United StatesThe decarbonisation of European electricity supply promises to lower energy prices, improve energy security and reduce greenhouse (GHG) emissions. However, progress is being held back by multiple challenges, particularly sub-optimal market design, local opposition and supply chain constraints.
Overcoming these hurdles will require decisive, far-sighted policy support that prioritises the collective benefits of an upgraded and expanded electricity grid. With progress in these areas, private capital should flow to deliver investment on the scale required.
Advantages of a decarbonised grid
Europe stands at a critical juncture in its energy transition. Having been relatively flat for more than a decade, the region’s electricity demand is forecast to rise with the adoption of electric vehicles (EVs), the electrification of energy-intensive industrial processes and the proliferation of data centres. Governments including Germany’s expect annual demand growth of up to 7% this decade.1
A clean, efficient and reliable electricity grid promises three overarching benefits.
First, cost: renewables (solar and onshore wind) can add the cheapest additional supply to grids.2 High capacity factors in sunny Iberia and in windy north-western Europe make them ideal for large-scale, low-cost projects.3
Second, energy security: transitioning towards local renewable generation should cut dependence on fossil fuel imports that can be vulnerable to supply disruption. The EU’s renewables policy is in part based on replacing Russian gas, while current tensions over US-imposed tariffs may further enhance the attractiveness of domestically-produced energy.
Third, climate action: switching to renewables is essential in delivering deep decarbonisation across the economy given the energy sector’s direct contribution to Europe’s GHG emissions (33% in 2022) and the potential to electrify emission-intensive sectors like transport (29%) and buildings (14%).4
Six obstacles to grid decarbonisation
Compelling economics and policy support have combined to drive a gradual decarbonisation of the European electricity system over the past decade or so. In 2024, solar and wind accounted for 28% of EU generation – more than coal and gas combined.5
The pace of change is being held back, though, by six overarching obstacles.
First, market design. Permitting procedures, bureaucratic hurdles and inconsistent frameworks delay projects and raise costs for developers. Grid connection queues for new renewables projects typically reflect planning bottlenecks: an estimated 800 GW of potential generation capacity is currently awaiting connection in the UK.6 In addition, as market rules in many European countries stipulate that the power price is set by the highest marginal cost producer on the system, it is often the price of natural gas that determines how much consumers pay for electricity.
Second, and related, local opposition to new infrastructure. New wind farms, pylons and substations often face legal challenges, driven by community concerns about visual impacts and property values.
Third, limited storage capacity. The intermittent nature of solar and wind generation means energy storage – both short-term and long-term – is needed to ensure grid stability and reliability. The mismatch of demand and supply often leads to price volatility, curtailment of production and potential blackouts.
Fourth, imperfect market connectivity. While Europe boasts a relatively well-connected grid, poor physical interconnection has created ‘energy islands’ like Iberia where excess renewable energy production can create negative prices. Political opposition to electricity exports in some countries, such as Norway, and internal grid constraints, such as limited north-south capacity in the UK, limit economically efficient trading.
Fifth, a shortage of key components. Global grid expansions have strained supply chains for critical components such as high-voltage switchgears and cables. Lead times and costs have increased significantly: transformers now take several years to deliver and are around 75% more expensive than in 2019.7,8
Sixth, the cost of capital, driven by elevated interest rates. Grid upgrades are capital-intensive, requiring substantial upfront investment. Higher borrowing costs make these projects less financially attractive, or even unviable.
Overcoming these challenges
European policymakers can help address each of these obstacles.
1. Governments should streamline regulatory processes and create clear, consistent guidelines for renewable and grid projects. Grid permitting authorities must move beyond the “first come, first served” principle and implement a more strategic approach to prioritising requests. This could involve evaluating projects based on viability, financial commitment and public interest, as the UK is considering.9
2. Incentive structures, including new energy pricing mechanisms, should be employed to help overcome local opposition to new infrastructure. The UK government has announced that households living within 500m of new or upgraded transmission lines will receive electricity discounts.10
3. Short-duration battery storage capacity is rising rapidly but can only balance the grid on an intra-day basis.11 Long-term storage is also needed to tally the seasonal variability of demand with intermittent supply. With limited pumped hydroelectric storage capacity, governments should encourage research and development into emerging technologies, such as thermal and electrochemical storage as well as compressed air.
