Europe's AI Ambitions Hinge on Fixing Fragmented Energy Market
A CSD analysis says Europe's fragmented electricity market and ageing grids are holding back its AI ambitions, with data centres clustering in a few member states.
Europe risks falling further behind in the global artificial intelligence race unless it fixes its fragmented energy market, according to an analysis by Martin Vladimirov, director of the Geoeconomics Program at the Center for the Study of Democracy.
The warning echoes former European Central Bank President Mario Draghi's caution two years ago that the continent faced "slow agony" without reviving investment and productivity.
The scale gap is stark. The European Commission in July announced plans for seven giant AI computing hubs, with 18 of the EU's 27 governments bidding for at least one site and pledging around €3 billion ($3.5 billion) in future compute purchases. By contrast, the combined capital expenditure of six largely U.S.-based hyperscalers is expected to exceed $1.3 trillion by 2027, according to S&P Global Ratings.
Closing that gap would require addressing a transmission system that cannot move electricity from where it is available to where new industrial demand is emerging. Weak interconnections, wide differences in power transmission fees and complicated permitting procedures divide what is meant to be a single market.
The cost implications are significant. In 2025, large energy-intensive industrial users in the EU faced an average final electricity price of around $107 per megawatt-hour, according to International Energy Agency estimates — more than twice the U.S. level and roughly 57% above China's.
The effect on traditional industries has been severe. Overall European production in 2025 was only about 1% above its 2021 level, according to an analysis of Eurostat data by CSD senior analyst Marius Köppen. Chemicals manufacturing fell 19% over the period, while output of basic iron and steel, cement and aluminium dropped 16%, 14% and 11% respectively.
Energy is not the sole cause — weaker global demand, relocation of EU facilities to the U.S. and China, and rising competition from Asian firms also played a role. But while most other parts of Europe's economy have recovered from the pandemic and the energy crisis that followed Russia's full-scale invasion of Ukraine, its energy-intensive industrial base has not.
Around 40% of EU power distribution grids are more than 40 years old. The European Commission estimates €584 billion of investment is needed by 2030 to modernise and extend electricity networks. A data centre can be built in roughly two years, but connecting it to the outdated transmission network can take up to seven.
As a result, AI infrastructure is highly concentrated. Since 2024, 68 major EU data-centre projects have been announced, with four countries — France, Spain, Finland and Sweden — accounting for 43 of them. A key reason is access to affordable low-carbon electricity and credible grid connections. A 100-megawatt data centre faces an annual electricity bill of approximately €254 million in Germany and €153 million in Spain, but only €91 million in Finland, where nuclear and renewables dominate the mix.
To build an integrated electricity market, Europe would need to change the economics of the system. Steps include increasing flexibility by making it easier to move energy across borders, expanding nuclear and hydropower to reduce reliance on imported gas, and investing in battery storage. Grid operators would benefit from a bloc-wide map of credible future demand, while multilateral lenders such as the European Investment Bank could finance grid development proactively rather than waiting for customers.
A common framework for AI infrastructure could accelerate grid connections and permitting. Building a gigafactory in every member state makes little economic sense, but the Commission could select sites based on credible demand and place major infrastructure where power system fundamentals are strongest, with all EU nations potentially gaining access through interconnected computing nodes.
Hurdles remain, including bureaucracy, competing national interests and the rise of political parties sceptical of deeper EU integration. Fixing the power system would not erase other AI weaknesses either: the EU produces less than 10% of the world's semiconductors and lacks cutting-edge fabrication capacity, depending heavily on U.S. chip design, Asian manufacturing and non-European cloud platforms. But without energy reform, the analysis concludes, Europe has little hope of even reaching the starting line.