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Research published by consulting firm McKinsey & Company shows a widening gap between expected volumes of decarbonization projects and those reaching final investment decision.
The research is based on US and European data, regions with explicit data, and shows the lack of project realization could threaten the pace of energy transition.
One of the key reasons for the disparity highlighted in the article, The energy transition: Where are we, really? is that investors are reluctant to deploy capital. They are dissuaded due to softer business cases promising lower returns, and technology that is not yet cost-competitive or sufficiently scaled and proven.
And with projects not reaching financial investment decision (FID), there is clearly an increased risk of project cancellations, especially in projects with longer lead times.
The research highlights that the lack of investment is being compounded by several factors:
- Challenging macroeconomic environment – Even with initiatives like the IRA in the United States, rising inflation and interest rates have made capital expenditure-intensive projects even more expensive;
- Fluctuating investment climates post-COVID;
- Long permitting procedures – across technologies, high volumes of projects are stuck in permitting phases;
- Grid reform challenges;
- Carbon pricing fluctuations;
- Raw material shortages, and
- Geopolitical uncertainty.
These factors combined have created a perfect storm with the impact being felt across several clean energy sectors. 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 the case of solar, of the announced capacity expected to come online before 2030, ~60% is still pending FID.
In Europe, less than 390GW of planned capacity will be online by the end of the decade and of the ~114GW of additional capacity expected to come online by 2029, less than 20% has reached FID. In terms of offshore wind, only 18GW are needed to meet the 2030 target of 176GW. However, of the announced 124GW of offshore wind capacity in Europe, ~65% is still pending FID.
McKinsey’s analysis also indicates the impact on decarbonization technologies such as CCUS and hydrogen, with a high risk of projects not materializing in both the US and Europe. In terms of CCUS projects, there is a pipeline of 148mpta in Europe and 170mpta in US, but 44mpta and 132mpta of projects respectively are still lacking FID.
Humayun Tai, senior partner at McKinsey reflects on the findings: “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.”
Thomas Hundertmark, senior partner at McKinsey, suggests that there are opportunities to remedy the situation. He recommends a strategic and regulatory revaluation to keep up with current economic and policy requirements.
Added Hundertmark: “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. Our forthcoming Global Energy Perspective will demonstrate how far the gap needs to close as we look at different levels of technology deployment, policy, and incentives across the energy system.”
McKinsey further suggests stakeholders across the energy value chain revisit decarbonization plans and assess if they are sufficient to meet climate goals.
Companies also need to adjust portfolio focus, given the rapid evolution of policies and government targets and government stakeholders should prioritize project- and market-enabling policies to improve project economics and to drive demand from the market for new products and solutions.
