and similar investments that can help reduce electricity costs.
• European power demand growthBaseline case about +1.5%-2.5% per year up to 2030, then about +3%-3.5%; high-uptake case about +4.5%-5% after 2030Growth is driven by EVs, heat pumps, industrial electric boilers, air conditioning, and data centers.
• European data center pipelineAbout 480 GW of connection requestsUK, Italy, and Germany account for higher absolute levels, indicating long-term electricity demand potential.
• European data center installable capacityOver 60 GW by 2035 in base case; around 80 GW in upside caseThe upside case assumes Agentic AI accounts for 30%-40% of query volume, leading to higher power intensity.
• Household energy cost savingsAbout -30%, around €1,200 saved per household per yearAfter full electrification, total annual household energy spend for a representative home is expected to fall from about €4,200 to about €3,000.
• European fossil-fuel final consumptionAbout €1 trillion per yearAs electrification increases electricity's share of primary energy, fossil-fuel spending of around €100-150bn per year could be saved during 2030-2035.

Impact & implications

The investment implication is a structural restatement of valuation across the European power value chain. If electricity price increases remain manageable, regulatory intervention risk falls, and utilities can more easily deliver sustained earnings growth through grid, renewable, flexible generation, and energy security investments. The report expects core electrification compound-growth companies to deliver high single-digit to low double-digit average earnings growth in the 2030s, supporting sector multiple expansion.

Risks

• Electricity price growth in the UK and Germany could be in the mid-to-high single digits, and if households face higher burdens, policy or fiscal intervention could be triggered.
• If the pace of electrification, EV, heat pump, and data center deployment falls short of expectations, expected demand growth and fixed-cost dilution effects may weaken.
• If inflationary investments such as grid expansion, backup generation, storage, nuclear, and offshore wind weigh more heavily than expected, power price pressure could rise.
• Higher cost of capital, project approval delays, supply-chain bottlenecks, or equipment cost volatility could impair returns for utilities and renewable companies.
• Household electrification requires upfront outlays for EVs and heat pumps; if subsidies are insufficient, conversion speed may be slower than model assumptions.

What to watch

• Actual EU-27 and country-level electricity network fees and retail power prices from 2026-2035, especially in the UK and Germany.
• Progress on EU electrification targets, including EV sales, heat pump installations, and the pace of building-heating electrification.
• The speed at which European data center connection requests convert into actual installations, and the impact of Agentic AI on compute and power intensity.
• Regulatory returns on grid investment, fiscal support, and consumer subsidy policy.
• Incremental renewable installation costs, grid-connection speed, order profitability, and electricity deflation effects.
• Whether upward revisions to utility-sector earnings expectations and valuation multiple expansion persist.