Why Europe’s strategic autonomy is driving up power prices and interest rates

Europe’s drive for strategic autonomy is reshaping the economic and investment landscape. As policymakers reduce reliance on the US through renewed domestic capacity in defence, sovereign IT, data centres and other critical technology, electricity has emerged as a central macroeconomic variable. Although electricity accounts for only around 3% of the euro area CPI basket, its relevance now extends well beyond consumer inflation. Electricity is increasingly a strategic input into security, industrial resilience and long-term growth, with direct implications for power prices, interest rates and risk asset valuations. This shift is not driven by cyclical demand, but by policy-led, capital-intensive investment with multi-decade horizons. Defence production, data infrastructure and advanced manufacturing are highly electricity-intensive, uptime-critical and effectively immobile once built. As a result, power availability and long-term electricity price visibility have become binding constraints on economic growth and industrial competitiveness, rather than secondary cost factors.

From price shocks to structural electricity demand

Historically, European electricity price shocks were fuel-driven and reversible. The 2021-2022 energy crisis, when wholesale prices rose by 200-300%, was primarily a natural gas price shock that rapidly fed through to inflation and monetary policy. The current environment differs in one crucial respect: electricity demand growth is now structural and persistent.

Rising defence spending toward 2-4% of GDP, combined with supply-chain localisation and the rapid expansion of data centres and AI infrastructure, implies a sustained increase in electricity demand. Individual facilities can require 100-500 MW of continuous baseload power. This shifts electricity pricing dynamics away from short-term fuel volatility toward capacity constraints, grid investment and the long-run supply-demand balance.

For central banks, this increases the risk that electricity inflation becomes persistent rather than transitory, reinforcing a higher-for-longer interest rate environment. For fixed income investors, electricity is no longer a tail risk to inflation, but a structural component of the macroeconomic environment.

Figure 1. Assumed evolution of electricity demand by load category (2023–2050)

Assumed evolution of electricity demand from 2023 to 2050 broken down by load category. The projections illustrate a gradual increase in electricity demand over time, reflecting higher demand from electrification, data centres and industrial activity.

Source: Swedish Power System 2050, a study by Quantified Carbon for Svenskt Näringsliv

Lessons from the US: How data centers raise the electricity price floor

The US experience illustrates how large-scale data center expansion can lift electricity prices even outside periods of fuel market stress. Power prices have risen faster than inflation, with the increases most visible in regions where data center capacity is concentrated. The underlying driver is not only higher consumption, but the growing need for grid reinforcement, firm capacity and system reliability to support uptime-critical loads.

These costs are typically recovered through network tariffs and capacity mechanisms, raising the long-term electricity price floor rather than creating temporary price spikes. As a result, electricity becomes structurally more expensive as power systems become more capital-intensive.

What structural electricity demand means for Europe

Europe is likely to experience a similar and potentially stronger impact. Compared with the US, Europe faces longer permitting timelines, tighter electricity grid constraints and a power system in which natural gas frequently sets the marginal price. As a result, incremental electricity demand is  more likely to translate into higher wholesale power prices, higher network charges and a steeper electricity forward curve.

The transmission mechanism is likely to be gradual but persistent, through rising grid tariffs, higher capacity values and a structurally higher base level for electricity prices. Power is increasingly priced as a strategic input, into security and industrial policy rather than a purely cyclical commodity.

Why the Nordics stand out

Europe’s electricity systems are highly heterogeneous. Across much of continental Europe, power prices remain closely linked to natural gas at the margin, embedding geopolitical risk and fossil fuel volatility into operating costs.

The Nordic region, and Sweden in particular, starts from a structurally different position. Electricity generation is dominated by hydropower, nuclear and wind, resulting in low carbon intensity, limited fuel price exposure and long-lived generation assets. While electricity prices are unlikely to remain low, the Nordic power system offers greater reliability, lower tail risk and materially better long-term cost visibility.

This distinction matters for investors. More predictable electricity costs support margin stability, cash flow visibility and balance sheet resilience across both corporate credit and equities. Nordic assets provide exposure to the same strategic autonomy and European re-industrialisation themes, but within a power system that is structurally more robust and less exposed to fossil fuel volatility.

Conclusion

Electricity’s role in Europe has fundamentally changed. As strategic autonomy reshapes defence, technology and industrial policy, power prices and interest rates are adjusting to a structurally higher equilibrium driven by long-term investment in resilience and productive capacity.

Power systems that can absorb structural demand growth while preserving reliability and price visibility will define relative competitiveness. In this environment, the Nordic region offers a clearer framework for translating higher system costs into sustainable economic growth and resilient risk-adjusted return over time.