The energy transition: A region-by-region agenda for near-term action
As 2022 comes to a close, the energy transition seems more disorderly than ever. A world economy shaken by a global pandemic and the surging inflation that has accompanied the subsequent recovery has had to contend with a tragic conflict in Ukraine and its aftermath of human suffering, rising energy costs, and declining energy security. The immediate response has meant more short-term reliance on fossil fuels and less available resources for the transition, not to mention additional challenges to regional and global coordination.
As we look forward to 2023 and COP28, the dual imperatives of ensuring energy resilience and affordability and of reducing emissions appear equally inescapable. Instead of delaying action, we believe these imperatives emphasize the importance of accelerating coordinated long-term action, at the same time as taking short-term measures.
This article, a summary of our full report (which can be downloaded as a PDF here) highlights a range of near-term actions that countries and regions around the world could take to ensure they transition their energy system while maintaining focus on the immediate needs of energy reliance and affordability–and thereby achieving a less disorderly, or “more orderly” transition.
The report looks at these actions through three different lenses: actions that apply on a global scale; actions that apply more specifically to regions that take into account their local needs and nuances; and finally, actions that various stakeholders including governments, financial institutions, companies, and individuals could take to find a path to a more orderly transition.
Our focus is on near-term, critical action, and we use 2030 as the time horizon. We are aiming to describe neither a longer-term path with its implications nor the implications of the current momentum. Three factors motivate this choice: the need to move from commitments to clear plans and actions; the recognition that transitioning our energy system is a slow-moving process and that actions taken now could take years to have the desired consequences; and the sense that time is running out.
Momentum toward renewables is growing but without a corresponding decrease in global emissions
The world’s progress toward cleaner energy has been accelerating. Over the past decade, production of renewable energy has more than doubled globally, and its share of total primary energy consumption has grown from 9 percent in 2011 to 13 percent in 2021. While renewables broadly defined encompass a range of energies, including hydropower and geothermal energy, we focus here mainly on solar and wind energy.
Despite growth in renewable energy, the use of fossil fuels is also expanding to meet growing demand for energy. Global energy demand grew by 14 percent from 2011 to 2021, fueled mainly by emissions-intensive sources. As a result, global energy-related emissions have increased in the past decade by about 5 percent, or 1.7 gigatons (Gt) of CO2, and the share of primary energy from fossil fuels has remained largely unchanged, at 82 percent (Exhibit 1).
Prescriptions for the role of fossil fuels cannot be simplistic, given this continued reliance. The net-zero transition requires steep and decisive declines in fossil-fuel consumption. At the same time, in one scenario of our analysis (the “achieved commitments” scenario, which implies a 1.7°C rise in global temperatures by 2100), global demand for natural gas could be higher in 2030 than 2021, while oil consumption would decline by less than 5 percent in the same time frame. Securing this supply would require investment in fossil fuels to ensure energy resilience and affordability. Achieving a more orderly transition entails balancing the accelerated decommissioning of inefficient and highly polluting assets such as coal or oil power generation facilities with incremental investments in lower-emissions fuel production. To the extent that fossil-fuel investments are made, they should be directed toward lower-emission options and flexible assets that can rapidly adjust their production as demand decreases to meet net-zero goals. Investments and actions to reduce the carbon intensity of fossil fuels, such as addressing methane emissions and electrifying oil and gas operations, will also be needed.
The socioeconomic context has become at once more precarious and more receptive to the energy transition. The war in Ukraine has, beyond its incalculable human cost, significantly increased energy and food costs and exacerbated the inflationary trends that were already manifest in the recovery from the COVID-19 pandemic. It has also elevated the urgency of energy resilience and affordability. In addition, the pandemic disrupted global supply chains and inflated, among others, the costs of energy-project construction. These challenges have heightened awareness and spurred new actions toward an energy transition, particularly in Europe.
The conclusion of COP27 last month has brought renewed uncertainty on the path to the energy transition. While progress was made in pursuing global cooperation through the establishment of Loss and Damage funding arrangements for particularly vulnerable countries, progress on emissions mitigation remained largely elusive.
According to our analysis, achieving national commitments could lead to significant progress toward a 1.5° pathway. However, after COP27, it is less obvious whether these critical targets will be met.
Physical climate risk and its visible manifestations are also continuing to grow. Specifically, according to the sixth assessment report of the United Nations’ Intergovernmental Panel on Climate Change (IPCC), extrapolation of current policies would lead to a median global warming of 2.4°C to 3.5°C by 2100 and put limiting global warming to 1.5°C beyond reach. McKinsey analysis indicates that there could be an annual gap of 2.4 Gt carbon dioxide equivalent (CO2e) (7 percent of 2021 energy-related emissions) between the “current trajectory” and the trajectory of an “achieved commitments” scenario.
