Accelerating European electrification could open a utilities earnings supercycle

Overview

This report discusses structural changes in Europe’s energy security and electrification strategy. Goldman Sachs believes that Europe has encountered energy tightness again in less than five years, which may shift policy from simple energy substitution toward faster electrification. After declining from 2008 to 2024, electricity demand reached an inflection point in 2025, with future growth driven by electric vehicles, heat pumps, building electrification, data centers, and AI Agent electricity demand. Utilities, especially renewable developers and integrated power companies with financing capacity, will be at the core of this investment cycle.

Core views

The core views are: first, European power demand is entering a stronger and more durable growth phase; second, renewable energy and nuclear power help improve energy security and reduce system power price volatility; third, under the super-electrification scenario, power generation investment could be about three times that of the past decade; fourth, strong balance sheets will determine whether companies can support expansion through internal cash flow; fifth, power demand and electrification capex could push utility valuations above mid-cycle levels, creating a 'generational earnings supercycle.'

Analysis framework

The report combines European energy policy, national energy and climate plans, IEA electrification forecasts, historical power demand trends, AI Agent energy consumption assumptions, LCOE technology cost comparisons, regional power price and generation mix comparisons, and company-level balance sheets, development pipelines, and valuation models to conduct scenario analysis and valuation reassessment for European utilities and renewable energy developers.

Methodology notes

• Scenario analysisSuper-electrification scenario

  Under the assumption that Europe broadly achieves its 2030 energy targets and AI Agent adoption is faster than in the base case, estimate the upside for power demand and capital expenditure.

  Under this scenario, power demand growth could reach about 5% per year around 2030, with 2026-35 power generation investment of about €2 trillion and total electrification investment of about €3.5 trillion.

• Cost comparisonLCOE

  Compare the levelized cost of electricity across different generation technologies.

  The report shows that solar and onshore wind have the lowest average costs in 2027-30E, at about €47/MWh and €77/MWh respectively, supporting the central role of renewable energy in meeting incremental power demand.

• Valuation methodDCF-SOTP and target price adjustment

  Set target prices by combining the value of existing assets with DCF-SOTP valuation through 2036.

  The report sets target prices as a weighted result of existing asset values and SOTP valuation, and raises the target prices for RWE, Orsted, and EDPR.

Asset mapping & comparison

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

• RWE

  Buy-rated and one of the report’s preferred names, benefiting from European power generation investment and renewable expansion.

  Strengths

  Target price raised to €68/sh; high renewable exposure; the report views its balance sheet and expansion capability as strengths.

  Weaknesses

  Valuation upside depends on European power demand and the investment cycle being realized.

  Comparison

  Along with Orsted and EDPR, it is one of the key RES developers discussed in the report, with about 12% upside in the table.

  Risks

  Power prices, policy, project execution, financing costs, and capex exceeding expectations.

• Orsted

  Upgraded from Neutral to Buy and one of the core beneficiaries of the electrification theme.

  Strengths

  Target price raised to DKK185/sh; high share of renewable EBITDA; the report sees its long-term expansion and valuation re-rating as more attractive.

  Weaknesses

  Still affected by offshore wind project execution, costs, and interest-rate sensitivity.

  Comparison

  Current price in the table is DKK163.5, implying about 13% upside.

  Risks

  Project delays, supply chain costs, changes in policy subsidies, and deterioration in the financing environment.

• EDPR

  Neutral-rated but with a higher target price, representing one of the renewable developer exposures.

  Strengths

  Target price raised to €15/sh; high renewable exposure.

  Weaknesses

  The report does not list it among Buy preferences, so valuation upside is relatively limited.

  Comparison

  Current price in the table is €13.68, implying about 10% upside.

  Risks

  Returns on renewable projects, cost of capital, pipeline execution, and changes in power price assumptions.

• Enel、Engie、Naturgy

  Utilities with strong balance sheets preferred by the report.

  Strengths

  Viewed as companies that can support electrification investment through internal funding and benefit from the sector earnings supercycle.

  Weaknesses

  Near-term valuations may already be at premium levels.

  Comparison

  Together with RWE and Orsted, they form part of the report’s preferred Buy-rated or favored basket.

  Risks

  Regulatory returns, debt costs, project execution, and energy price volatility.

• European renewable energy and nuclear generation mix

  Core supply-side assets for energy security and power price stability.

  Strengths

  The report notes that Spain, France, and the Nordics have electricity prices about 40%-50% lower than more gas-dependent regions due to higher shares of renewable energy or nuclear power.

  Weaknesses

  Requires substantial supporting investment in grids and power generation, while nuclear construction has a long lead time.

  Comparison

  Compared with regions such as Italy, the UK, and Germany, where gas marginal pricing has a higher share, price volatility is lower.

  Risks

  Grid connection bottlenecks, policy approvals, construction costs, and weaker-than-expected power demand.

Key data

• Base-case European power demand growth1.5%-2% per year in 2026-27E; 2%-4% per year by the end of this decadeBased on the report’s base-case view on electrification and data center expansion.
• Super-electrification power demand growthabout +5% per yearAssumes Europe broadly achieves its 2030 targets and AI Agent adoption exceeds the base case.
• Power generation investment demandabout €2 trillion in 2026-35EAbout three times the €0.7 trillion of the past decade.
• Total electrification investment demandabout €3.5 trillion in 2026-35EIncludes power generation and grid investment; the past decade was about €1.4 trillion.
• Data center upside scenarioEuropean data center capacity of about 76GW by 2035E, potentially accounting for about 25% of power demandDriven by higher AI Agent adoption.
• Energy technology LCOESolar about €47/MWh, onshore wind about €77/MWh, offshore wind about €118/MWh, CCGT about €177/MWhUsed in the report to support the cost advantage of renewable energy.
• Target prices and upsideRWE €68/sh, 12%; Orsted DKK185/sh, 13%; EDPR €15/sh, 10%From the report’s valuation table.

Impact & implications

The investment implication is that European utilities are not just a defensive sector, but could become structural growth assets under the triple themes of energy security, electrification, and AI electricity demand. Companies with strong balance sheets, renewable pipelines, and long-term expansion capability are more likely to outperform, while those reliant on gas-based pricing, with static asset portfolios or unclear capital allocation, are at a more obvious relative disadvantage. If electricity demand continues to rise as the report expects, sector valuations could remain above mid-cycle levels for an extended period.

Risks

• AI Agent adoption, data center construction, and electrification progress fall below the report’s scenario.
• Europe’s 2030 energy and climate plans are implemented less effectively than expected.
• Renewable energy projects face approval, grid connection, supply chain, cost of capital, and execution risks.
• Utilities already trade at a near-term valuation premium, and if the earnings supercycle does not materialize, there is downside risk.
• Changes in gas prices, power prices, interest rates, and regulatory policy could alter investment returns.
• There is uncertainty around the pace of coal phase-out, nuclear restarts, and SMR commercialization progress.

What to watch

• Whether European power demand maintains 1.5%-2% annual growth in 2026-27.
• Whether AI Agent adoption, data center capacity, and electricity intensity approach the upside scenario before 2030.
• EU27 electric vehicle sales, heat pump installations, and the pace of building electrification.
• Progress in European grid investment, renewable grid connection, and nuclear/SMR policy.
• Capex plans, balance sheet capacity, and pipeline execution at companies such as RWE, Orsted, and EDPR.
• Whether forward power price divergence between Italy, the UK, Germany and Spain, France, the Nordics continues.