- Europe power demand has declined by c.10% cumulatively over the past 15 years, driven in part by high power prices from Europe’s energy crisis in 2022-2023
- The decline is set to reverse from 2024 amid lower power prices and tailwinds from decarbonisation and electrification efforts
- AI megatrend could drive stronger power demand than current near-term projection of c.2% CAGR
- As power prices normalise, we believe that the network sub-segment is the bright spot for utilities, given significant growth needs and steadier returns
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Europe power demand back on track; will AI drive strong growth ahead? Over the past 15 years, European electricity demand has registered cumulative decline of c.10% and this was exacerbated by the energy crisis of 2022-2023 which saw demand falling c.6% on the back of higher prices. The decline was due to weaker industrial demand, milder weather conditions, and improved efficiencies, which collectively more than offset the increase in demand arising from growing electrification and data centres. The trend, however, is set to reverse this year as decarbonisation and electrification translate to lower gas and power prices.
While demand growth projections appear moderate at this juncture (c.2% p.a. in 2024-2026 based on US Energy Information Administration estimates), the Artificial Intelligence (AI) megatrend could drive further expansion of data centres, potentially boosting Europe’s power demand growth at >4% CAGR over the next decade. Key beneficiaries of the AI data centre boom in Europe include countries with cheap and abundant green power, such as the Nordics, Spain, and France; as well as those with large financial and tech company clusters such as Ireland, UK, and Germany.
Power prices could stay soft in the near-term; network investment to scale up. While power demand is expected to return to growth territory, power prices could stay soft in the near term as renewable capacity remains oversupplied and gas prices remain muted. This may be a drag on power producers’ earnings. We believe the bright spot lies in the network sub-segment, which is seeing rapid expansion. Electricity networks, the backbone of energy transition, are vital in integrating renewables, enabling reliable electricity flow and the creation of new services for consumers.
Investment needs in electricity networks are projected to double in the next 5 years (Eurelectric forecasts growth from an average of EUR33bn per year to EUR67bn per year from 2025 to 2050), and gas networks are also seeing rising demand for hydrogen/biogas conversions. The investment return for network investment is likely to be steadier given less competition and inflation adjustments. Regulatory support is also in place to facilitate the upgrading of distribution grids.
Prefer integrated providers and network players. Utilities stocks in Europe have underperformed the broad market YTD in 2024, with the STOXX EU 600 Utilities Index down c.4% vs a c.8.5% increase in the STOXX EU 600 Index at the time of writing. This is mainly driven by the higher-for-longer interest rate environment and fall in power prices. However, we believe the tide should be turning, with improving power demand expectations and potential Fed rate cuts later in the year.
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