Why Europe’s electricity prices threaten its AI ambitions

Europe wants to position itself as a leader in artificial intelligence and compete with the United States and China, but experts told CNBC that rising energy prices could undermine those goals.

The region aims to get ahead in artificial intelligence by increasing its computing capacity and creating the critical infrastructure required for technology. But power-hungry data centers mean investments are particularly sensitive to the cost of energy, and prices in Europe are rising amid the US-Iran war.

Data center projects will likely move to parts of Europe with lower energy costs, creating winners and losers across the continent, experts said.

“The gap in the cost of energy around the world is going to be really extreme,” Michael Brown, global investment strategist at Franklin Templeton, told CNBC.

“If you’re making energy-intensive investments, you go where energy is cheapest. If I were building the next $7 billion data center, it would be in the United States or China.”

“After the last Iran crisis, there has been a renewed interest in stimulating the economy,” Olivier Darmouni, an associate professor at HEC Paris who specializes in energy transition, told reporters in a briefing on Tuesday. he said.

It found that rapid growth of data centers could increase regional electricity costs by 20-40% in very hot regions such as Texas and Virginia in the US, or Slough in the UK and Paris in France.

He said AI is a “wake-up call” to think about the energy system as a matter of economic sovereignty. “Affordability and inflation, competitiveness against European companies and technological leadership through artificial intelligence; we can’t achieve any of these if we don’t fix the energy system.”

Prices of energy-intensive industries in Europe last year averaged roughly twice as much According to the International Energy Agency, it is 50% higher in the US than in China and India.

Data centers now consume 2% of the world’s electricity, according to a report released Wednesday by the International Data Center Authority (IDCA); this rate was 1.7% in 2024.

IDCA’s report found that when data centers exceed 5% of national electricity consumption, social and political backlash against facilities often intensifies; This means an important turning point.

According to the report, the USA is almost at the 6% threshold, the UK is at 5.8% and Singapore is at 19.5%.

Chris Seiple, vice president of Wood Mackenzie’s energy and renewables division, told CNBC there are three reasons why Europe is lagging behind in data center development: “One is the cost of energy, the second is the geographic location of companies developing data centers, and the third is speed to market, the time it takes to build the infrastructure and get connected.”

These “make Europe a little bit more challenging for data center development,” he added.

Europe has a plan to increase computing capacity and data center build-out, but the bloc faces a real challenge in deciding whether it really wants to have technological leadership in artificial intelligence, Darmouni said.

“We can’t do this without having a lot of data centers. The scale of what we see in the US is 1 to 100 compared to what we see in Europe. Europe is really far behind. If we want to match what they’re doing in the US, it requires even more investment.”

“The central part of Europe has already lost the game,” said program chief executive Vladimir Prodanovic. Nvidiahe said during a panel discussion at a conference in Denmark in April. He cited high electricity costs in Germany and the UK as examples.

In May, average price According to the IEA, the price per MW for electricity in the UK was $111.65, while in Germany it was $88.97, in France it was $44.19 and in the US it was $28.

Like the EU, the UK has plans to increase data center capacity, but last month OpenAI said it was pausing its Stargate project in the country, partly due to the cost of energy. He also cited the country’s regulatory environment as a cause for concern.

HEC Paris’ Darmouni said he expects AI models to eventually start pricing. He added that in this scenario, customers using Anthropic’s Claude AI, for example, would have to pay more in the UK.

Darmouni said many “will be concerned about price discrimination for AI services going forward, and those will probably be related to energy costs, because that’s electricity, which is the marginal cost of providing AI services.”

Scandinavian countries and France are often cited as countries that can best benefit from artificial intelligence investments due to their low electricity prices and diverse energy mix.

“Number one for me right now is Norway, almost all the big AI companies are there,” said Nvidia’s Prodanovic, adding that companies have also moved to Denmark and Sweden.

Microsoft It is among the hyperscalers investing heavily in the Scandinavian countries. The tech giant has partnered with Nscale on a massive $6.2 billion deal to build AI infrastructure in Norway; It has a $3.2 billion expansion plan in Sweden and plans to invest $3 billion in data center capacity in Denmark between 2023 and 2027.

Scandinavians have become accustomed to low electricity prices, according to Vili Lehdonvirta, professor of economic sociology and digital research at the Oxford Internet Institute. He noted that this led to negative prices On some days in winter in Finland, this means utilities pay consumers to use electricity.

“Consumers have gotten used to it…it means they can heat their saunas all day long. Not only are they saving money, they’re making money,” he told CNBC.

Darmouni said France had a “huge advantage” in lowering electricity prices because it is a leader in European nuclear energy.

But he said low electricity prices are not the only factor to consider, as is which country’s willingness to build new energy sources.

“What Europe needs is greater integration of transmission, light and storage, going well beyond national borders to ensure the price of energy is the same across places,” he said.

Saying that geography makes this integration difficult in places such as England, Scandinavia, the Iberian Peninsula and Italy, Darmouni added that countries such as France and Germany are more integrated because they are neighbors.

The imbalance between supply and demand, leading to higher development costs, will also play a role. The cost of securing data center capacity in Europe’s five largest markets – Frankfurt, London, Amsterdam, Paris and Dublin – is expected to rise 12% by 2026, according to research by real estate investment firm CBRE.

— CNBC’s Gaelle Legrand contributed to this story.