Capital is critical to tackling climate change. According to McKinsey analysis, meeting net-zero targets will require spending $9.2 trillion a year on physical assets between now and 2050, up from $3.5 trillion today.1 By then, the energy mix would also include nascent energy technologies such as clean hydrogen; battery storage; and carbon capture, utilization, and storage (CCUS). Capital projects, including those crucial to the energy transition, typically take many years and many hands to design, build, and launch. The number and scale of projects in the current pipeline will not suffice. Labor costs are increasing as raw materials and components remain in high demand, and the global supply chain has strained to keep pace, making the transition to newer technologies with different cost structures even more challenging. And, by definition, nascent technologies don’t have a track record of lessons learned to inform cost productivity improvements to accelerate scaling. That said, investment in the energy transition is accelerating. As an example, when the Inflation Reduction Act was signed in 2022, the US federal government released $370 billion in funding to provide tax credits for clean-energy projects.2 With this in mind, the challenge moving forward will be securing the right people, resources, and physical space while overcoming supply chain constraints and financing for nonestablished players. The time is now for industry players to fundamentally rethink how they approach projects to deliver them faster, cheaper, and more efficiently than ever.
four areas—renewables, hydrogen, battery storage, and CO2 captured—in the next 30 years (Exhibit 1). Each of these decarbonization technologies will be critical to tackling climate change. In some areas, such as solar and wind, the global industry has already made significant strides in expanding installed renewable capacity. But other areas, such as carbon capture technologies, are still in early stages.3 Batteries are projected to see a meteoric rise in demand in the coming decades if the industry can overcome ongoing challenges in securing the raw materials, such as lithium, copper, and nickel, needed to produce at scale. On this point, recent McKinsey estimates show that meeting global demand for copper and nickel alone could require capital expenditures of $250 billion to $350 billion by 2030, both to grow new capacity and to replace depleted existing capacity.4 The pathway for hydrogen perhaps best illuminates the challenges of scaling new energy technologies. McKinsey estimates that by 2050, two primary fuels—electricity and hydrogen—will make up an estimated 50 percent of the global energy mix.5 This growth will be seen across different forms of hydrogen, including renewable “green” hydrogen, which is produced via the electrolysis of water. Recently announced projects would add about 22 million metric tons of capacity, but their financing is still unclear—and collectively they would account for only 15 to 20 percent of the estimated 2035 need.6 Regarding cost parity, improvements are possible in terms of the levelized cost of hydrogen,7 but this will require the industry to rapidly improve electrolyzer systems, increase hydrogen plant capital expenditures, and lower electricity costs (Exhibit 2).
A once-in-a-generation call for capital investment
McKinsey analysis suggests that global annual capacity needs to be drastically increased across
1 “The net-zero transition: What it would cost, what it could bring,” McKinsey Global Institute, January 2022. 2 “Here’s how the Inflation Reduction Act is impacting green job creation,” World Economic Forum, March 14, 2023. 3 “Scaling the CCUS industry to achieve net-zero emissions,” McKinsey, October 28, 2022. 4 “The raw-materials challenge: How the metals and mining sector will be at the core of enabling the energy transition,” McKinsey, January 10, 2022. 5 Global Energy Perspective 2022, McKinsey, April 26, 2022. 6 Ibid. 7 The levelized cost of hydrogen refers to the methodology used to calculate the capital and operating costs of producing hydrogen, allowing for the comparison of different production routes.
Accelerating the journey to net zero
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