This article is a collaborative effort by Diego Hernandez Diaz, Humayun Tai, and Thomas Hundertmark, with Michiel Nivard and Nicola Zanardi, representing views from McKinsey's Global Energy & Materials Practice. Contact online >>
This article is a collaborative effort by Diego Hernandez Diaz, Humayun Tai, and Thomas Hundertmark, with Michiel Nivard and Nicola Zanardi, representing views from McKinsey''s Global Energy & Materials Practice.
Translating into action the ambitious climate targets that have been put in place by governments and companies depends on accelerating the deployment and adoption of several interrelated technologies. These include renewable energy sources (RES), electrification technologies such as electric vehicles (EVs), and heat pumps—as well as comparatively less mature technologies, such as carbon capture, utilization, and storage (CCUS), green and blue hydrogen, and sustainable fuels.
These decarbonization technologies (alongside many others, such as nuclear, long-term duration energy storage, battery energy storage systems, and energy efficiency investments) are the cornerstone of efforts to reduce greenhouse gas (GHG) emissions in all McKinsey energy scenarios. The period until the end of this decade is a critical one to put in place a trajectory of accelerated adoption to meet 2030 and 2050 targets set by countries and companies.
The gap between what is needed and what has been achieved in the deployment of low-emissions technology is large—to date, only about 10 percent of the deployment of low-emissions technologies globally by 2050 required for net zero has been achieved, mostly in less challenging use cases. Closing the gap would require building a new, high-performing energy system to match or exceed the current one, which would entail developing and deploying new low-emissions technologies, along with entirely new supply chains and infrastructure to support them.
Given the size and complexity of today''s energy system, this is no easy task. The physical challenges that would need to be overcome to successfully transform the energy system are significant and would require concerted action to solve. McKinsey''s recent report, "The Hard Stuff: Navigating the physical realities of the energy transition," identifies 25 physical challenges across seven domains of the energy system that would need to be addressed for the energy transition to succeed.1The hard stuff: Navigating the physical realities of the energy transition, McKinsey Global Institute, August 14, 2024.
Addressing these physical challenges would involve improving the performance of low-emissions technologies, addressing the interdependencies between multiple challenges, and achieving massive scale-ups, even in technologies where a strong track record has not yet been established. And, of course, this is only one side of the equation. To overcome these physical challenges, significant firm investment into low-emission technologies needs to be unlocked.
While significant progress has been made in developing and deploying some of these technologies, notably solar and wind, for which installed capacity has risen sharply over the past 15 years, a significant gap has emerged between the actual results and the expected ones. The at-scale deployment of all these technologies is still not happening as fast as needed to reach 2030 targets (see sidebar "The technology gap"). Moreover, the technologies are at risk of facing raw material and labor shortages and long permitting procedures.
We have identified three major issues that threaten the necessary deployment of capital: first, the business case—that is, the economic returns and policy predictability for developers—often remains weak; second, many technologies are increasingly but not yet cost-competitive for consumers, given the lack of at-scale manufacturing capacity or learning rate driven by deployment; and third, several technologies have not been tested at scale and need multiyear product, project, and supply chain development, thereby creating uncertainty about their effectiveness and efficiency. Ultimately, technology-focused enablers have not yet managed to address the challenges posed by macroeconomic shocks, geopolitics, and what it takes to enable tech ecosystems.
To shed light on the current status of the energy transition and provide a rigorous, fact-based assessment, we conducted an extensive analysis involving several steps.
Scope: We identified the key singular technologies that together account for the bulk of decarbonization potential (onshore and offshore wind, solar PV, clean hydrogen, sustainable fuels, CCUS, electric vehicles, and heat pumps). This means we excluded several other decarbonization technologies, including energy storage and battery energy storage systems (BESS) because these technologies are already in vast supply, with very healthy pipelines, and numerous players not only announcing projects but committing to them. We also excluded energy efficiency, low-carbon thermal generation, and nuclear because these are very fragmented markets with limitations due to regulation.
Data collection: We gathered comprehensive data from various sources, including proprietary and commercial project-tracking databases. This allowed us to obtain up-to-date information on the status of numerous projects across different decarbonization technologies.
Policy and historical capacity review: We reviewed existing policies, historical capacity deployments, and growth trends to understand the broader context and the trajectory of different technologies. This helped us benchmark current progress against historical data and policy targets.
Comparative analysis: We compared stated targets with expected capacity deployments, including project status and historical sales levels for customer adoption-driven technologies, such as EVs and heat pumps. This enabled us to assess the alignment between ambitious climate targets and actual progress on the ground.
Gap assessment: By examining the project status, including those that have reached FID stage, we assessed the gap between target volumes, expected volumes (based on current trends), and volumes that have already reached FID. This analysis highlighted the discrepancies between announced projects and those that are likely to materialize.
Facing this hard truth, innovation and policy resets will be needed for the increasing number of country and company net-zero commitments to be achieved in practice and move projects to FID and quickly beyond to subsequent deployment.
Rigorous, fact-based assessment of real-world progress is key to ensuring that momentum is maintained, and the energy transition continues at the necessary pace. In this article—a prelude to our Global Energy Perspective 2024—we seek to provide a detailed, albeit partial, assessment of where the execution of projects stands for specific low-emissions technologies in Europe and the United States. The goal is to answer the critical question: where are we, really, in the energy transition?
