Utilities, municipalities, states, and nations want low-cost, reliable electricity. Many have also set goals to decarbonize1 their power systems. How can they do both? In this article, we describe, in general terms, how integrated power systems – across bulk-generation, transmission & distribution, and direct customer offerings – can achieve up to 100 percent decarbonization by 20402 and the approximate costs.3
In most markets, the costs of solar and wind power and storage have fallen so far and so fast that they are often the lowest-cost option. Reaching 50 to 60 percent decarbonization can therefore be done with little or no investment beyond that determined by purely rational economic behavior. Getting to 80 to 90 percent decarbonization is generally technically feasible, but will be more expensive, more complicated,4 and require more market-specific actions. At this level, the system would look noticeably different from how it looks now. And getting to 100 percent is likely to be difficult, both technically and economically. Newer technologies will need to be deployed to match supply and demand when wind- and solar-power production are depressed. Among them: biofuels, carbon capture, power to gas to power, and direct air capture.
Given differences in climate, natural resources, and infrastructure, different markets will take different pathways to decarbonize their power systems (exhibit).
We have analyzed the possible pathways in four types of markets:
- “Islanded” markets, refer to islands, such as Hawaii, as well as to places that are unusually remote or isolated.
- Thermal-heavy, mature markets typically have large populations, good interconnections, and significant fossil-fuel assets. Their power systems are reliable and accustomed to managing significant load. Germany and the PJM Interconnection, the largest regional transmission organization in the United States,5 are two examples of such markets.
- Baseload clean markets are those that already have significant zero-carbon baseload power—such as France, with its vast nuclear assets, and Brazil and the Nordic region, with their hydroelectric resources. These markets are likely to be able to pursue significant decarbonization at little or no cost.
- Large, diversified markets refer to places like California, Mexico, and parts of eastern Australia. They cover extensive territory and have good potential for renewables—typically, a mix of wind, solar, and, sometimes, run-of-river hydroelectric power. On the other hand, they often do not have much clean baseload power.
The road to deep decarbonization will be complicated, and there will be both winners and losers along the way. If done well, however, the benefits could be momentous. Customers will find their costs optimized, companies will create new value from decarbonization, and society will benefit from cleaner air and lower emissions.
Jason Finkelstein is an associate partner in McKinsey’s San Francisco office, David Frankel is a partner in the Southern California office, and Jesse Noffsinger is an associate partner in the Seattle office.
The authors wish to thank Amy Wagner for her contributions to this article.
1. We measure decarbonization as the reduction (in percent) in greenhouse-gas (GHG) emissions for a given power system. Therefore, 80 percent decarbonization means 80 percent fewer GHG emissions in 2040 than in 2020; in 100 percent decarbonization, the power sector has zero emissions.
2. The model includes the bulk-electricity generation, distributed-electricity generation, electric-transmission, and electric-distribution systems (down to the feeder level). It also includes necessary interlinkages, including ties to the natural-gas network for power-to-gas-to-power technologies and adoption of electric vehicles and other behind-the-meter devices to provide flexible load, insofar as they provide support for decarbonizing the power sector. Finally, the model makes optimization tradeoffs across the network, such as comparing the cost of a new build transmission line vs. a distributed battery storage system vs. operating an existing bulk power asset. This analysis does not explore decarbonization outside of the power sector. For example, it does not include decarbonizing the transportation or agriculture sectors.
3. We focus on decarbonization because the goal of most renewables-focused policies is to reduce greenhouse-gas emissions, and most markets will require expanding the use of intermittent generation sources, such as solar and wind power, to do so.
4. Except in markets with high levels of clean-baseload generation—chiefly, hydroelectric or nuclear power.
5. The PJM Interconnection serves all or part of Delaware; Illinois; Indiana; Kentucky; Maryland; Michigan; New Jersey; North Carolina; Ohio; Pennsylvania; Tennessee; Virginia; Washington, DC; and West Virginia.