Europe’s grid revolution: modernisation in the era of war and AI

Europe’s grid revolution: modernisation in the era of war and AI

Freddie Fuller, Senior Institutional Portfolio Manager, for the RBC European and International Equity teams, and Lukas Harrison, European Equity Portfolio Manager, discuss the discuss the critical challenges facing Europe's aging power grid infrastructure and the investment opportunities emerging from the €1.2 trillion European Grids Package.

Freddie Fuller: My name is Freddie Fuller, and I'm the Senior Institutional Portfolio Manager for the RBC European and International Equity teams. I'm delighted today to be joined by Lukas Harrison, who is one of the portfolio managers on the desk. Welcome, Lukas.

Lukas Harrison: Thanks, Freddie. Good morning.

Freddie: Lukas, I suppose in some ways, counterintuitively, a discussion about Europe's energy needs and the grid might feel rather low down the priority list at the moment with everything going on in the Middle East today. In fact, in your eyes, actually, this really reinforces the importance of Europe reorientating its energy independence, not just because of current events, we should point out, but also because of those of the last decade or so.

Lukas: Yes, for sure. The war in Iran and the oil shock that's ensued has again highlighted the importance of Europe becoming more energy independent. This only comes, like you say, a few years after the EU-Ukraine war sent initial shock waves. The EU still imported 57% of its energy in 2025, which is coming down, but it still puts them at risk of supply chops. With Europe not wanting to continue to depend on coal plants or other fossil fuels for power, it really increases the urgency to increase the use of renewables.

On the right path, with nearly half of energy production, around 47% coming from renewable sources, and then another quarter from nuclear, including that as a clean energy source. More than a quarter of the energy actually consumed in the EU is now coming from renewable sources. They want this to be 42.5% by the end of the decade.

Freddie: Yes, on that point, we've spoken about it on this podcast before, but the issue has never really been about the building out of renewable capacity. Instead, it remains that big issue of actually being able to connect them to a grid that can handle it effectively.

Lukas: Exactly. As advanced as these intentions are, the issue today is that the increase of renewables into the system aren't being fully realised because the grids are unable to handle the extra load. Close to 1,700 gigawatts of renewable energy, renewable projects are just stuck in queues waiting to be connected to the grid. This actually, this numbers more than three times what the EU needs for its 2030 renewable targets.

I think seven countries alone wasted €7.2 billion worth of renewable energy in 2024 due to grid capacity constraints. While the increase of renewable production is well intentioned, it isn't beneficial if it can't be utilised. Expanding grid capacity and modernising grids is a crucial factor enabling greater energy independence in Europe, particularly through the use of renewable energy sources.

Freddie: Great. I was thinking how we go about this. It's such a big topic, but maybe it'd be helpful if you give us a sort of potted history, I suppose, of how we got to this stage, particularly given European infrastructure is so much older than almost anywhere else in the world, and then why the need for modernisation has become quite so pressing.

Lukas: Yes, like you say. The European grid infrastructure we have today was predominantly built in the post-World War II era, and it was to focus on national reliability and industrial growth. This is when countries developed large centralised power plants, working under the assumption of predictable and controllable power generation. When we got to the 1990s, we started to see utilities being unbundled with generation and transmission being separated. At the same time, an increase in cross-border electricity trading and interconnectors between the countries. In a more recent history, we've seen the shift to renewable energy, which is decentralised, has variable supply, and has electricity flow in multiple directions.

While we've seen the landscape change, the European grid infrastructure didn't quite keep up at the same pace. It's estimated that 40% of the EU distribution grids are already over 40 years old. I spoke to some of the cabling companies, and they said they laid down cables that were expected to have a useful life of 30 to 40 years, and they've been used for 50 now. They're built at a time, this infrastructure's built at a time when power generation was focused on fossil fuels and nuclear plants delivering one-directional electricity flow to consumers, when in reality, in today's world, we have a decentralised generation, rooftop solar, cross-border trading, and bidirectional flows. The legacy architecture just struggles, as it was never in areas that were designed to support.

Freddie: Is that the point where there's a lot of discussion about at the moment, this is where smart grids and the use of AI comes into play?

