A substantial opportunity for green growth and business-building in Asia is being accelerated by ongoing global climate and geo-political events, with momentum particularly strong in the energy industry. Currently accounting for almost three-quarters of global CO2 emissions, the energy sector (electricity, heat and transport) is expected to play a key role in the world’s pathway towards a low-carbon future. Recent McKinsey analysis shows that the shift to net-zero power could generate more than $1 trillion of sales per year by the end of the decade.1“Playing offense to create value in the net-zero transition,” McKinsey Quarterly, April 13, 2022.
With stronger assets, capabilities, and relationships compared with independent start-ups,2“Building new businesses: How incumbents use their advantages to accelerate growth,” McKinsey, December 12, 2019. corporate ventures are well-placed to create value during the transition—provided they move quickly. To identify and scale successful green businesses, organizations can look to balance both sides of the energy supply-demand equation. This requires organizations both to invest in supply (either by launching their own venture or partnering across the value chain) and to design for consumer demand when faced with large-scale shifts.
Shift 1: Growth in intermittent renewable power
Supported by favorable policies and targets, renewables are forecast to account for 60 percent of all power generation by 2035, and 86 percent by 2050, under an accelerated scenario (Exhibit 1).
However, to reach this accelerated trajectory, investment is required to boost stability of supply in the context of renewable energy sources that can often be intermittent. This also needs to be supported by demand-management measures comprising a mix of technology and behavioral interventions to shape energy usage by consumers.
Invest in supply
Beyond dramatically accelerating wind and solar, there is a strong need to tackle the intermittent nature of renewable energy sources. Storage technologies such as green hydrogen, pumped hydro, long-duration energy storage, and batteries (such as the set of battery storage facilities built in Hokkaido, Japan) will likely be at the forefront of a more reliable grid. Dispatchable zero-carbon generation options such as bioenergy, concentrating solar thermal (combined with thermal energy storage), and geothermal can also be considered.
Finally, co-locating renewable assets offers another solution to renewable intermittency: for example, the Gullen wind and solar project in Australia has shown that the complementary generation profile of wind and solar can enable more continuous electricity generation. Public-private partnerships and regulatory incentives will continue to improve these approaches and make them more cost-effective going forward.
Design for demand
Players across the energy value chain can use technology and behavioral nudges to “flatten” the load curve and shape energy demand patterns. For example, smart EV chargers can automatically enable charging at times when demand is lowest and electricity cheapest, thus reducing the burden on the network. Similarly, rate design and digitized home energy control (harnessing the IoT) can help consumers measure electricity usage and pricing at narrow intervals—for instance, every hour. This empowers consumers to voluntarily shift their electricity use to times when power is less expensive. McKinsey’s CHOICES framework provides an effective categorization of common actions that can influence behavior, such as incentives or “salience”.1Salience is the phenomenon whereby people take in messages that are easier to process and remember. For more, see Dilip Bhattacharjee, Keith Gilson, and Hyo Yeon, “Putting behavioral psychology to work to improve the customer experience,” McKinsey, March 11, 2016. Also, regulatory frameworks need to be in place to properly reward changes in consumer behavior, especially in the context of reducing overall system peak load.
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Shift 2: Widespread electrification to meet climate targets
To meet ambitious climate targets, Asian countries are looking to rapidly electrify across all sectors—the supply of electric vehicles (EVs), for instance, is expected to climb significantly over this decade. China is expected to account for 60–80 percent of electric and hybrid model sales by 2030, with considerable variation in penetration across other countries in the region (Exhibit 2). To bolster electrification efforts across transport, infrastructure, and industrial processes, policymakers and market participants can encourage consumers and businesses to switch via a mix of regulatory incentives, infrastructure investments, and positive messaging and campaigns designed to address consumer concerns.
Invest in supply
Electrifying transport (especially cars and buses) is a key lever, and requires investment not just in vehicle manufacturing but also in EV-charging infrastructure and battery materials. Combining green venturing and partnerships is an effective way to invest across the value chain. For buildings, induction stoves and electric heat pumps (which provide both heating and cooling) are gradually replacing gas-fueled equipment. Electrifying industrial processes is also integral to this transition. Across all types of fuel that industrial companies use to provide energy, almost 50 percent could be replaced by electricity with currently available technologies such as electric heat pumps, boilers, and furnaces.1Occo Roelofsen, Ken Somers, Eveline Speelman, and Maaike Witteveen, “Plugging in: What electrification can do for industry,” McKinsey, May 28, 2020. The remaining 50 percent, which mostly comprises electric-powered very high-temperature heat processes (such as virgin steel and cement production) still requires R&D investments to mature the technology. Similarly to power, long-duration heat storage will be a critical enabler for industry. Finally, grid investments will be essential to bring high-voltage power to new locations.
Design for demand
Beyond regulatory-led initiatives around rebates and infrastructure (Exhibit 3), societal pressure amplified by positive campaigns (an approach that has been successful for other aspects of sustainability such as waste management) can help accelerate replacement of fossil-fuel-based technologies with electric alternatives. Players can personalize their offerings to drive consumer uptake by gaining a deeper understanding of customer trends and needs (perhaps by setting up a behavioral-insights unit) using advanced analytics and machine learning. For example, EV range anxiety can be addressed by offering clearer information about charging locations, which complements longer-term initiatives such as more EV charging infrastructure and battery density design.