To bridge this gap, annual solar and wind installed capacity would need to nearly triple, from approximately 180 gigawatts (GW) of average yearly installed capacity in 2016–21 to more than 520 GW over the coming decade, with different accelerations required across global regions (Exhibit 2).
Countries fall into five main archetypes with respect to their opportunities and priorities for a more orderly energy transition
The opportunities, challenges, and risks associated with a more orderly energy transition are not distributed evenly around the globe. Some countries can count on greater financial or natural resources, and not all economies are equally equipped to address the challenge of transforming their energy mix. It is therefore useful to identify the primary archetypes, or groupings, into which countries would fall in the context of the energy transition and the corresponding opportunities and challenges.
Considerations of affordability and resilience will shape each country’s ability to achieve a more orderly transition. The following three factors are critical in understanding each country’s ability to make the transition. The first two relate to energy resilience, while the third relates to energy affordability.
The country’s short-term economic reliance on energy imports and emissions-intensive industries. Some countries rely on imported energy, frequently fossil fuels, for energy security. These include several European countries including Germany, which are exposed because of their high level of dependence on imported fuels, and India and China, which represent the world’s largest population centers and have both high energy needs and highly polluting energy-consumption profiles.
The country’s access to favorable natural resources. Some countries have limited natural domestic potential for the development of clean energy, such as the required levels of sunshine or wind, suitable land for new projects, or abundant reserves of minerals such as copper and nickel that are critical to the energy transition.
The country’s disposable financial resources and ability to leverage capital to support the energy transition. The net-zero transition would require an additional $1 trillion to $3.5 trillion in average annual capital investment globally through 2050, according to estimates in our January 2022 report on the net-zero transition. Renewable energy and grid improvements require up-front capital investment. These capital investments pay off over various time horizons in the form of reduced operating expenses and improved energy resilience and cost. The transition will also require investments to address stranded costs in fossil-fuel assets, conduct at-scale R&D, retrain the workforce, offer safety nets to vulnerable groups, and fund early-stage infrastructure deployment to initiate “learning curve” effects. Both more and less affluent countries find themselves under budget constraints these days, but the former have many more resources and face fewer trade-offs than the latter in making these investments.
The five archetypes
Based on the examination of these three dimensions, we have defined five main archetypes of countries that face similar challenges and opportunities in the net-zero transition (Exhibits 3 and 4). While each country is different, we believe these archetypes lend themselves to similar sets of actions and priorities for a more orderly energy transition. This categorization of countries reveals that the burdens of the energy transition, and each region’s ability to meet the challenges of adaptation and mitigation, will not be evenly distributed. Moreover, global cooperation and coordinated collective action beyond current levels will be needed: for example, while significant progress has been made in mobilizing public and private financing for developing countries, OECD analysis indicates that the $100 billion target for 2020, set at COP15 in Copenhagen, was likely not met.
The pathway to mobilizing global financial flows from more affluent to more at-risk countries is still unknown, but our analysis indicates that developing countries can benefit from readily available solutions such as abatement and avoidance of coal expansion or methane emissions, which increased financing flows can catalyze. Similarly, affluent countries would benefit from greater availability of critical natural resources from developing countries, which would require investment in the sustainable extraction and processing of these resources.
1. Affluent, energy-secure countries. These countries—which include Australia, Saudi Arabia, and the United States—together account for 8 percent of the global population and 22 percent of global greenhouse-gas (GHG) emissions. They have abundant domestic production of energy and high GDP per capita (as a proxy for the amount of available financial resources and capital). They are likely to remain energy exporters as the energy transition unfolds but could reconsider their energy sources to meet emissions targets.
2. Affluent, energy-exposed countries. These countries—which include Germany, Italy, and Japan—represent 7 percent of the global population and 13 percent of global emissions. They have relatively high GDP per capita but are exposed to energy security concerns. The transition could represent an opportunity for them to pivot to domestic clean-energy production; some of the more manufacturing-intensive countries could incorporate more green manufacturing practices.
3. Large, emissions-intensive economies. China, India, and South Africa are among the countries in this archetype. Together, these countries are home to 37 percent of the global population and generate 40 percent of global emissions. For these economies, a net-zero transition would naturally focus on finding a balance between meeting growing energy demand with cleaner resources and addressing reliance on the most emissions-intensive fuel, which has historically been relatively low-cost, domestically produced coal.
