Europe’s Energy Transition: Faster Than You Think

Europe’s Energy Transition: Faster Than You Think

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27 Apr 23
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In brief

  • The fallout from Russia’s invasion of Ukraine revealed the true risks of Europe’s dependence on Russian oil and gas.
  • We hoped Europe would use this moment to move to a more sustainable energy mix: one that was not only more secure, but also did not cook the planet.
  • Now it is time to ask the big question: has Europe indeed seized the moment?


In the latest edition of The Sustainability Trends Report, published in September 2022, we argued that Europe faced a once-in-a-generation opportunity. The fallout from Russia’s invasion of Ukraine had revealed the true risks of dependence on its oil and gas. Vladimir Putin repeatedly threatened to cut Europe off, and then followed through with the threat. Energy prices soared. “Europe confronts the stark possibility of running out of gas this winter, while German industry may be forced to shut down to keep German households from freezing,” we warned.

Perhaps, we hoped, Europe would use this moment to move to a more sustainable energy mix: one that was not only more secure, but also did not cook the planet. Now it is time to ask the big question: has Europe indeed seized the moment? In matters of climate change, there are many false dawns and many dashed hopes. Yet our analysis of European energy trends, compiled from a wide range of sources, gives some reason for optimism. The continent seems to be moving in the right direction.

Consider, first, the European Union’s dependence on Russian hydrocarbons. In October 2022, for the first time ever, the club imported more energy from the United States than it did from Russia (see Figure 1). Along many pipelines Russian gas flow to the EU has fallen, sometimes to zero. In its place, Europe is now importing a large amount of liquefied natural gas (LNG). According to the Energy Information Administration, Europe’s LNG import capacity is set to expand by one third by the end of 2024.1 About 40 percent of Europe’s LNG comes from America.2

Figure 1: Monthly EU imports of natural gas and gasoline, by partner country

Source: Generation analysis of Eurostat data

That is good news for the EU’s bargaining position vis-à-vis Russia—even if Europe’s ravenous demand for LNG has made it more difficult for poorer countries to secure their own energy supplies.3 But the trend says less about climate change.4 Shifting to a different source of fossil-fuel supply does not reduce carbon emissions. Yet when it comes to the environment, there is also room for optimism.

Emissions of carbon dioxide seem to be moving in the right direction. The Centre for Research on Energy and Clean Air, a think tank, measures European emissions in “real time.” Their research has some important findings. In November 2022 both total European CO2 emissions and power-sector CO2 emissions were their lowest in at least 30 years. “Total CO2 emissions have been falling since July, pulled by dramatic reductions in fossil-gas use in industry and buildings,” they said.5 This is not the only research pointing in this optimistic direction. Last year the International Energy Agency (IEA) noted that “[t]he European Union’s CO2 emissions are on course to decline this year.”6 What is going on?

Start with what is not happening. For months economists have worried about a recession in Europe. Emissions sometimes decline in downturns, as factories shut down and people move around less—just look at what happened in 2020, during the worst of the COVID pandemic. Yet in Europe something else is happening. In 2022 the EU’s economy actually expanded fairly robustly.7

A more plausible explanation relates to energy efficiency. There is a growing body of evidence that Europe is using energy more smartly than it did a year ago. Consider, for instance, German industry—the sector that we worried about in The Sustainability Trends Report. The headline figures are striking. By the end of 2022, industrial consumption of gas in Germany was close to 20 percent lower than normal.8 Yet industrial output barely changed. Germany’s gross domestic product per unit of energy, in other words, jumped. A recent paper examines this idea in a more detailed way.9 For industrial consumers the authors find a “strong and sustained response, with reductions [in gas demand] steadily increasing from 4 percent in September 2021 to 29 percent in October 2022.”

How has Europe improved energy efficiency so quickly? Some of the change is behavioural. A recent report by the IEA noted that smart meters and controls “can reduce energy use by up to 40 percent at little or no extra cost.”10 Many European governments have introduced public information campaigns to encourage households and businesses to use energy more judiciously. It is easy to scoff when the French government urges people to take “eco gestures” such as shorter showers.11 But in aggregate, these changes do seem to have made a difference.

Europe’s energy mix is also changing. There seems little doubt that the share of the EU’s electricity generation coming from solar and wind power is rising fast,12 though the data are far from perfect.13 Europe’s renewable-energy generation also appears to be rising faster than you would expect it to rise in the absence of the Russian invasion of Ukraine. Using data from Ember, a consultancy, we estimate that the share of European electricity generation coming from non-nuclear renewables rose by over two percentage points in 2022, compared with a global average rise of 1.3 percentage points.14

Figure 2: Share of electricity generation coming from non-nuclear renewables, by region

Source: Generation estimates using Ember data

High levels of investment have allowed Europe to move to a cleaner energy system faster than expected.15 Relative to 2019, in 2022 European majors cut traditional oil-and-gas investment by $15 billion, and boosted renewable-energy investments by the same amount.16 As for European private equity, aggregate deal value for renewable-energy companies has soared roughly tenfold over 2021.17 According to one estimate, over the next decade or so Europe will install about four times as much solar-and-wind power capacity as gas capacity.18 According to one estimate, European electricity generation from fossil fuels will fall by around a fifth this year.19

It is premature to declare victory. The aspirations that we outlined in The Sustainability Trends Report have not yet been achieved. And we note some concerning developments too. There are some indications that regulations on fossil-fuel investment could become lighter if it is done under the auspices of “increasing energy security.”20 Europe’s “dash for gas” has also raised some concerns. At the same time, though, we recognise that progress is being made—and encourage Europe to carry on.

  4. However, we do note that in some cases LNG terminals can in principle be repurposed for hydrogen.
  15. To be clear, there are many factors blocking an even faster transition. One of the most important relates to permitting (i.e., companies being granted permission to build new energy-generation capacity). There are recent examples of legislation in some countries (namely Denmark and Poland) that is slowing down wind installations. The EU is trying to speed up permitting in the Net Zero Industry Act.

Important Information

The ‘Insights 15: Europe’s Energy Transition: Faster Than You Think’ is a report prepared by Generation Investment Management LLP (“Generation”) for discussion purposes only. It reflects the views of Generation as at April 2023. It is not to be reproduced or copied or made available to others without the consent of Generation. The information presented herein is intended to reflect Generation’s present thoughts on sustainable investment and related topics and should not be construed as investment research, advice or the making of any recommendation in respect of any particular company. It is not marketing material or a financial promotion. Certain companies may be referenced as illustrative of a particular field of economic endeavour and will not have been subject to Generation’s investment process. References to any companies must not be construed as a recommendation to buy or sell securities of such companies. To the extent such companies are investments undertaken by Generation, they will form part of a broader portfolio of companies and are discussed solely to be illustrative of Generation’s broader investment thesis. There is no warranty investment in these companies have been profitable or will be profitable. While the data is from sources Generation believes to be reliable, Generation makes no representation as to the completeness or accuracy of the data. We shall not be responsible for amending, correcting, or updating any information or opinions contained herein, and we accept no liability for loss arising from the use of the material.