Can Europe replace Russian gas and still achieve its net-zero emissions goals?

With the right mix of infrastructure investment, Europe can emerge from the tensions with Russia over natural gas flows with a system that’s cheaper, achieves the region’s net-zero carbon emissions goals and is also more secure.

At least that’s the view of Goldman Sachs Research which believes it will take EUR10tn of investment by 2050 for Europe to transform its energy infrastructure.

According to Goldman Sachs’ Carbonomics framework, the spending is estimated to eventually pay for itself from savings on energy imports.

60% more affordable

In addition to being more sustainable than supply from Russia, the broker’s analysts believe the new system would be more affordable.

Best estimates envisage energy costs for the average European consumer being cut potentially by -40% versus prices in 2021 and by -60% compared to the expected peak in 2022.

Goldman’s model sees a material reduction in the energy dependency rate of the region, from circa 58% currently to under 50% by 2030, under 30% by 2040 and around 15% by 2050.

“We estimate that close to €10tn can be recouped from lower net energy imports by 2050, sufficient to fully cover the infrastructure investments required, although with a decade of time lag,” the broker notes.

LNG and green hydrogen

Bottom line is Goldman’s believes natural gas is going to be a key part of Europe’s energy supply for the next 20 years.

Long-term contracts for LNG are expected to strengthen energy security and allow a new generation of LNG projects to be developed for Europe.

In short, the broker expects renewable power to be at the heart of the future energy system.

Seasonality and the energy requirements for transportation and heavy industry, adds Goldmans mean that green hydrogen will also be a key component.

“Lower cost long-term LNG contracts, cheaper renewable power and better seasonality management through batteries and hydrogen can substantially reduce the European consumer’s energy spending in the long term.”

Incremental LNG imported volumes

Goldman’s reminds investors of EU’s ambition for a two third reduction in Russian gas imports by the end of this year and zero gas imports by 2030.

Having factored this goal in its modelling, Goldman’s concludes that the shortfall between gross natural gas demand and available domestic supply, plus other ex-Russian pipelines imports, has to be met with incremental LNG imported volumes.

“It is in Europe’s interest to sign up to an additional 40mtpa of 15-year LNG contracts, and potentially up to another 50mtpa of 10-year LNG contracts, to improve security and diversification of supply – and allow a new generation of LNG projects to be developed for Europe,” the broker concludes.

Hydrogen to emerge as a critical technology

While hydrogen currently has a niche role, mostly in chems and refining, Goldman’s sees it emerging as a critical technology in the long term.

The broker also expects hydrogen to address the seasonal discrepancy between renewable power supply and power demand and aiding the de-carbonisation of heavy industry and transport.

Overall, Goldman’s expects hydrogen demand for Europe to surpass 60 Mtpa long term, reaching 15% of the region’s final energy consumption and creating a circa ERU0.74tn cumulative investment opportunity in the direct hydrogen supply chain in Europe.