Lukas: Exactly. We're still lacking enough smart grids. We need real-time data, automated control systems, and demand response capabilities, when in reality, we still predominantly rely on limited sensors, manual process, and slow response times. With renewables becoming a greater portion of the energy production, the grid needs to handle the intermittency that comes with it. Then also, although Europe is interconnected, it's still not integrated enough in their bottlenecks that limit energy sharing between the countries. European grids are not at the required standard to deal with the challenges of today, and in the future, as we continue to see further electrification. This is really why grid modernisation is imperative.

Freddie: I suppose a very obvious example of the struggles of this legacy architecture, as you put it, I suppose, is the failure of the grid across Spain and Portugal last year.

Lukas: Yes, exactly. We saw last year a massive blackout that left over 55 million people without power for up to 16 hours. We live in such an electricity-dependent ecosystem. The outage caused widespread disruption, public transportation system, traffic lights, banks, mobile networks, internet service, all unavailable. It was the biggest blackout in Europe in over 20 years, and even that much more significant, given that our economy's dependency on power and connectivity has increased that much more in the last 20 years.

Freddie: Yes, absolutely. I should note, I have a vested interest in this topic, given I was at a Spanish airport at exactly the moment the blackout hit, and for whatever reason was lucky enough to be on the final flight out whilst our traveling companions, I think, were stuck in a lift with their two children for a further four hours. Not sure what we did to deserve that. Regardless, we've had a bit of time since then, and I know that there's been a lot of analysis as to what happened. What was the cause of the blackout? I think particularly answering that in terms of the context of the really political criticisms that have come out of this, and what feels in many cases like people really wanting to have a go at renewables in this context.

Lukas: Yes. We had the regulators just release their final report on their findings from the incident, and they concluded there wasn't a single factor that caused the massive outage, but rather it was a combination of factors that led to a perfect storm of cascading failures. Voltage control was a key element as the reactive power assets couldn't handle a managed rapid voltage rise.

The grid was operating under outdated standards that allowed for high voltage ranges, leaving little room for error when a disturbance occurred. They wouldn't put the blame on renewables. It was more so about the fact of the grid just wasn't ready to handle this kind of disruption. I think the key is that it's really a warning sign that this could happen other places if smart grid technology isn't implemented.

Freddie: Interesting. Maybe we could go back and touch on your point around power demand. We've talked a lot about the supply issues, but talking about the demand side of the equation, demand is expected to increase in Europe after actually periods where there's been a lot of stagnation. There are reasons why there's been efficiency, a lot of energy-efficient appliances, lights, building retrofitting, et cetera, have helped to offset a slow energy demand increase that comes from electrification. With a slightly stagnant economic growth picture in Europe as well, that's helped. The big elephant in the room right now is AI and the boom and the data centers required to enable all of this. The expectations for energy demand needs going forward is pretty big, isn't it

Lukas: Yes, it's quite massive. I guess we could probably look at Ireland as an example because this is a country where data centers have already accelerated. In 2015, data centers accounted for 5% of Ireland's national electricity consumption. Since then, power consumption has increased by 400%. Data centers now account for more than 22% of the country's electricity usage. This is one of the reasons why Ireland has some of the most expensive energy prices in Europe. These are also predominantly not AI data centers, which will even be more power-hungry.

When we look at a European standpoint, electricity demand for data centers is expected to increase close to 150% over the next decade. Overall, this should lead to power demand starting to rise 2% to 3% per annum. Given the energy intensity of data centers, using renewable sources to power would be ideal to help lower emissions. Europe's goals of incorporating more renewables could make it a great area for hyperscalers to set up data centers. There are, however, issues when it comes to the, again, the intermittency of power as data centers need essentially 100% uptime.

We are starting to see solutions in the space. A lot more focus on behind the meter solutions. The data centers are powered by energy suppliers that aren't relying on energy from the grid, and that's taking also less pressure off the grid as well. Battery energy storage systems can be used to store the renewable energy. It's just solar during off-peak times, so it can again be used when needed.

When it's dark, essentially, because obviously, solar energy can only be generated when it's getting sunlight. That being said, even with this technology, we still do need connection to the grid. The issue is, again, the backlog. New facilities tend to wait 7 to 10 years for good connectivity. In some cases, it can take up to 13 years. For this reason, we are starting to see a shift in the data center demand growth. It's moving from the traditional leaders, such as Frankfurt, London, and your Dublin, as we've mentioned, because of the higher grid congestion. It's moving into the Nordics in more Southern Europe, where there are shorter wait times.

