Closing ‘reality gap’ between net zero ambition and energy transition action requires US and EU to pull all decarbonization levers

Moving away from an energy mix heavily dependent on fossil fuels to one dominated by low-carbon and clean power is a complex task that even the European Union (EU) and the United States (U.S.), which are considered to be the frontrunners in the decarbonization game are struggling with despite the flurry of energy transition pursuits and rising net zero zest. McKinsey & Company, a global management consulting firm, highlights the need to up the climate action ante by scaling up interrelated low-emission and green technologies.

With the disparity between project target volumes, expected ones, and those reaching final investment decision (FID) on the rise, the consulting firm’s research, presented in ‘The energy transition: Where are we, really?’ spotlights the energy sector’s widening “reality gap” between decarbonization technology project commitments and realization in Europe and the United States, which threaten the pace of the energy transition.

Given the softening business cases amid a challenging macroeconomic environment and fluctuating investment climates post-COVID, technology cost-competitiveness, and project-enabling and market-forming policy support, corporate, public, and private investors are said to be hesitant about deploying capital, as illustrated by a proportion of announced projects not yet close to FID, which increases the risk of project cancellation.

The divide between net-zero ambition and reality is compounded by long permitting procedures, grid reform challenges, and carbon pricing fluctuations which delay the approval and deployment of new projects. Further complications after projects get FID may arise from a lack of skilled workers in green technologies, as such issues slow down the installation and maintenance of systems across the supply chain.

Bridging the net zero gap calls for technology deployment, policy, and incentives across the entire energy system to accelerate climate action by deploying and adopting renewable energy sources (RES), electrification technologies, carbon capture, utilization, and storage (CCUS), green and blue hydrogen, and other sustainable fuels.

McKinsey’s energy scenarios point out that these decarbonization tools alongside nuclear, long-term duration energy storage, battery energy storage systems, and energy efficiency investments, among others, are the cornerstone of endeavors to curb the GHG emissions footprint.

Regarding projects with longer lead times in specific technologies, such as offshore wind, the research notes the industry’s ongoing trend of reaching the stage at which FID status projects will become operational after 2030, which affects the countries’ abilities to meet the 2030 Paris Agreement goals.

While the remaining six years are perceived to be critical for putting in place energy transition measures to hit the 2030 and 2050 targets, McKinsey’s findings indicate that CCUS projects are facing bottlenecks, such as the need to build out entire value chains for technology deployment preventing them from reaching FID.

Humayun Tai, Senior Partner at McKinsey, emphasized: “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.

“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.”

Based on McKinsey’s research, swift action is needed moving forward as global decarbonization projects are experiencing significantly high fall-through rates, with Europe and the United States in the same boat, falling short of announced targets. The U.S. renewable power generation saw over 1,000 green or blue hydrogen project announcements since 2015, but less than 15% came to the FID stage.

Currently, the solar PV capacity additions are projected to stagnate after 2028 at 220 GW due to no firm commitments, and the announced capacity, which is due to come online before 2030, however, about 60% is still pending FID.

Furthermore, Europe’s solar pipeline is not on track to meet 2030 capacity targets of 600 GW, with less than 390 GW of capacity planned to be online by the decade-end. Fewer than 20% of the approximately 114 GW of additional capacity anticipated by 2029 has reached FID.

While some technologies, like PV, can augment deployment ahead of 2030 goals and offshore wind is only 18 GW shy of meeting its 2030 target of 176 GW, the consultancy business underscores that 65% of the announced 124 GW of offshore wind capacity in Europe is still pending FID.

With about 1 GW of installed offshore wind capacity, the U.S. is deemed far off its national targets, as 30 GW by 2030 has been set as the goal. The American energy sector disclosed plans to bring 17 GW of offshore wind capacity online by 2030, representing 60% of the target with 90% still in the pre-FID phase.

McKinsey’s analysis highlights that CCUS project pipelines are full with 60x and 9x the current CCUS capacity to be available in Europe and the U.S. respectively by 2030. With a pipeline of 148 mpta in Europe and 170 mpta in America, 44 mpta and 132 mpta of projects, respectively, lack FID, augmenting the risk of this not materializing. 

Thomas Hundertmark, Senior Partner at McKinsey, underlined “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.

“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 decarbonization plans to pioneer the next wave of progress.”