McKinsey: electrification to drive long-term growth for power and gas markets

With power purchase agreements (PPAs) surging  and grid operators revising their forecasts upwards, gas, power and LNG are set to become the key drivers of commodity trading within the energy sector, according to McKinsey & Co.

While PPAs in Europe surged to 21 gigawatts (GW) in 2024, driven by corporate demand for renewable energy, some grid and market operators in the United States are revising forecasts to accommodate a 15% annual increase in power demand from data centers through 2030, the consultant observed in the McKinsey 2025 Commodities Trading Report.

In 2024, the increasing demand for power was intensified by market volatility from an uptick in the share of renewables and the ongoing role of gas in the energy transition. Demand was further heightened by electrification efforts and aging infrastructure, indicating this value pool will likely remain strong in 2025, McKinsey said.

Although power and gas earnings before interest and taxes (EBIT) declined by approximately 40% in 2024, market liberalisation and electrification trends could drive long-term growth.

Liberal markets

Global power and gas markets have continued to liberalise, becoming increasingly complex and data-driven. Leading traders have expanded operations across commodities, markets, and geographies, profiting from a more sophisticated understanding of interconnected markets, McKinsey said. As markets evolve, the ability to process large volumes of data and leverage quantitative approaches through traditional AI and AI foundation models is becoming paramount for success, it said.

“In the last two years they’ve been almost parallel [with oil] and we definitely see stronger fundamental growth prospects on the power, gas and LNG side going forward,” said Roland Rechtsteiner, head of McKinsey’s commodity trading and risk practice.

Flexible assets, such as batteries, are gaining importance in the value chain but are significantly more complex to value and trade than traditional renewable assets, such as wind and solar. Although renewables often focus on PPA origination and short-term trading, flexibility requires traders to manage intricate models that account for storage, dispatch, and multimarket optimization, the report said.

McKinsey cautioned, however, that increasing uncertainty about demand development, alongside renewables penetration and regulatory uncertainties, could drive volatility and risk premiums.

LNG outlook

In LNG, European gas prices remain about 50% higher than in 2021, even after significant demand reductions and warmer winter seasons, the report said. While LNG EBIT declined by 23% in 2024, partially due to US export capacity coming online more slowly than expected, LNG prices could drop by up to 30% by late 2026 or early 2027, reflecting additional liquefaction capacity coming online in the United States, the report said.

For oil and oil products, McKinsey observed that in the short term, data shows China moving away from its role as the primary driver of global demand – a mantle likely to be taken up by non-OECD economies.