4. Developing, naturally endowed economies. Brazil, Indonesia, and Mexico are among the countries with developing, naturally endowed economies. Together, these countries represent 9 percent of the global population and 5 percent of global emissions. These countries have significant potential for power from solar or wind sources or critical natural resources, such as rare metals, to support the energy transition. A natural priority for these countries would be setting up a framework to develop these resources and move to a sustainable mode of production.
5. Developing, at-risk economies. These regions include parts of Africa and Southeast Asia, as well as some island nations. Together, they are home to 11 percent of the global population and generate 5 percent of global emissions. They are characterized largely by agricultural economies and a disproportionate exposure to climate risk. Some have limited potential for the development of renewable energy, either because of financial constraints or because of limited natural endowments. Their transition would likely be coupled with the establishment of basic infrastructure services and investment in climate adaptation, and it would likely be possible only with foreign support.
Globally, eight sets of common actions are needed for a more orderly transition
All countries could take eight sets of actions that are necessary in the near term to make the energy transition more orderly. The extent to which these actions are relevant to a given country, and the specifics of their implementation, would of course vary. While these actions address the entirety of the global energy system, most of them focus on energy production rather than consumption. Indeed, while promoting the adoption of green technology on the demand side will be important, we believe that many of the actions to be taken in the near term will interest the supply side, where addressing the scalability of assets and infrastructure and moving energy production toward a smaller carbon footprint will likely be key priorities.
This analysis builds on a previous article that groups the requirements for a more orderly transition into three categories: physical building blocks; economic and societal adjustments; and governance, institutions, and commitments. Many of these actions are well understood. We believe it is possible and critical to make meaningful progress on all of these actions by the end of this decade.
Physical building blocks
1. Streamlining access to land and simplifying permit processes to accelerate time to deployment for renewables and cleantech. Streamlining the permit process and limiting the number of required project-approving entities could accelerate project execution. Access to land could be simplified by advancing projects that benefit local communities and by developing land-efficient solutions such as offshore wind. The use of alternative lands—for example, wastelands, which is land degraded by human activities, or agrivoltaic land, which is used for both agriculture and solar-photovoltaic-energy generation—and out-of-the-box solutions such as floating solar photovoltaics could help expand the area suitable for installation of renewables.
2. Modernizing and repurposing legacy infrastructure and creating new assets to accelerate the integration of renewables and cleantech into the energy system. Investing in developing and modernizing the power grid will be crucial to ensuring that areas with high potential for renewables generation are integrated and connected with demand centers. Also important will be the development of new flexibility solutions such as batteries and better-matching supply and demand through demand-response programs—that is, incentives and technology solutions to adjust distributed energy demand and generation when the grid needs support. Conventional assets such as gas plants or pipelines might still be important to ensure an adequate supply, but they will need to be adjusted to reflect decreasing utilization or repurposed to use a cleaner fuel mix, such as hydrogen.
3. Strengthening global supply chains to secure critical raw materials, components, and labor competencies. Countries will need to develop resource strategies to match their needs for components and materials with the supply that’s available. This could include investing in product redesign to promote the substitution of constrained or at-risk materials. Promoting recycling and reuse could help limit demand for critical resources. The selective adoption of reshoring could promote the development of local supply chains. Setting up long-term agreements and partnerships with suppliers could be a hedge against variations in critical supply.
4. Decarbonizing the industry and transportation sectors by investing in new technologies such as hydrogen solutions for energy and carbon capture, utilization, and storage (CCUS), alongside electrification and energy efficiency. Providing incentives for investments in hydrogen and CCUS solutions could help increase demand in hard-to-abate sectors and, in turn, promote the growth of a green-product industry. Investing in electrification and energy efficiency could boost the decarbonization of light industry. The transportation sector could address its carbon footprint through incentives for the uptake of light-duty transportation. Technological acceleration could reduce the cost difference between fuel cell electric vehicles and conventional internal-combustion-engine vehicles for heavy-duty transportation.
Economic and societal adjustments
5. Limiting and mitigating emissions-intensive generation to reduce the carbon footprint of fossil fuels and lower the risk of stranded assets. Measures to limit the addition of new fossil assets could be introduced to avoid the further expansion of fossil plants, particularly highly intensive assets like coal. Fossil-fuel generation would progressively shift toward balancing intermittent renewables while storage systems are brought to scale. Mechanisms to value flexibility and capacity of “firm” power generation assets—that is, sources that provide controllable and reliable energy—could be introduced, even as the utilization rates of some of these assets decline. To the extent that fossil-fuel extraction is necessary, basins with the lowest carbon intensity could be prioritized.
