Europe energy transition requires $10 trillion investment: Goldman Sachs

An estimated €10 trillion ($10.24 trillion) of investment will be needed by 2050 for Europe’s energy transformation, which can then be entirely recouped from the savings of net energy imports, says Goldman Sachs.

Investments will accelerate and peak by 2035, driven largely by the initial infrastructure expansion required for power networks, charging networks, the massive expansion of renewable power, buildings upgrades and heating pipeline infrastructure to accelerate the penetration of electrification and clean hydrogen, Goldman says.

Inter-regional hydrocarbon flows between Europe and the rest of the world can be substituted for a more inter-connected European system of power networks and hydrogen pipelines.

This is likely to result in significant demand for steel, Kallanish notes.

The recouping of costs will occur with a decade of time lag, meaning efficient financing and a reliable regulatory environment are key to bridge this time gap.

Natural gas nevertheless remains key to Europe’s energy supply for the next two decades and Goldman says it is in the interest of Europe to sign new long-term LNG contracts to improve security of supply.

While many industrial sub-segments could potentially be electrified, over 50% of Europe’s industrial natural gas consumption stems from heavy industries, typically requiring high operating temperatures making direct electrification unfeasible, Goldman points out. This includes steelmaking.

“While green hydrogen’s move towards cost parity with grey hydrogen is accelerating, and we expect this to be reached before 2030 across regions of low renewable power costs, we note that the current macro environment of higher commodity prices, in particular for European natural gas, combined with carbon prices is creating a unique green hydrogen cost parity dynamic in Europe,” Goldman observes.

“With most currently produced hydrogen being sourced from natural gas in the region, the notably higher natural gas price to which the region is currently exposed is tilting the scale in favour of green hydrogen from an economic standpoint,” it adds. The bank estimates the carbon price implied by the current higher natural gas price environment in the region is equivalent to over $200/tonne of CO2 equivalent.

This is even without considering European ETS carbon prices, which are currently well above $50/tCO2e despite their correction from the peak. This is more than sufficient to bridge the cost of grey hydrogen with green across regions of Europe where green hydrogen is produced with dedicated RES and a renewable power LCOE lower than $70/MWh, Goldman concludes.

Adam Smith, Poland