McKinsey & Company: Energy Transitions, Polices Must be Addressed to Reach Climate Goals

mckinsey company 2023 global energy outlook with a photo of the world from space

(Credit: McKinsey & Company)

by | Nov 27, 2023

In order to achieve global warming mitigation goals set by the Paris Accords, energy transition bottlenecks and value chain issues must be addressed, accompanied by enforcement of global energy policies, according to McKinsey & Company’s recently released Global Energy Outlook.

The analysis explores four possible scenarios for the energy transition, ranging from 1.5 degrees Celsius to 2.9 degrees Celsius of global warming. Based on current trajectories, warming is expected to reach an average of 2.3 degrees above pre-industrial levels by 2100. The report explains that this may be avoided and improved through rapid decarbonization supported by a “macro shift” of decision-makers establishing policies towards meeting the 1.5-degree Celsius goal set in the Paris Accords.

Specifically, the 1.5-degree scenario requires net-zero commitments achieved by all 70 countries that have explicitly set such targets, an emissions decline of 74% by 2050 compared to 2019, and 85% of power generation supplied by renewables by 2050.

1.5-Degree Scenario Includes Overcoming Renewables, Green Technology Bottlenecks

Ramping up renewable energy is a commonly cited requirement for meeting global decarbonization targets, but various obstacles stand in the way of required growth levels. The report identified several bottlenecks, such as land availability, energy infrastructure, manufacturing capability, and consumer affordability, among others, that will need to be overcome to meet net-zero targets.

The report also said that technologies with the fastest expected growth, such as wind and solar, electric vehicles, green hydrogen, and heat pumps are the most susceptible to the identified bottlenecks.

“The analysis of these bottom-up scenarios shows that the world requires a major course correction to reach the goals aligned with the Paris Agreement,” said Bram Smeets, a partner at McKinsey. “While we see a strong increase in low-carbon technologies such as solar, wind, and electric heat pumps, urgent global momentum and collaboration across the energy value chain is needed to resolve bottlenecks and fulfill critical prerequisites for accelerated decarbonization.”

Report Expects Decrease in Fossil Fuel Demand

The report also identifies needed prerequisites that will need to be met across fuel types, such as investment needs and supply chain development.

McKinsey & Company emphasized that global energy consumption, which has been on the rise, may instead decline by as much as 6% as sectors work to electrify operations, resulting in lower energy consumption. If electrification slows down, however, energy consumption may grow by 24%.

Within the energy sector, electricity and hydrogen were found to be the fastest-growing energy carriers, with hydrogen demand expected to increase two to five times by 2050 across all scenarios. Total aggregate growth in fossil fuels has begun to slow, according to the report, and demand is also expected to begin to decline in the next two to seven years across all scenarios. This is reportedly driven by a slowdown in car-parc growth, engine efficiency technology for road transport, and continued electrification of transportation.

The McKinsey & Company report said total annual investment in the energy sector is expected to grow by 2-4% each year, reaching between $2 trillion and $3.2 trillion in 2040, led by investment in decarbonization technologies.

“While the energy transition has gathered pace, it will be further enabled by continued growth in investment into green technologies and electric transmission and distribution,” said Luciano Di Fiori, Partner at McKinsey. “Investment in a broad and balanced portfolio of low-carbon solutions is one of the most critical levers for debottlenecking the transition.”

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