The European energy grid: Challenges and the startups shaping a resilient future

Europe’s energy grid is undergoing a seismic shift. As the continent moves toward decarbonisation, integrating renewable energy, electrifying key sectors, and modernising aging infrastructure have become critical priorities. Yet, significant challenges remain, writes Felix Krause, partner at Vireo Ventures.

This article explores these challenges, what was neglected in recent years, and how startups across Europe are driving innovative solutions to future-proof the grid.

The challenges facing Europe’s energy grid

Integration of renewable energy

By 2023, wind and solar accounted for 27% of the EU’s electricity mix, up from just 5% in 2009—a fivefold increase in a little more than a decade. Wind power, now the second-largest source of electricity, contributed 17.5% to this total.

However, renewable energy generation is inherently variable. For instance, solar power can fluctuate between 0% and 100% depending on cloud cover, while wind power can drop dramatically during calm periods. During the solar eclipse in March 2015, Europe saw solar generation plummet by 17GW in just 90 minutes, forcing the grid to adapt quickly to avoid widespread blackouts.

Aging infrastructure

Much of Europe’s grid infrastructure was built decades ago, with over 70% of transmission lines and substations now more than 40 years old. This aging infrastructure struggles to meet the modern demands of a renewables-heavy energy system. The International Energy Agency (IEA) estimates that Europe will need to invest over €1 trillion ($1.9 trillion) in grid infrastructure by 2030 to handle increased electrification and renewable energy integration. However, current annual investments of around €50 billion ($55 billion) are falling short, creating bottlenecks and system vulnerabilities.

Energy security and geopolitical pressures

The Russian invasion of Ukraine in 2022 exposed Europe’s heavy reliance on Russian gas, which accounted for 40% of the EU’s gas supply in 2021. By 2023, Europe had rapidly pivoted away from Russian energy, investing more than $10 in clean energy for every $1 spent on fossil fuels.

However, this transition has placed immense pressure on the grid, which needs to quickly adapt to new energy flows. In response, Europe invested nearly $110 billion in renewable energy generation in 2023—a 6% increase from the previous year—yet, energy security remains a concern.

Balancing supply and demand

The growth of electric vehicles (EVs), heat pumps, and industrial electrification is expected to drive up electricity demand by at least 25% by 2040. In 2023, the EU’s electricity demand stood at 2,697TWh. As electrification accelerates, the grid must manage increasing volatility between supply and demand.

The challenge lies in balancing periods of high renewable energy production, such as windy days where wind energy can account for over 60% of electricity production in Germany, with periods of low production. Without sufficient storage and demand-side management, grid stability will become increasingly difficult to maintain.

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Neglect of energy storage

Europe’s underinvestment in energy storage remains a critical issue. In 2023, the EU had approximately 8GW of installed battery storage capacity, while the IEA estimates that 200GW will be needed by 2030 to support a renewables-heavy grid.

This gap means that much of the renewable energy produced during peak times is wasted. For example, over 6TWh of renewable energy was curtailed in 2020 due to grid constraints. Increasing energy storage capacity is essential for storing excess renewable energy and deploying it during periods of high demand.

What needs to change: Making the grid future-proof

Investment in grid modernisation

Grid modernisation is critical to handling the demands of an increasingly renewables-based energy system. The European Network of Transmission System Operators for Electricity (ENTSO-E) has identified over 150 critical grid reinforcement projects that need to be completed by 2030, requiring €180 billion ($196 billion) in investments.

These projects include expanding cross-border interconnections and deploying smart grid technologies that enable real-time energy management and bi-directional electricity flows from distributed energy resources (DERs). Enhanced digitalisation and predictive maintenance will reduce costs and improve grid resilience.

Accelerating energy storage deployment

Expanding energy storage capacity is essential for managing intermittent renewable energy and ensuring grid reliability. Without sufficient storage, renewable energy overproduction often leads to curtailment, wasting valuable electricity that could otherwise be stored for periods of higher demand.

How Contracts for Difference (CFDs) could help

Contracts for Difference (CFDs) are a proven tool in renewable energy finance and could play a pivotal role in accelerating the deployment of energy storage technologies. CFDs guarantee a stable revenue stream for storage operators, reducing financial risks in the often volatile electricity market. If electricity prices fall below an agreed “strike price,” the government compensates the operator for the difference. Conversely, if prices exceed the strike price, the operator pays back the surplus. This mechanism ensures predictable returns and makes long-term investments in energy storage more attractive.