4. New high-voltage connections between and within economies can lower electricity bills and enhance grid resilience, and it is encouraging that cross-border interconnectors have received support under the RePowerEU initiative.12 Their benefits should be better communicated to garner public support.
5. Greater policy certainty, including commitments to long-term targets and clear regulatory frameworks, would encourage companies in the grid supply chain to invest in regional manufacturing capacity. Harmonisation of technical specifications would also help: Europe has many hundred grid operating entities, and high levels of customisation are common.13
6. To mitigate the impact of elevated interest rates, governments could offer financial incentives such as tax credits, grants and loan guarantees to encourage capital flows into clean energy and grid infrastructure. Enhanced budgets for renewable capacity auction rounds should support project viability.
Identifying investment opportunities
The structural trend towards electrification, driven by consumer preferences, government policies and technological advances, underpins long-term opportunities for companies whose products and services enable an expanded and cleaner European grid. Poor market sentiment and irrational calibration of risk often lead to the mispricing of stocks of firms at the forefront of grid decarbonisation.
There are three broad areas of opportunity.
First, grid developers and operators. As the revenues of utilities that own and operate grids in markets like Spain and the UK typically rise in line with electricity usage, this sector should in future deliver attractive growth. Many of these businesses are also expanding and upgrading infrastructure to increase capacity and connect more geographically dispersed renewables.14
Second, manufacturers of critical grid components, like cables and transformers. Two-fifths of Europe’s grids are more than 40 years old and due for replacement.15 Increasingly, high voltage direct current (HVDC) cables is the best solution for connecting renewables generation to centres of demand. The global offshore wind industry – of which the North Sea is a major basin – could see 56,000km of HVDC cable installed by 2035.16
Finally, innovative smart grid solutions. As grids become more complex, with decentralised generation and ‘prosumers’ (consumers who also produce energy), advanced systems are needed to balance demand and supply. Modern grids make extensive use of hardware (like sensors) and software to accurately track flows of power and changes in supply and demand, and to anticipate system vulnerabilities and equipment failures. BloombergNEF projects that global annual digital grid investment will almost double to US$68bn by 2040 under a business-as-usual scenario – and roughly treble under its net-zero scenario.17
So, in conclusion, the drivers of grid decarbonisation are not evaporating. The economic value of cost-competitive renewable generation in Europe has been underlined by conflict in Ukraine. Meanwhile the financial costs of climate-related weather events, including more extreme flooding and droughts, continue an upward trend.
Against this backdrop, the pace of grid decarbonisation in Europe should accelerate. By taking the steps outlined above, far-sighted policymakers can mobilise private capital and catalyse investment, helping to improve the region’s economic competitiveness and resilience.
1 McKinsey, 2024: Electricity demand in Europe: Growing or going?
2 International Renewable Energy Agency, 2024: Renewable Power Generation Costs in 2023
3 Bento, P.M.R., October 2024: Large-scale penetration of renewables in the Iberian power system: Evolution, challenges and flexibility options. Renewable and Sustainable Energy Reviews. Wind Europe, 2025
4 IEA, 2024: Europe Emissions
5 Ember, January 2025: European Electricity Review 2025
6 Ofgem, March 2024: Preparing for a faster, more efficient electricity connections process
7 Wood Mackenzie, April 2024: Supply shortages and an inflexible market give rise to high power transformer lead times
8 IEA, February 2025: Rising component prices and supply chain pressures are hindering the development of transmission grid infrastructure
9 Ofgem, February 2025: Clean power by 2030 one step closer as proposed new, fast-track grid connections system is unveiled
10 UK Government, March 2025: Households near new pylons to save hundreds on energy bills
11 Economist, 20 November 2024: Grid-scale storage is the fastest-growing energy technology
12 European Commission, 2024: REPowerEU – 2 years on
13 World Economic Forum, October 2024: Grid Development in Europe: Five Actions to Strengthen the Business and Economic Case
14 For example, National Grid and SSE plan to invest at least £30bn and £22bn respectively in UK energy infrastructure by 2030
15 European Council on Foreign Relations, 2023: Gridlock: Why Europe’s electricity infrastructure is holding back the green transition
16 Xodus, 2023
17 BloombergNEF, October 2024: New Energy Outlook 2024
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