If the United States is to decarbonize its economy, the power sector has a critical role to play. This task is complicated by the fact that the US electric-power sector is highly regionalized, with each market having its own governance and structures.
As of September 2020, 22 states plus the District of Columbia have set targets to fully or mostly decarbonize their power systems over the next ten to 30 years (exhibit). Four more have set targets to reduce at least one-quarter of their emissions; we call these 26 states “decarbonizing.” The other 24 states, which account for 55 percent (in total megawatt-hours in 2019) of US electric power generation, have no or limited targets; we call these states “cost driven.”
To explore how electricity demand and the mix of power generation could evolve across the United States over the next 30 years, we modeled scenarios that projected market changes. Unsurprisingly, we see very different rates of decarbonization over time across the two market archetypes.
Our analysis found that demand for power grows twice as fast in decarbonizing markets, but these markets build more zero-carbon power—and sooner. Key implications include the following:
- Gas expands substantially in cost-driven markets but acts as a bridge fuel in decarbonizing markets. In cost-driven markets, we expect installed gas generation capacity and the amount of power generated from gas to rise, as low-cost gas replaces coal.
- Grid flexibility becomes a much more acute need in decarbonizing markets. In grids with substantial levels of renewable generation, flexible solutions will smooth out imbalances between demand for power and the intermittent supply from renewable sources.
- Decarbonization will challenge power market structures. As regions move toward solar, wind, and flexibility solutions, the ways in which generation and flexibility assets operate change. Consequently, power market structures will also need to change.
Our analysis illustrates the extent of the policy-driven differences in the power sector that have emerged across the country. The implications for companies operating in the sector are enormous.
Owners of gas power plants, for example, could see rising demand for their output and favorable conditions for new plants in cost-driven markets—as well as rapidly decreasing utilization, high operational volatility, and tougher prospects for new investment in decarbonizing markets.
Electric utilities could see a range of outcomes, from limited disruption in the cost-driven markets to a rapid increase in electrification and growth of centralized and distributed renewables in decarbonizing markets. In addition, a host of modernizing and capacity-increasing investments in the electric grid might be needed to accommodate those changes.
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Players that understand the factors likely to shape demand over the next three decades—and how they are connected—will be better positioned to develop effective long-term strategies.
Rory Clune is a partner in McKinsey’s Boston office, where Ksenia Kaladiouk is an associate partner and Sarah Yasenka is a research analyst; Andrew Grass is a consultant in the Washington, DC, office; Jesse Noffsinger is an associate partner in the Seattle office; and Humayun Tai is a senior partner in the New York office.