The energy transition in Europe, Part 1: More constraints than certainties

Mario Draghi’s 2024 report on the future of European competitiveness was a call to action to, among other things, accelerate the energy transition to support a more resilient and competitive European economy. In the report, Draghi, former head of the European Central Bank, argues that the EU must address three key areas to maintain its relevance, those being: regaining its capacity for innovation, ensuring a secure and affordable energy supply to remain competitive, and prioritizing security and reducing dependencies. In this article we focus on the EU’s energy imperative: There can be no booming EU economy without an affordable and secure energy supply. In Part 2 of this series, we will dive into Draghi’s specific recommendations and the European Commission’s policy response.

Since the energy sector is a major source of greenhouse gas emissions, recent debates have largely overlooked its foundational role in enabling a competitive economy. The first Von der Leyen Commission emphasized the environmental dimension of the Green Deal, sidelining the strategic importance of energy supply. Yet, energy is not just a climate issue – it’s a cornerstone of industrial competitiveness and economic resilience.

In this article, we argue that the energy transition must be viewed through a broader strategic lens. Factors such as Europe’s risk of deindustrialization and the redesign of global supply chains are increasingly shaping the possible directions and urgency of the transition. The EU does not have significant domestic oil or natural gas resources. Decarbonization is not only a bet on an environmental friendly supply; it is the only viable path toward a more resilient economy.

As in previous pivotal moments in modern history, energy supply has transcended its role as a mere utility to become the foundation of any global influence. Without a secure, autonomous, and affordable supply, no economic bloc can sustain long-term competitiveness or geopolitical relevance. That’s the strategic intent behind Draghi’s push for a less fossil fuel-dependent energy system. The report’s language makes this clear: “1.5°C climate target” is mentioned just three times, in contrast with 650 uses of the word “competitive.” The energy transition has shifted from climatic ambition to strategic imperative.

Strategic energy security

The EU remains structurally dependent on external fossil fuel sources. In 2023, 94.9% of its oil and 90% of its natural gas supply originated from outside the bloc. This dependency exposes the EU to dual vulnerabilities: energy supply insecurity and price volatility. In total, as depicted in figure 1, EU fossil fuel imports account for 58% of the bloc’s total primary energy consumption, leaving it as one of the most exposed regions to markets fluctuations.

Source: Ember, RaboResearch 2025

Russia’s invasion of Ukraine exposed Europe’s energy vulnerability, prompting the EU to reduce its reliance on Russian fossil fuels through the REPowerEU plan. In the second quarter of 2025, the largest energy exports to the EU were Norway (15% of petroleum and 51% of natural gas) and the US (58% of LNG), while Russia’s shares have constantly declined and will further decline as a result of the 19th sanctions package, adopted October 23.

The geopolitical takeaway is clear: Achieving strategic autonomy requires a deep transformation of the EU’s energy system. To overcome its structural energy vulnerability, the EU must pursue a dual-track strategy:

Economically, this entails shifting from a system primarily characterized by operating expenses (OpEx) around fuel supply to one that is more structured around capital expenditure (CapEx). In the later, equipment – and not its required fuel – is the most relevant cost component. The distinction between OPex and CapEx has crucial implications regarding risk exposure and resilience across supply chains, as illustrated in table 1.

The EU’s strategic energy autonomy aspirations are not achievable in the medium term. There is no political or economic option through which the EU could swiftly cancel current supply risks. The EU can only alleviate these risks through pursuing a strategy of maximum diversification and minimization of OpEx-based dependencies.

Reducing reliance on volatile, volume-based inputs, such as imported fuels, will strengthen resilience and enhance short-term control over critical infrastructure. Yet, switching the EU’s energy supply from oil- and gas-based to one based on locally produced renewable electricity would not instantly solve the supply risks. However, it is the only diversification option the EU has. This option does not eliminate energy supply risks but rather reconfigures them. It shifts exposure from immediate disruptions in fuel availability to potential dependencies on the infrastructure and equipment required for further diversification. In essence, it trades short-term volatility for longer-term dependencies. This is illustrated by the recent critical minerals export restrictions announced by China. Acknowledging the limitations of the diversification strategy, the EU already approved of the Critical Raw Material Act and has announced a critical minerals plan, the ResourceEU plan.

From a competitiveness standpoint, the EU already faces structural limitations, as it currently cannot source fossil energy at comparable cost levels to its largest suppliers or key global competitors. Figure 2 illustrates the supply cost gap for natural gas as traded in Henry Hub (US) or TTF (EU).

The EU will never be competitive while heavily relying on imported fossil energy supplies. Any routes to restoring competitiveness for the EU entails the electrification of the energy supply.

