McKinsey takes a hard look at the energy transition’s hard stuff.

August 22, 2024The McKinsey Global Institute (MGI) has conducted extensive research on the economic, financial and societal aspects of the net-zero transition, working with colleagues from our Sustainability and Global Energy and Materials Practices.

"We wanted to flip the paradigm in this report, and focus on the physical realities-the nuts and bolts-in the 'here and now,'" explains Tiago Devesa, a senior fellow at MGI. "What are the technologies, supply chains, and infrastructure we need to run the high-performance low-emissions energy system of the future?"

In this post, Mekala Krishnan, the McKinsey Global Institute partner who led the research, and Tiago share what they learned.

Tell us about the scope of the research-what exactly does the "hard stuff" mean?

Tiago: Our team looked across seven domains that would have to be physically transformed, such as power, industry, and mobility. It's a landscape with some 60,000 power plants; more than 1.5 billion vehicles on the roads; and 2 million kilometers of oil and gas pipelines. We interviewed our own as well as external experts about topics ranging from exciting innovations in industrial heat in Europe, to new lithium extraction technologies in Argentina, and the latest long-duration energy storage projects in China. We identified the 25 biggest physical challenges-and classified them into three levels of difficulty. So basically we are saying if we want to get the energy transition right, we need to look at its physical realities-the "hard stuff."

What surprised you in this analysis?

Tiago: A couple things are a bit staggering. There has been tremendous momentum in recent years, especially in wind and solar power, electric cars, heat pumps. Climate finance has started to flow; and many companies have made considerable commitments.

But right now, we're only at about 10 percent of the deployment of 'physical assets'-technologies and infrastructure-that we will need to meet global commitments by 2050. This is not an abstract dollar number, or goal, or theoretical pathway. 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.

Mekala: I don't want to underestimate the task at hand: it is a huge bending of the so-called "emissions curve." But what was fascinating is that of the 90 percent we have left to go, things are evenly split: 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 percent are what we call "Level 3-the harder challenges.

Can you give an example of a harder challenge?

Mekala: In some domains, including hydrogen, carbon capture, and industrial production, we're sometimes at 1 percent deployment or even less of where we will eventually need to be.

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 decarbonized steel.

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.

But even in the case of Level 3 challenges, there are ways to make progress. For example, producing new, virgin steel in a low-emissions way is difficult, but recycling steel is pretty mature. We've been doing it for decades, it's fairly low-cost. So simply increasing the recycling share of steel can go quite a long way in abating emissions.

We are also seeing many new potential solutions: the Hybrit project in low-emissions steel, LEILAC in cement, and Hubei Yingchang in compressed air storage for long-duration energy storage. The task now is continuing to innovate to improve performance, reduce costs, and scale.

What are some examples of Level 1 challenges or easier wins?

Tiago: The average electric car being sold today can cover the needs of more than 70 percent of households, and high-end models more than 90 percent. 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 percent of the human population no matter where they live.

This is encouraging because these are two of the foundational technologies that we need to decarbonize mobility and buildings.

How are we helping companies interpret this research for their own sustainability work?

Mekala: They can use this understanding of the physical challenges to ask themselves three questions and calibrate their action:

The first is, "Based on Level 1 challenges which are relatively easy to address, what initiatives can I take today that will have an impact?"

A second is, "For our 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 example, "how can I plan for a projected shortage in critical minerals in the period to 2030?"

A third question that relates to the very hardest challenges, "Can we play a role here? Where is the potential to create value for our business? And where do we need to innovate on individual technologies and form strategic partnerships to help solve some of them?"

What should readers take away from this work?

Mekala: 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. I go back to our metaphor: we are not replacing the bulb, we are rewiring an entire house.

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