McKinsey: Despite Progress, Energy Transition Faces Hurdles
New research from the McKinsey Global Institute (MGI) reveals only 10% of necessary physical assets for a net zero future have been deployed.
These findings highlight an urgent need for action as although undeniable progress is being made, the energy transition must be viewed as more than just a concept — a physical transformation.
The scale of the energy transition challenge
Tiago Devesa, a MGI Senior Fellow, said: “We wanted to flip the paradigm in this report and focus on the physical realities — the nuts and bolts — in the here and now. What are the technologies, supply chains and infrastructure we need to run the high-performance low-emissions energy system of the future?”
MGI’s research spans seven domains requiring physical transformation, including power, industry and mobility — encompassing 60,000 power plants, more than 1.5 billion vehicles and two million kilometres of oil and gas pipelines.
The team behind the research identified 25 major physical challenges, categorising them into three levels of difficulty.
Despite recent momentum in wind and solar power, EVs and heat pumps, McKinsey found that only about 10% of the physical assets needed to meet 2050 global commitments — whether that be technologies or infrastructure — have been deployed. This stark reality, as Tiago added, underscores the enormity of the task ahead.
“This is not an abstract dollar number, goal or theoretical pathway,” he said. “It’s the physical world that exists around us today. So, despite all the momentum, we’re still in very early stages of the energy transition."
Is energy transition progress attainable?
Looking at the remaining 90%, McKinsey’s analysis found that the progress left to make is pretty evenly split.
MGI Partner Mekala Krishnan, who led this research, explained: “Half of the energy system-related emissions are in what we call Level 1 and Level 2 challenges — things that are relatively easy to solve. It’s a matter of how to best deploy mature technologies. But the remaining 50% are what we call Level 3 — the harder challenges.”
Harder challenges can be found in some areas, like hydrogen, carbon capture and industrial production, Mekala shared. This is because current adoption lags far behind where the world needs to be to work toward global net zero goals.
“We’re sometimes at 1% deployment or even less of where we will eventually need to be,” she said.
“For example, many of the technologies to produce low-emissions steel are relatively nascent, with issues to solve. Then there is the challenge of scaling any new technology: we would need to retrofit massive facilities processing millions of tons of steel around the world.
“Third, we need to solve the adjacent problem of accessing enough low-emissions hydrogen and power and their respective value chains — inputs that are needed for the manufacturing of decarbonised steel.
Then there is the challenge of scaling any new technology: we would need to retrofit massive facilities processing millions of tons of steel around the world
“This illustrates what makes this work hard. We see this in cement, in plastics, in ammonia: the consistent theme of technology performance gaps, massive scaling needs and entwined linkages.”
In a bid to make meaningful progress, Tiago looks at McKinsey’s findings and encourages progress be made in the easy-to-attain places, such as the aforementioned Level 1 areas.
He said: “The average electric car being sold today can cover the needs of more than 70% of households and high-end models more than 90%. There’s still work to be done, but we’re close there. Another example is air-source heat pumps, which can serve the needs of over 95% of the human population no matter where they live.
“This is encouraging because these are two of the foundational technologies that we need to decarbonise mobility and buildings.”
Takeaways from McKinsey’s energy transition research
With the energy transition involving a complex, system-wide transformation, a strategic approach from businesses across sectors is necessary. This is why Mekala emphasises that companies must navigate this landscape by addressing three critical questions.
- Based on Level 1 challenges which are relatively easy to address, what initiatives can I take today that will have an impact?
- For so-called Level 2 challenges, where there are constraints to scaling, where do I expect there to be bottlenecks or hurdles in the medium-term and how do we prepare for these?
- For Level 3, can we play a role here? Where is the potential to create value for our business? Where do we need to innovate on individual technologies and form strategic partnerships to help solve some of them?
“The more I work on this topic, the more I am fascinated by how — while we can often talk about individual technologies, sectors, companies or countries — at its core, what we are talking about is a system-wide transformation,” Mekala concluded. “I go back to our metaphor: we are not replacing the bulb, we are rewiring an entire house.”
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