Freddie: Interesting. We've touched on a few of them here, but from your perspective, where are the primary bottlenecks here in terms of the broader modernisation picture? I suppose the obvious one seemed to be, is it policy? Is it the fault of policymakers? Are we talking economics? I suppose increasingly that we're talking about, is it societal pushback to the break-neck speed that we seem to be moving out on all these fronts?

Lukas: To be honest, a bit of everything that you just mentioned there, permitting and regulatory delays remain the key bottleneck. New transmission lines can take 10 to 15 years from the planning stage until they're actually operational. They have to pass through multiple layers of approval from the local to regional, national, and sometimes even EU levels. Then part of the issue, too, there is that there isn't a unified grid authority within Europe. You have countries controlling their own grid planning and regulation, and then they're also trying to coordinate cross-border projects. It just involves multiple governments and operators.

Then, as you mentioned, on the societal front, there's a lot of pushback, as we see with many infrastructure projects. People want the benefits of an upgraded grid, but they don't necessarily want it if it inconvenienced them. The whole not in my backyard philosophy. Maybe it's additional construction in the area. Maybe they feel their local community has to bear more of the cost. I look at my own area and it seems the road is being ripped up every few weeks for upgrading energy supply, water supply, internet, whatever it is. It's obviously annoying at the time, but it's necessary for a better future.

Then, of course, there's the economic strain as well. Because the grid is still out of date and hasn't been maintained, it requires a lot more work to upgrade and replace rather than just building something new. It requires a significant amount of investment. You have issues with the supply chain in terms of the shortage of transformers, and cables, high voltage equipment because such a strong demand. Then we also have to look at the demographics of the aging workforce and the lack of skilled workers to really work on these projects. Renewable energy projects and data center buildouts have much faster rollout times. This creates this disconnect in timing with the grid modernisation just leading to long queues for grid connections.

Freddie: As you've just laid out, there are a lot of bottlenecks here that do need to be sorted. Coming back to our original point on the impact of the events in Iran right now, it's just re-highlighting the lack of competitiveness that Europe has on a global scale. You said it originally, Russia's invasion of Ukraine, but particularly put the spotlight on oil and liquid natural gas four years ago. Even now, energy costs remain far too high for both households and industries. It's a big question for policymakers.

How do you address these issues? I know that the EU announced the European grids package in December last year, and that's going to see around €1.2 trillion invested through to 2040 across transmission and distribution networks. I suppose, positively, a key component will be the emphasis on energy highways, and that's really about strengthening transmission between countries on the continent. This should prove, one would hope, an important step in pushing Europe towards further self-sufficiency.

As we live in more geopolitically volatile times, and there's another another Iran crisis or there's another Russia-Ukraine event, there will be at least some padding around Europe that just doesn't exist today, we would hope. Lukas, maybe we could end by narrowing in on the investment perspective very briefly. Where do you see the opportunities, particularly for listed equity investors in this space today?

Lukas: It's really across sectors where we see opportunities with this, again, with this EU, this European grids package hopefully coming through. We see a lot in the industrial space, thinking of names like Prysmian, who's the global leader in advanced cable systems, distribute energy across the region that enable modern transmission networks. Then you have a lot, obviously, in the utility space. You have the big utility players like an Iberdrola who are actively building and operating the next generation networks and integrating the smart grids to enable efficient, sustainable, and safe power delivery.

Then if you're a small cap investor, too, you have names like Solaria who are solving that bottleneck issue by providing already built behind the meter infrastructure, connecting data centers to the grid much faster than traditional methods, using the combination of the solar plants and battery energy storage systems to help supply these data centers. There's plenty of opportunities within the European equity space that we see as benefactors of this massive grid investment.

Freddie: Well, as you say, it's encouraging, the breadth of the theme and just at a time where the interest in European equities is growing. It's good to see. On that note, I think we should conclude. Thank you very much, Lukas, for taking the time to join us, and for our listeners for tuning in.

Lukas: Thanks, Fred.