CFDs have already proven successful in lowering costs for renewable energy projects across Europe. The UK’s Contracts for Difference scheme, for example, has been instrumental in driving down the cost of offshore wind by providing price stability. Extending this model to energy storage could incentivise a broader range of investments in technologies such as long-duration storage and hydrogen storage, which are critical for balancing the grid during periods of fluctuating renewable energy supply.

By reducing market risk, CFDs enable energy storage projects to secure financing, even in a rapidly changing energy landscape. This would help bridge the investment gap between the current €5 billion ($5.5 billion) annually and the €15-20 billion ($16-22 billion) per year needed to meet Europe’s energy storage targets by 2030.

Applying CFDs to storage projects can help unlock the scale of investment necessary to make Europe’s grid more resilient, ensuring that renewable energy can be efficiently stored and deployed when needed.

Strengthening cross-border interconnections

Strengthening cross-border energy interconnections will enhance Europe’s ability to balance supply and demand across regions. Projects like the North Sea Wind Power Hub, which connects offshore wind farms to multiple countries, are critical to ensuring that renewable energy can be efficiently distributed across the continent. Cross-border grid integration will also improve energy security by reducing reliance on any single country’s energy resources.

Demand-side management and flexibility

One way to ensure grid stability is through demand-side management, which incentivises consumers to shift their energy use to periods when renewable energy production is high. Flexibility markets, where energy consumers are paid to reduce or shift their consumption, are also gaining traction.

The role of startups in shaping the future grid

Startups across Europe are developing innovative solutions to the challenges of grid management, from balancing supply and demand to integrating new technologies. By focusing on digitalisation, decentralisation, and decarbonisation, these startups are crucial in making the grid more resilient and adaptable. Here’s how:

Ancillary services and grid balancing

Startups like Next Kraftwerke and GridBeyond are using artificial intelligence (AI) and machine learning to optimise the dispatch of distributed energy resources. These companies operate virtual power plants (VPPs) that aggregate thousands of decentralised energy units to provide ancillary services to the grid, such as frequency regulation and demand response. Encentive is another player in this space, optimising grid balancing through real-time data and flexibility markets.

Energy efficiency and battery management

Startups such as Suena Energy, Entrix, and Enspired are part of a new wave of companies developing software to optimise battery storage for consumers and grid operators alike. By improving battery performance and maximising the use of stored energy, these solutions will help reduce renewable energy curtailment and stabilise the grid during peak demand periods. Other companies like Sonnen are similarly focused on empowering consumers to become “prosumers” who can generate, store, and share their renewable energy with others.

Vehicle-to-Grid (V2G) technology

As electric vehicle adoption accelerates, startups like The Mobility House are pioneering vehicle-to-grid (V2G) technology, which allows EVs to serve as mobile energy storage units. This technology enables EV owners to discharge electricity back into the grid during peak demand periods, providing additional flexibility and helping to stabilise the grid. Nuvve and FlexeCharge are also enabling fleets of EVs to contribute balancing power to the grid, with real-world applications already underway.

Decentralised energy solutions

Decentralised energy is another area where startups are making an impact. Home Energy Management Systems are emerging, such as GridX, Synergi, Clevergy, and Clever PV,  providing consumers with the tools to manage their own energy production and consumption, thereby reducing strain on the central grid.

Conclusion

Europe’s energy grid faces significant challenges, but it also presents a tremendous investment opportunity as the continent transitions to a low-carbon future. Integrating renewable energy, upgrading infrastructure, and balancing supply and demand will require coordinated efforts and substantial investment. However, with the right strategies—including expanding grid interconnections, increasing energy storage’ and enhancing demand-side management, Europe can create a grid that is both resilient and future-proof.

Startups across Europe are leading this transformation by providing innovative solutions to tackle the complexities of the energy transition. Their contributions are essential for building a sustainable energy system that can meet Europe’s climate goals while ensuring energy security.

About the Author
Felix Krause, a partner at Vireo Ventures and active Business Angel, supports pre-seed and seed companies focused on decarbonisation and green transformation through electrification and digitalisation to prosper. His deep expertise in Green Energy and Funding enables him to identify and back startups shaping Europe’s electrified future, and sets new impulses into the every changing industry.