Energy generation costs

Electricity price formation is neither a straightforward nor uniform process across the EU. In addition to production costs, prices often include regulatory charges, taxes, and increasing transport costs. But competitiveness certainly has to start on production terms. Assessments from Fraunhofer, IRENA, and the IEA highlight the growing cost-effectiveness of renewable electricity, driven by ongoing technological advancements. Wind and solar are now widely recognized as the most cost-effective sources of electricity based on the levelized cost of energy (LCOE) under a growing cases of scenarios. The energy think tank Ember has illustrated how collocated battery energy storage systems with solar PV may be competitive for 24-hour electricity supply in certain contexts. And the financial advisory firm Lazard has illustrated fossil-fueled technologies’ sensitivity to fuel prices and capital costs. Figure 3 depicts the range of LCOE in Germany, as obtained in a Fraunhofer study. With the discussed caveats, it does illustrate the LCOE landscape for countries in central Europe.

Flexibility integration costs

Production costs are only the first part of the energy price formation process. LCOE analyses may consider some characteristics of the system in which a certain generation technology will be integrated, but often overlook the grid integration costs associated with high shares of variable renewable generation.

The tension between low-cost generation and system flexibility is, however, not new in the EU’s energy landscape, as the historical evolution of installed capacity in figure 4 illustrates.

Over the years, the EU power system has been fundamentally shaped by more expensive but dispatchable, fossil-based generation like gas-fired combined cycle technology (CCGT), designed to balance the inflexible nature of cheaper nuclear generation continuously running as a base load. Fossil fuel sources haves always been used to adjust supply to the variability of consumption. Transmission infrastructure was developed under strong national government oversight, typically within monopolistic structures, many of which remain in place today.

Source: Eurostat, RaboResearch 2025

The flexibility integration challenge of the current energy transition is thus not totally unprecedented. Its core objectives – strategic autonomy, supply security, and affordability – have remained consistent throughout phases of the energy transition, though their prioritization has shifted. What sets this moment apart is its scale and urgency. If the EU intends to remain a leading global economic powerhouse, it will likely need to fundamentally redefine its power supply architecture. Achieving this will require an exceptionally demanding balancing act, blending energy resilience, competitiveness, and sustainability.

Although not unprecedented, the required grid transition is not exempt from challenges. This is already apparent in some countries through long grid connection queues for both consumers and suppliers of electricity. In the Netherlands alone, 14,000 offtakers and 8,600 energy suppliers are waiting to get connected to the grid (link in Dutch). If unsolved, this will continue to slow down the energy transition, as businesses will be unable invest in electrifying their processes, and renewable energy projects will be unable to supply electricity. Addressing these challenges requires innovative approaches in, for example, grid design, processes changes, regulatory adjustments, and enormous investments in grids. One place the European Commission will seek to address these challenges is in the upcoming European Grids Package.

Strategic energy constraints and certainties

In conclusion, the EU’s strategic autonomy is currently non-existent due to its degree of exposure to unreliable or competing fossil fuel suppliers. Reducing OpEx exposure to fossil fuel sources could potentially lessen the impact of supply disruptions. Electrification of both supply and demand based on local renewable resources is the most direct route toward some form of autonomy. Still, the electrification process is not exempt from strategic implications, as depicted in table 2, which outlines how major generation technologies could affect the EU’s energy strategy.

*Note: See: World Nuclear News Source: RaboResearch 2025

Unfortunately, the EU’s aspiration of a secure and affordable energy supply offers no silver bullets. On the contrary, it mostly faces constraints. As illustrated by the implications of each technology choice across the strategic variables in table 4, the energy transition can only be a complicated balancing act.

Under the right system design, electrification presents an alternative to replace a very big share of fossil fuel end uses. In many cases, it may offer not only strategic but also competitive advantages. Although, as discussed, its final affordability and scalability could depend on grid investments and the involvement of both public and private stakeholders.

Beyond economic competitiveness, Europe’s pursuit of strategic autonomy is also challenged by rising security concerns, increasing political polarization, and the risk of industrial decline – all of which could undermine any progress efforts.

Systemic and supply chain challenges

Europe’s significant reliance on China for critical components related to the energy transition presents a considerable challenge to achieving greater autonomy. China dominates global production of solar PV panels and batteries and holds an average market share of 70% across refined critical raw materials (CRMs), which are essential for clean energy technologies (see figure 5).