6. Managing economic dislocations to promote energy affordability and create fair opportunities for affected and at-risk communities. Compensation mechanisms such as subsidies will likely be required to ensure energy affordability for the most vulnerable consumers. Regions, especially those more dependent on fossil fuels, will need to accelerate diversification of their GDP and industrial footprints. Workers in at-risk industries such as fossil mining will need safety nets. Skills programs could be developed to create a new generation of competencies in response to the needs of the energy transition.
Governance, institutions, and commitments
7. Developing stable and attractive remuneration frameworks, market designs, and offtake structures to encourage investments in renewables and cleantech. Lower-risk frameworks for offtake, such as virtual power purchase agreements (which do not involve the physical delivery of energy) could be applied on a global scale to renewables and to an even broader universe of technologies. In addition, establishing and scaling capacity markets could be a way to reward flexibility and contribute to attracting investments in storage solutions such as batteries and hydrogen.
8. Scaling frameworks and standards to measure the carbon intensity of energy and final products and to develop a global, new carbon economy. Developing the right carbon standards, incentives, and markets will be important to accelerating the transition. Further, the right carbon pricing could play an essential role in driving the fossil-to-green switch and promoting the viability of business cases for low-carbon technologies. Carbon transparency could ultimately lead to the pricing of carbon contents and the creation of low-carbon or green premiums for hydrogen and other fuels and for commodities such as steel and cement.
These global actions will play out differently across regions and countries and will need to be combined with region-specific actions to enable a more orderly transition. In the full report, we identify some of these regional actions. It is important to recognize that the burdens of the transition would not be felt evenly. Developing countries face unique challenges related to transitioning their energy systems. Three challenges stand out: difficulty accessing private-capital markets; constraints on public spending (particularly if government tax revenues from emissions-intensive industries fall); and the impact of rising energy costs, given the limited safety nets and the imperative in these regions to expand energy access and enable development.
A more orderly transition will therefore need to be a just transition, one that recognizes the specific challenges that developing countries experience and that responds with collective, global, and unified action. This could take various forms, including the expansion of financial transfers to the poorest countries, measures to derisk lending to developing countries (for instance, via a greater role for multilateral development banks), and broader capital-market access.
Key stakeholders can accelerate action to promote a more orderly transition by 2030
Achieving an orderly global energy transition will require all stakeholders to take decisive, coordinated action. It will also require global coordination to ensure an equitable and affordable transition, while not compromising the need for energy security. Global stakeholders will need to consider several key priorities:
Governments and multilateral institutions have a central role to play in implementing policies and measures to encourage carbon standards and promote investment in renewables, with the objective of translating net-zero goals into an integrated energy plan that combines emissions reductions, resilience, affordability, and energy security and mitigates uneven impacts on communities at risk. Governments will need to work together with the private sector to promote measures that accelerate green technologies and mobilize key resources, such as the domestic labor force and supply chain.
Financial institutions are instrumental in rethinking investment horizons and risk/return profiles (for example, derisking lending to drive demand for net-zero technologies), disclosing and measuring their portfolio exposure in the near term, and quickly deploying capital toward clean-energy projects. Financial institutions can further contribute “beyond money,” by lending their expertise and guidance to drive the success of green initiatives.
Companies would gain from focusing on developing net-zero strategies and action plans, prioritizing innovation in green business models and technologies, and securing a sustainable supply chain. For energy providers such as utilities and transmission and distribution companies, priorities will be defining a strategy for carbon intensive assets to manage stranded-asset risks without compromising energy security; derisking and securing the supply chain for raw materials, labor, and components; prioritizing innovation in business models and technologies; and developing the manufacturing footprint for clean technologies. Companies in energy-intensive industries, such as mining, cement, and oil and gas extraction, could consider setting targets for energy decarbonization, linked to specific, time-bound initiatives such as power purchase agreements and energy efficiency programs, which would also improve their resilience to commodity market fluctuations; investing in energy supply and developments, usually with partners; creating an asset transition strategy to promote a transition of portfolio and operations toward a net-zero world; and developing a procurement and energy risk management strategy to mitigate energy security and volatility risks.
Individuals can make informed trade-offs and decisions about the behavioral changes that may be required. These could include green-product-purchasing decisions, more efficient use of energy, and shifting of economic priorities. To manage a transition that combines emissions reductions with energy security and affordability, citizens will need to demand greater transparency and accountability from their leaders.