Policy support should pull forward demand, creating upside risks to earnings estimates for companies that are linked to the evolving energy mix.

The trajectory for Europe’s energy transition has changed profoundly. Net zero goals used to be a target for 2050, yet from the perspective of policymakers today, the prioritisation of energy security in light of Russia’s invasion of Ukraine requires a major overhaul of the energy mix that must now happen in years, not decades.

Energy crisis averted, for now

Progress made over the past year to diversify fossil fuel sources has been quicker than many would have envisaged as being possible. Last spring, the European Union (EU) was facing a significant challenge, having just lost 40% of its natural gas supplies that had previously come from Russia, at the same time as inventories were sitting well below average levels following a challenging winter.

Roll forward to today, inventories are now sitting at their strongest position in 10 years and spot gas prices have fallen by more than 80% from previous peaks. With much less work now required to refill the gas tanks ahead of next winter, futures prices for winter 2023 have also come down sharply as markets price out the risk of major disruption later this year.

A closer look at the drivers behind how the EU has managed such a turnaround highlight why the solutions used so far cannot be relied on indefinitely. According to data from the International Energy Agency, industry demand for gas fell by around 25 billion cubic metres (bcm) in 2022 – a 25% reduction relative to the previous year. Yet only 3 bcm is estimated to have come from increased efficiency, with the bulk of the remaining savings stemming from a combination of curtailed production and gas-to-oil switching. Similarly in the buildings sector, more than half of the 28 bcm in demand reduction was the result of unseasonally warm weather, with the remainder coming from a combination of increased efficiency, fuel switching and changes in behaviour.

In search of a medium-term solution

Clearly, policymakers cannot rely on a never-ending string of warmer winters. Nor will they want to see output cuts from industry on a regular basis. Yet if demand for gas reaccelerates, it will be challenging for supply to keep up. A major increase in liquefied natural gas (LNG) imports from the US and the Middle East were a key support to fill the gap left by Russian gas in 2022, but with Chinese demand likely to return in 2023 as its economy reopens, international LNG markets look set to tighten.

Policymakers are therefore now focusing on finding a medium-term solution to Europe’s energy challenge. The answer is largely reliant on three factors:

  1. A rapid acceleration in the usage of clean power generation
  2. Increased electrification of the economy
  3. Improved efficiency to limit growth in power demand

The scale of the changes that are required is significant. In 2022, wind and solar overtook gas in terms of their share of EU electricity generation for the first time, which helped to limit the uptick in coal usage required to plug the gap in energy supply. Yet further out, several estimates from different sources conclude that wind and solar’s share of power generation will need to exceed 75% by 2035 to stay on track with net zero goals, in comparison to a 22% share today.

The good news is that there is increasing evidence of a shift in momentum. At a micro level, European households added 25 gigawatts of solar power capacity in 20221, almost 50% more than in 2021 and enough to power more than 7 million European homes. Meanwhile, the RePowerEU plan helped to deliver sales growth of nearly 40% in heat pumps last year2 as part of the target to install 20 million heat pumps across the bloc by 2026. Electric vehicle (EV) sales are another area seeing strong growth, with EV penetration expected to surpass 20%after 2023 and the European Council reaching an agreement that all new cars and vans registered in Europe will be zero-emission by 2035.

From a top-down perspective, government policy is also increasingly supportive of Europe’s climate ambitions. Forecasts for renewable capacity expansion had already jumped following Russia’s invasion of Ukraine, and EU leaders have now agreed to new targets that will see 42.5% of energy come from renewables by 2030, which is more than 10 percentage points higher than the current goal.

The Green Deal Industrial Plan (GDIP) is the next step to hit those targets, with Europe looking to allocate over 1% of GDP to climate subsidies. As well as increased funding, the streamlining of approvals for new solar and wind projects is one particularly notable element of the GDIP. Faster approvals will be essential if the planned expansion of clean energy capacity is to be achieved, and the goal of capping approval processes to a maximum of 18 months4 depending on the scope of the project should be a major improvement on the situation today.

Investment implications

From an investment perspective, the increasing momentum at both a micro and a macro level should accelerate demand, creating upside risks to earnings estimates in many European companies that are linked to the evolving energy mix. Renewable players in the utilities sector are perhaps the most obvious beneficiaries, but increased electrification will have knock-on impacts for many other companies that form part of the infrastructure required to cope with a much-expanded electricity ecosystem. An element of discernment will still be required – identifying companies that are inadequately prepared for the energy overhaul ahead will be just as important as identifying the beneficiaries.

Energy efficiency “enablers” – many of which are found in the industrials sector – are another area where we anticipate material improvements in the earnings outlook. Historically, companies exposed to this theme have often seen earnings move in line with GDP, but mid single-digit earnings growth now appears achievable given strengthening demand. Asset owners and operators are not only being encouraged by strong financial incentives to boost efficiency given higher energy bills, but also are under increasing pressure to cut emissions, both from regulators and from internal objectives, which are increasingly focused on incentivising decarbonisation.


The first phase of Europe’s response to the energy crisis has ultimately been successful. An immediate gas supply crunch has been avoided and the region’s position is looking more secure running into the winter of 2023/2024. The second phase – to achieve a durable shift in Europe’s energy mix – is already underway. Many challenges still lie ahead, but European investors would be wise to take note: the energy transition is not a theme for the future – it is happening now.

1 Ember Climate European Electricity Review 2023.
2 Monschauer, Y., Delmastro, C., Martinez-Gordon, R., “Global Heat Pump Sales Continue Double-Digit Growth”, International Energy Agency commentary (31 March 2023).
3 Citi State of Global Electric Vehicle Adoption.
4 Shorter limits of 9 or 12 months apply for projects with limited capacity.
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