The European energy transition is at a crossroads. Since the energy crisis of 2022, persistently high costs have strained both industry and households, while the ambitious goal of net zero emissions by 2050 demands unprecedented investment. Meeting the objectives of the Green Deal and REPowerEU requires €6.6tn of energy system investments over the next decade. Average annual energy investments must more than double by 2030. The challenge is clear: how can Europe transition to a sustainable energy system without jeopardising economic stability or affordability?

Europe’s energy system remains heavily dependent on fossil fuels, which account for over 60% of consumption and 30% of total system costs. Reducing reliance on imports through cleaner energy sources enhances sustainability and strengthens geopolitical resilience. However, unless a pragmatic and cost-efficient approach is adopted, capital may be directed towards expensive and uncertain solutions.

A structured transition can be guided by three core principles:

1. Prioritising cost-effective decarbonisation strategies – maximising emissions reduction per euro spent by accelerating low abatement cost solutions while adjusting the role of more expensive technologies.
2. Technology neutrality – allowing the market to scale the most effective solutions rather than favouring specific technologies.
3. Market-driven transition – leveraging carbon pricing, emissions trading and targeted support rather than excessive subsidies.

By following these principles, Europe could unlock significant savings. Projections indicate that power system costs per kWh could decline by 20%, and over €1.5tn in system costs could be saved by 2050 – equivalent to an average of €300/y per household.

Key priorities for a cost-effective transition
The current transition approach aims to decarbonise power, heat, transport and industry at the same time with an unprecedented pace. This simultaneous advancement risks losing focus on fundamental priorities. A cost-effective strategy should prioritise:

• Electricity first, but not all-electric – electrification is the most cost-effective abatement strategy, covering 80% of transition potential. Expanding power demand would ensure broader cost distribution, keeping unit prices in check.
• Temporary support where necessary – electrification of heat and transport will increase EU power demand by 30% by 2035. While electric vehicles and heat pumps are nearing mainstream economic viability, incentives should continue to push adoption rates beyond their tipping points.
• Tax reform to level the playing field – electricity remains the backbone of the transition, yet it is taxed three times more than fossil alternatives. Reducing electricity taxes and levies would lower consumer costs, ease reliance on subsidies, improve efficiency and drive electrification forward.
• Infrastructure investment for long-term success – grid expansion must keep pace with rising demand and renewable energy deployment. Competitive returns on infrastructure investment will attract private capital.
• Accelerating digitalisation and flexibility – integrating demand-side flexibility could prevent up to 240 GW of backup capacities, saving €40bn/y by 2050.

Scaling an affordable energy system
For an affordable energy system, Europe must balance supply and demand effectively. Without this alignment, inefficiencies, stranded assets and unnecessary subsidies will inflate costs. A cost-optimised transition would include, first, right-sizing hydrogen deployment. While renewable hydrogen is a long-term necessity for net zero, high costs have slowed its development. Rather than forcing a premature scale-up, adjusting to a delayed ramp-up could save almost €200bn by 2030.

Second, smart renewable deployment is required. Synchronising wind and solar expansion with grid capabilities could optimise the build-out and reduce subsidies for new assets by over €20bn/y.

And third, a more integrated European approach is needed. A fully integrated Energy Union would reduce overall costs, avoid 2,500 TWh of fuel burn and eliminate the need for 100 GW of additional backup capacity.

The final 10% of emissions reductions will be the most costly and technically challenging. Europe must prepare now to have the necessary tools and policies at hand. First, it must lead in energy innovation. Advancing next-generation renewables, clean baseload power, cost-effective hydrogen production and carbon removal requires early R&D investments and stronger venture capital support. Second, it must develop future-ready infrastructure. Technologies such as carbon capture, use and storage (CCUS) will be critical, with the potential to capture up to 400mn tonnes of CO₂ annually by 2040.

For an affordable energy system, Europe must balance supply and demand effectively – without this alignment, inefficiencies, stranded assets and unnecessary subsidies will inflate costs.

The time to act is now
High energy costs remain a burden on industry and households, while the transition to net zero is not progressing quickly enough. Affordability is crucial for public acceptance and Europe’s competitiveness. A structured, cost-efficient pathway could flatten the steep investment curve, making the transition financially sustainable while maintaining climate ambitions.

Policymakers must act decisively to correct the trajectory of Europe’s energy transition. By prioritising electricity first, scaling an integrated and affordable energy system and addressing the critical last mile of decarbonisation, Europe could secure a resilient and sustainable future.

The views and opinions expressed in this article are strictly those of the authors only and are not necessarily given or endorsed by or on behalf of the Energy Institute.

• Further reading: ‘How energy companies can combat the threat of European deindustrialisation’. Europe’s industrial competitiveness is under increasing pressure from high energy costs and growing competition from the US and Asia, which could shift manufacturing activity away from the continent. The situation presents both challenges and opportunities for the energy sector, which could become a cornerstone of efforts to retain energy-intensive industries in Europe, writes Florence Carlot, Partner with Arthur D Little.
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