Europe needs €10tn in green investment by 2050 to transform energy system

Move expected to reduce the continent's reliance on Russian supplies, Goldman Sachs says

A compressor station connected to the Megal gas pipeline in Germany. The IMF says Germany could lose 4.8 per cent of its GDP if Russia shuts down gas supplies to the country. Bloomberg

Europe needs €10 trillion ($10.17tn) in cumulative green infrastructure investment by 2050 to transform its energy system and meet its net zero carbon ambitions, according to Goldman Sachs.

The push to invest in energy infrastructure across the UK and the 27-member European bloc represents an average annual opportunity of €350 billion in the next 28 years, the US investment bank said in a report.

The aggregate €10tn figure, which equals about 2 per cent of Europe’s gross domestic product by 2030, “focuses solely on incremental infrastructure investments and does not include maintenance and other end-use capex [capital expenditure]”, Goldman Sachs analysts said.

Green investments can help Europe to strengthen its energy independence in the face of the Russia-Ukraine crisis without compromising its climate change goals.

It will make energy cheaper across the region, create domestic employment in key clean innovation areas and improve the overall balance of payments and security of supply.

The investment bank's model estimates a material reduction in the energy dependency rate of the region, from about 58 per cent currently to 50 per cent by 2030, about 30 per cent by 2040 and about 15 per cent by 2050.

“We estimate that close to €10tn can be recouped from lower net energy imports by 2050, sufficient to fully cover the infrastructure investments required, although with a decade of time lag,” Goldman report said.

“Efficient financing and a reliable regulatory environment are key to bridge this time gap.”

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Europe, which is heavily reliant on Russian oil and gas, is in a stand-off with Moscow over its military assault in Ukraine.

The EU relied on Russia to meet about 40 per cent its gas requirements and more than a quarter of its imported crude oil needs last year.

The bloc has accused Russia of using energy as a weapon and agreed on sanctions that will cut about 90 per cent of Russian oil imports to the EU by the end of this year.

The region is also facing the prospect of Russia completely shutting off gas supplies to the bloc in response to several rounds of retaliatory sanctions on Moscow.

European countries will face a severe power crunch if Russia turns off gas supplies, and their economies will contract to varying degrees, according to the International Monetary Fund.

The most-affected nations in central and eastern Europe — Hungary, Slovakia and the Czech Republic — could register a GDP decline of up to 6 per cent amid gas shortages of up to 40 per cent of normal consumption, the IMF said last week.

Halting Russian gas supplies to the EU could potentially reduce the bloc's GDP by as much as 1.5 per cent if the next winter is severe and the region fails to take preventive measures to save energy, Bloomberg reported, quoting a draft EU document.

The EU's GDP would fall by 0.6 per cent to 1 per cent if the winter is ordinary, the news wire reported.

Goldman Sachs said while the energy independence of Europe is set to improve substantially with continued green investments, the region will still probably need to import about 15 per cent of its gross energy needs, accounting for fossil fuels used as feedstocks and about half of the green hydrogen volumes it requires.

Natural gas will remain a core part of the European energy system for another 20 years. However, despite its importance across industries, the region has been reluctant to sign long-term LNG contracts over the past 15 years.

This has resulted in an over-concentration of natural gas imports reaching Europe through pipeline.

Europe currently imports about 80 per cent of its natural gas needs, with supply largely dominated by a handful of nations such as Russia, Norway, Algeria, Nigeria, the US and Qatar.

“This is no longer sustainable, in light of the current geopolitical landscape,” Goldman Sachs analysts said.

““We believe it is in the interest of Europe to sign new long-term LNG contracts to improve security of supply.”

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The bank said that renewable power will remain at the heart of Europe’s energy system reinvention, with power demand more than doubling by 2050 and green hydrogen accounting for about 15 per cent of Europe’s energy mix in the long term.

The European energy evolution could be very accretive to the overall balance of payments in the region.

After factoring in the impact of net imported clean technology equipment such as solar panels and batteries, the Wall Street bank estimates that about 75 per cent of the infrastructure investment can be recouped, resulting in €7.5tn in net imports savings.

Goldman Sachs projects that the direct energy cost to the average consumer in Europe could be reduced by 40 per cent in the long term, compared with 2021 levels, and about 60 per cent from the estimated peak of 2022.

“Improved energy efficiency, but also lower cost long-term LNG contracts, cheaper renewable power and better seasonality management through batteries and hydrogen can substantially reduce the European consumer’s energy spending in the long term,” the bank said.