Source: International Energy Agency: Global Critical Minerals Outlook 2025, RaboResearch 2025

CRMs like lithium, copper, nickel, cobalt, graphite, and rare earth elements, are critical for the energy transition, since they are used in products like permanent magnets for wind turbines and batteries for electric vehicles. China’s dominance in CRMs is a significant vulnerability for European supply chains. Any disruption in Chinese exports could have far-reaching effects across industries. Over the past two years, China has imposed CRM export restrictions roughly 15 times, with the most stringent announced on October 9, though these are currently off the table amid the constant swing of geopolitics. Such actions underscore China’s ability to leverage its market position for a strategic advantage against the US.

As a result of China’s market dominance, the EU recently launched its Critical Raw Materials Act and is pushing for circular business models to reduce import dependence on CRMs. Circularity is also considered indispensable to achieve the EU’s ambitions in its Clean Industrial Deal and is driving the development of the upcoming Circular Economy Act.

Looming deindustrialization

European industry is under pressure from growing external competition as it faces higher energy prices than other regions alongside the cost of adapting to the energy transition. In some cases, as with Chinese electric vehicles, Europe is even getting left behind.

Recently, major companies across various sectors have announced temporary closures of production lines or plants, the movement of production to other countries, layoffs, and delayed investments. The automotive industry has been hit particularly hard, leading to announcements in 2025 of an estimated minimum 63,000 job cuts plus (temporary) closures of seven plants in Europe in the years to come.[1] Prominent companies in the chemical industry have also announced the closure of plants or production lines or the postponement of investments due to high production costs and weakening demand. According to the forum for the EU chemical industry (Cefic), these decisions could lead to up to 200,000 direct job losses through 2030. Most of these negative developments have centered around industrial clusters in northwestern Europe (see figure 6).

[1] RaboResearch, based on company announcements in 2024 and 2025.

Source: European Industry & Energy Summit, “Mega Cluster Europe” infographic, RaboResearch 2025

These decisions have led to repeated calls to EU lawmakers from businesses to introduce measures that could improve the investment climate for companies in Europe. For example, in early 2024, a group of CEOs from more than 70 companies called for the European Commission to urgently introduce measures to improve the business case for investment in Europe. The so-called Antwerp Declaration, supported by more than 1,300 companies from 25 sectors, calls for 10 measures, including prioritizing investments in clean energy to rapidly lower energy prices, increasing the EU’s raw material security, and boosting demand for net-zero, low-carbon, and circular products. The declaration was followed up by Cefic in January 2025 with a call for an “Industrial Deal” to support the European chemical industry.

Other sectors follow the same path. In April, the offshore wind supply chain proposed a new offshore wind deal for Europe. The signatories, representing large organizations across the supply chain, called for better coordination of tenders to secure a stable annual pipeline of 10GW of projects in the next decade, covered by contracts for difference (CfDs). In return, the signatories committed to deliver 30% in cost reductions in LCOE. During the Copenhagen Competitiveness Summit in October, a group of 28 of Europe’s largest companies handed over the Copenhagen Pledge. In the pledge, RWE, Siemens, Maersk, ThyssenKrupp, Novo Nordisk, and others committed to investing strongly in Europe in line with Draghi’s recommendations, should EU policymakers deliver on cutting red tape, incentivizing private investments, speeding up the energy transition, strengthening Europe’s defense industrial base, and advancing the region’s technological resilience.

If European industry does not invest or even shrinks, it poses a threat to the progress of electrification, postponing the long awaited increase in electricity demand.

The execution of the energy transition depends on the complex interplay of technologies, resources, and infrastructure. As a result, two strategic imperatives emerge: the need for maximum diversification of energy sources and a shift from an energy system with an OpEx-heavy supply to one more balanced toward CapEx-driven technologies – especially where operational dependencies cannot be fully eliminated.

However, growing geopolitical tensions and new supply chain challenges increasingly constrain Europe’s ability to freely assemble the components of its energy transition. Even if driven by clear and ambitious long-term goals, integrating technologies, securing supply chains, mobilizing financing, and aligning regulatory frameworks remains a highly conditional and fragmented process.

The EU’s ability to reshape its energy system may depend on the degree of systemic awareness, coordination, and informed decision-making across public and private sectors. Driven by the EU’s urgency to restore its strategic autonomy – and constrained by a limited set of viable alternatives – a decisive energy transition could help reverse some of the region’s negative economic and industrial trends. While progress to date has been uneven, the current momentum, if sustained, has the potential to reshape Europe’s energy landscape and strengthen its geopolitical and economic positioning.

The economic case for renewable technologies has become so compelling that it increasingly challenges even the current US administration’s ideological resistance to the energy transition. Cost competitiveness, agile scalability, and investor momentum are increasingly driving the energy transition, regardless of political resistance.