FRESH TAKES ON BIG IDEAS

This year marks a decade of McKinsey’s Global Energy Perspective. What have we learned from ten years of analyzing the world’s energy sector?
 
The primary lesson is that the world is not on track to meet the goals of the Paris Agreement, which would limit global warming to levels that a United Nations panel estimates would reduce the odds of initiating the most dangerous and irreversible effects of climate change. What’s more, this situation is unfolding at a time when the world faces a rapid increase in energy demand—as data centers, industrial electrification, and economic growth in large population centers combine to ramp up global energy needs. 

The need to meet this rising demand coincides with a shift in the economics of renewable energy: While the underlying cost of generation continues to drop, the average return on investment is threatened as subsidies change and increased supply results in lower returns per kilowatt-hour. Meanwhile, fossil fuels continue to have a strong business case in many contexts—the internal combustion engine is still gaining efficiency, for example. This year’s Global Energy Perspective, more than in the previous five years, suggests that fossil fuels (in particular, natural gas) may have a longer lifetime in our energy system than previously expected.

Over the past decade, the two biggest drivers of the energy transition have been policy and technology. Energy policy sets long-term targets, creates incentives, and sends economic signals at both regional and global levels. So far, countries’ climate policies have been insufficient to drive the changes needed to keep the world on track to limit global temperature increase to 1.5 degrees Celsius—one of the benchmarks of the Paris Agreement. This year’s analysis suggests we are further behind than a year ago. Even where policies are in place supporting the energy transition, we see actual installations of renewable energy projects failing to meet regional targets.

Technology innovations, both incremental and breakthrough, have shaped the evolution of the energy mix. Several technologies—such as batteries, electric vehicles, liquefied natural gas, shale oil, and solar photovoltaics—have exceeded expectations. On the other hand, some technologies—such as carbon capture and storage and clean hydrogen—are taking longer to mature. While innovation will certainly play a role in bringing not-yet-economical technologies to market, we can still make progress toward an energy transition that limits global temperature increase to 1.5 to 2.0 degrees using the technologies we have today. All the necessary chess pieces are on the board, but stakeholders will need to think cohesively and strategically about how to bring available solutions to bear on the challenge. This could potentially mean employing more nuclear, more gas, and more flexible energy demand from industry and residences, as well as actively locating facilities where low-emission energy is available.

“Our advice to energy sector leaders is clear: Although you cannot predict the future, you can prepare for it.”

The energy transition is a massive and demanding physical transformation that extends to all corners of the globe. To get on track, countries can consider how to remove system bottlenecks, optimize policy, and promote stable long-term funding (such as public investment in energy-transition-enabling infrastructure). But they can also focus on finding ways to make the transition more economically practical. Regional pathways will likely be based on a mix of emerging innovations and “triple win” technologies—those that provide energy that is simultaneously affordable, low-carbon, and secure. An example of a triple-win solution is an approach that matches low-carbon generation with demand, such as a nuclear plant directly powering data centers.

The transition will not be uniform. Emissions are still increasing globally, but regions’ trajectories differ substantially. Local circumstances—including natural energy endowments, regulatory environments, and energy price differences—can shape the trajectory and speed of regional transitions. The high penetration of renewables seen in Europe and California does not necessarily reflect the path others will, or should, take. 

Ten years on from the inaugural Global Energy Perspective, our view of the energy landscape has matured. Every year brings unforeseen developments—be they breakthroughs in energy technology that allow accelerated scale-up of solar and wind power, innovations (such as AI) that drive rapid growth in power demand, or increasing geopolitical tensions. The future of the energy transition will need to account for a wide range of scenarios. 

The journey toward decarbonization remains long, but our advice to energy sector leaders is clear: Although you cannot predict the future, you can prepare for it. Building resilience and agility, while pursuing no-regrets moves such as cost reductions for clean technologies, will be crucial for transforming challenges into opportunities.

—Edited by Jessica Marshall, executive editor, Seattle

ABOUT THIS AUTHOR

Diego Hernandez Diaz is a partner in McKinsey’s Geneva office.