McKinsey highlights window of opportunity to revisit decarbonisation plans

The energy sector has a widening “reality gap” between decarbonisation technology project commitments and realisation, according to new research by global consulting firm McKinsey & Company.

The analysis, focused mainly on Europe and the United States, highlights that the disparity between project target volumes, expected volumes and those reaching final investment decision (FID) is significant – threatening the pace of the energy transition.

According to McKinsey, a significant proportion of announced projects have not yet reached FID. For projects with longer lead times in specific technologies, such as offshore wind, the industry is quickly reaching the stage at which FID status projects will only come online after 2030 – impacting countries’ abilities to reach 2030 Paris Agreement commitments.

According to McKinsey, this divide is being driven by several factors.

First, the challenging macroeconomic environment and fluctuating investment climates post-COVID are impacting the financing and prioritisation of projects. This is then compounded by long permitting procedures, grid reform challenges and carbon pricing fluctuations which delay the approval and deployment of new projects. Once projects do reach FID, a lack of skilled workers in green technologies is again slowing down the installation and maintenance of systems across the supply chain.

With decarbonisation technology projects experiencing significantly high fall-through rates, McKinsey’s analysis shows that swift action is required in Europe and the United States as they scramble to meet announced targets.

FID challenges

In renewable power generation in the US, for example, more than 1,000 green or blue hydrogen projects have been announced since 2015, but fewer than 15% have reached FID. In more established technologies such as solar, PV capacity additions are projected to stagnate after 2028 at 220GW because of a lack of firm commitments – and of the announced capacity expected to come online before 2030, around 60% is still pending FID, according to McKinsey.

“Transforming the energy system hinges on the coordinated deployment of interlinked and interdependent technologies. A slowdown in deployment in one area of the energy system can cause cascading delays and hamper the growth of other technologies,” said Humayun Tai, Senior Partner at McKinsey.

“This data confirms the reality gap that we believe the industry is experiencing, especially through inflation and system shocks alongside geopolitical uncertainty, which is seeing international supply chain tensions and trade disruptions. It further underscores the need for companies to reassess the current strategies to further drive the transition,” he added.

In Europe, the solar pipeline is not currently on track to meet 2030 capacity targets of 600GW, with less than 390GW of capacity planned to be online by the end of the decade. Of the ~114GW of additional capacity expected to come online by 2029, less than 20% has reached FID.

According to McKinsey, there is recognition that in some technologies, like PV, there is still an ability to accelerate deployment ahead of 2030 goals. Offshore wind has a gap of only 18GW remaining to meet its overall 2030 target of 176 GW. But, again, of the announced 124GW of offshore wind capacity in Europe, around 65% is still pending FID.

Scope for new technologies

The analysis highlights decarbonisation technologies such as carbon capture utilisation and storage (CCUS) and hydrogen are also facing bottlenecks, such as the need to build out entire value chains for technology deployment. CCUS project pipelines are full with 60x and 9x the current CCUS capacity to be available in Europe and the US respectively by 2030. There is a pipeline of 148mpta in Europe and 170mpta in US, but 44mpta and 132mpta of projects respectively are still lacking FID, according to McKinsey.

“While the gap is widening, there is still a window of opportunity for governments and companies to deliver the growth needed while meeting their net zero ambitions,” said Thomas Hundertmark, Senior Partner at McKinsey.

“Doing so will require revaluation of existing strategies and regulatory regimes, many of which were devised to assume a different economic and policy landscape than exists today. With a clear view of the reality gap emerging, now is the time for stakeholders across the energy value chain to revisit decarbonisation plans to pioneer the next wave of progress.”