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Shift 3: Step-change in hardware investment for the energy transition
With the growth in EVs and other technologies, electricity demand is forecast to rise, which will place additional pressure on grids and operators. For example, achieving EV and climate targets across Asia would require substantial investments in EV charging infrastructure and low-cost EV model distribution. A mix of policy measures and investments to create a robust grid backbone combined with a drive for energy efficiency among consumers can avoid power infrastructure being overwhelmed in the transition to a more electrified economy.
Invest in supply
An upgraded and expanded electric grid will be the backbone of the Asian energy transition—and an integral requirement of any realistic decarbonization pathway. Existing electric grids can be strengthened, whether through new forecasting capabilities, stronger electrical design standards, or stronger cybersecurity. However, grid augmentation is going to be essential. With substantial investment in clean energy-generation expected to continue, energy players and market operators need to move quickly to shorten development timelines by streamlining permitting and approvals, cooperating across sectors, and harnessing analytics.
In developing areas, green community grids—especially in countries such as China, India, and Nepal—are now gathering substantial momentum. Establishing an early presence in this space, as an investor, manufacturer, seller, or distributor, could help to diversify value streams for traditional, centralized energy players.
Design for demand
While significant long-term transmission upgrades are necessary, strategies to promote energy efficiency in the short-to-medium term will be paramount. For example, modern electric heat pumps are 2.2 to 4.5 times more efficient than gas furnaces. According to McKinsey analysis, heat pumps could constitute approximately 90 percent of new heating unit sales by 2050, compared with 35 percent today. Other building energy efficiency enhancements include envelope1A building’s envelope comprises all the structures that separate the internal building from its external environment (such as the roof, windows, and walls). upgrades and EV charging equipment installation. Companies can look to make it easy for property owners (both residential and commercial) to reduce their energy usage through sustainable design, perhaps by introducing simple low-interest green financing or installation discounts.
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Shift 4: Step-change in digital investment for the energy transition
Rapid developments in technology, regulatory policy (such as Japan’s Green Growth strategy), and green start-up investment activity have shifted momentum towards sustainability and innovation in the energy sector. Beyond infrastructure investment (see shift 3), there is a need for investment in digital, analytics, and connectivity to support activities across the energy value chain, from data management and aggregation to customer communications. Digitalization in the energy industry can provide value across many areas such as operations and energy efficiency.
Invest in supply
Virtual power plants (VPPs), also referred to as battery aggregation or energy sharing, are now at the forefront of the flexibility landscape. VPPs are cloud-based distributed power plants that aggregate the capacities of distributed energy resources for the purposes of enhancing power generation. In Japan, a multinational conglomerate is partnering with German VPP operator Next Kraftwerke to manage many renewable energy facilities simultaneously and then sell this energy to the wholesale market. In addition, vehicle-to-grid (V2G) services can facilitate the selling of power stored in EV batteries back to the grid during demand peaks, which helps to stabilize the grid and allows EV owners to access income.
Design for demand
To accelerate demand in new technologies and transition from early adopters to the early majority, companies need leverage digital to design for empathy and target customer needs and pain points. For example, building a carbon-markets business requires ongoing consumer education efforts around digital tools (such as integrated carbon-farming1Carbon farming (a type of regenerative agriculture) refers to the sequestering and storing of carbon and the reduction of greenhouse-gas emissions in agriculture at an individual farm level. project planning or emissions-measurement software) and additional advantages of carbon farming (such as carbon credits). Furthermore, digital trackers and meters that compare a home’s energy usage and efficiency to the local average can influence consumers to save more energy—an example of “smart disclosure” nudging.
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Shift 5: Smoothing the transition from old to new infrastructure
Coal remains a major energy source in Asia. Indeed, the region is home to 71 percent of the world’s coal-fired power plants (Exhibit 5). As Asian countries look to meet climate targets, it is important to design for renewable power early and find opportunities in legacy infrastructure. Otherwise, energy supply fluctuations and price uncertainty may reduce the stable and reliable provision of energy and so hinder investment in electric technologies.
Invest in supply
Firstly, industrial facilities should be designed with decentralized storage and power solutions in mind; these facilities should allow for intermittency flexibility from renewables. Second, as aging infrastructure becomes cheap and redundant, it can be purchased by businesses and organizations that can extract new value from it. For example, by reusing parts of the existing infrastructure, companies can convert old coal-fired power plants to biomass-fired plants or clean-energy hubs. Converting existing jobs at coal-fired power plants to green jobs can also help to rapidly accelerate the energy transition.
Design for demand
Looking at past examples of smooth infrastructure transitions (such as the fixed line to mobile transition or cash and checks to electronic payments), it can be seen that the new technology reaches scale long before the corresponding legacy technology is phased out. As such, encouraging consumers to switch to cleaner energy can provide the demand uplift necessary to stimulate supply. In Switzerland for example, energy consumers are being asked to automatically enroll in clean-energy programs (using an “opt out” rather than an “opt in” system).
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The energy transition is well underway in Asia. As it progresses, capital will be reallocated, new markets will open, and technologies will scale. When considering green business-building opportunities, organizations that pivot between investing in supply and designing for demand will be at the forefront of this next wave of value creation.