While considerable progress in the energy transition has been made in many countries, this article focuses solely on Europe and the United States, both of which have set explicit 2030 targets.2For the analysis in this article, Europe refers to the European Union plus Norway, Switzerland, and the United Kingdom. There may some gaps in the data based on data availability. It should be noted that we are neither modeling nor forecasting future outcomes, but rather seeking to bring to light the facts as best as can be defined to assess how big the gap is and what needs to be done to close it.
Sustainability matters. Together we''ll make it real.
Recent years have seen a flurry of net-zero commitments and ever-growing enthusiasm for climate action from all parts of society.
Industrial policy in many OECD economies is now anchoring climate technologies as a core pillar and substantial public funds are being earmarked for their development. In both Europe and the United States, emerging industrial policy has centered on building up a competitive cleantech value chain.
Together with continued cost improvement, including through innovation, these and other policy initiatives are leading to progress. Globally, between 2010 and 2023, renewable energy installation capacity grew around 20 percent per year, while the adoption of EVs surged, with a compound annual growth rate of around 80 percent (Exhibit 1).8Renewable energy installation includes solar photovoltaic, solar thermal, onshore wind, and offshore wind.
Such developments underscore a broader trend toward cleaner energy and reduced carbon emissions, but are now set against an increasingly complex and uncertain global energy space. Energy security, affordability, reliability, and industrial competitiveness can be challenging to achieve alongside sustainability, and investment is harder to secure.12"An affordable, reliable, competitive path to net zero," McKinsey, November 30, 2023.
The question remains whether the world''s much-needed commitments can be translated to action. McKinsey''s analysis of targets and announcements highlights a potential disconnect between climate ambitions and what is likely to be achieved in practice—at least at current course and speed. Regarding NDCs, for example, the United Nations acknowledges that "quality and ambition vary."13"All about the NDCs," United Nations Climate Action, accessed July 2024. Where the SBTi is concerned, many of the companies that have signed up have made commitments but have not yet articulated a clear plan to achieve them.14SBTI monitoring report 2023, Science Based Targets initiative, July 2023.
In the United States alone, more than 1,000 green or blue hydrogen projects have been announced since 2015. However, fewer than 15 percent had reached FID at the time of writing, indicating a high risk for project fall-through.15Hydrogen Insights Project Tracker, McKinsey. This discrepancy between announced projects and projects realized following FID does not only apply to hydrogen—it is true across most critical energy transition technologies (Exhibit 2).
Indeed, decarbonization technology projects have historically had a high fall-through rate, with only a small percentage of announced projects reaching FID, and an even smaller numbers of projects actually being realized. Our analysis shows that many planned projects for key decarbonization technologies in the European Union and the United States are falling short of announced targets, some significantly so.
The extent of this shortfall varies by technology and region—renewable energy generation technologies, especially solar, are the closest to meeting short-term goals, while electrification technologies have seen periods of rapid growth but are now losing momentum. Many innovative technologies that could be crucial for decarbonizing "hard-to-electrify" sectors have ambitious project pipelines but are not yet deployed at scale. These technologies need to be deployed as electrification is only a partial answer.
Here, we look at the progress of each of these technologies and where they are falling short of targets.
In the European Union and the United States, renewable energy generation technologies, such as solar PV, onshore and offshore wind, and battery energy storage systems (BESS), have experienced rapid development, driven by supportive policies and increasing private sector investment.
BESS has seen significant technological advancement over the last decade and has scaled rapidly since 2015. In the United States, legislation has supported a robust pipeline and project conversion, especially in states like California and Texas. In Europe, we expect the solar PV project pipeline will in turn attract BESS projects, especially in places like Germany and Spain where colocation is favorable. All in all, battery production capacity appears healthy, leading us to believe there is less risk of a supply gap (and therefore why we excluded BESS from this analysis).
However, our analysis of offshore wind and solar PV shows that not all renewable pipelines are on track to meet 2030 targets and short-term deceleration is threatening the existing pipeline further (Exhibit 3). System bottlenecks need to be resolved faster to ensure deployment scales at the required rate.
3
Solar PV has experienced significant growth in both Europe and the United States, with around 180 gigawatts (GW) and 120 GW of solar PV capacity added since 2015, respectively.16"Renewable capacity statistics 2023," International Renewable Energy Agency, March 2023.
Despite this growth, Europe''s solar pipeline is not on track to meet 2030 capacity targets of 600 GW: less than 390 GW of capacity is planned to be online by end of the decade, leaving a gap of approximately 200 GW. Moreover, of the approximate 114 GW of additional solar capacity expected to come online over the next five years, less than 20 percent has reached FID. A catch-up is still possible: in contrast to wind, additional solar capacity could be delivered rapidly, within 18 months, and the pipeline between now and 2030 could increase and become firmer.
In the United States, according to our analysis, annual solar PV capacity additions will slow down after 2028, at about 220 GW of capacity (operational and FID), because of a lack of firm longer-term commitments. Of the announced capacity to come online before 2030, around 60 percent is still pending FID, putting a significant proportion of planned solar at risk. However, again, here we would acknowledge that the nature of solar installation is such that the pipelines could indeed materialize in time.
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