Supply chains for some of these key technologies are already stretched, and geopolitical tensions have exacerbated the existing problems. Supply chain blockages risk delaying or increasing the cost of the energy transition. A shortage of labor presents a further obstacle. Potential challenges The region faces potential challenges for critical decarbonization technologies in three areas of the supply chain: 1. Raw materials. Essential materials for decarbonization technologies originate in just a few countries. That makes supply chains vulnerable to geopolitical risks, political instability, and disruptions in trade relationships. This dependency therefore leaves the European Union at risk for supply shortages, long lead times, and unreliable availability, which could cause sharp price increases and delays for clean technologies. For example, the supply of the rare-earth metals neodymium and praseodymium, used in wind turbines and electric vehicles (EVs), depends considerably on China’s refining capacity (Exhibit 1). In some scenarios, there could be shortages of 50 to 60 percent in 2030, and the European Union might not be able to scale up local refining capacity in time to fill these gaps. 12 Other key materials, such as nickel and cobalt, are expected to be in short supply by 2025. 2. Components. The European Union faces supply resilience challenges for some components of key decarbonization technologies. China, for example, supplies around 70 percent of solar modules and around 60 percent of lithium battery components. 13 To be competitive in these products, the European
The challenges of reducing them vary from country to country. The Benelux nations, for example, rely on heavy industry and serve as a hub for air freight and shipping—relatively difficult sectors to decarbonize. Other countries, such as Poland, rely on coal-based power generation. Despite these differences, EU member states could act in similar ways to overcome the challenges and help realize the region’s climate goals. McKinsey’s 2022 report on the transition 11 highlighted nine requirements for reaching net zero. Our research has identified five action areas that EU nations could consider to accelerate the energy transition in an orderly manner:
1. creating resilient, at-scale supply chains for key decarbonization technologies
2. building out the energy grid infrastructure to support resilience and reduce barriers to in-region renewables 3. reexamining land use, societal, and regulatory constraints to accelerate the development of renewables
4. redesigning power markets in line with decarbonization and affordability objectives
5. ensuring the affordability of clean technologies to foster their adoption and accelerate the energy transition
Action area 1: Creating resilient, at-scale supply chains for key decarbonization technologies
The European Union currently imports many of the critical inputs that clean technologies need, including solar panels, wind turbines, and batteries.
11 The nine critical requirements to reach net zero are as follows: physical building blocks, encompassing (1) technological innovation, (2) the ability to create at-scale supply chains and support infrastructure, and (3) the availability of necessary natural resources; economic and societal adjustments, including (4) effective capital reallocation and financing structures, (5) the management of demand shifts and near-term unit cost increases, and (6) compensating mechanisms to address socioeconomic impacts; and governance, institutions, and commitment, namely (7) governing standards, tracking and market mechanisms, and effective institutions, (8) commitment by (and collaboration among) public-, private-, and social-sector leaders globally; and (9) support from citizens and consumers. See The net-zero transition: What it would cost, what it could bring , McKinsey Global Institute, January 2022. 12 The role of critical minerals in clean energy transitions , International Energy Agency, May 2021. 13 “Geopolitics on the rise in solar PV manufacturing,” S&P Global , February 8, 2022; Al Root, “China is winning the lithium wars. What it means for Tesla and other EV stocks,” Barron’s , May 18, 2022.
Accelerating the journey to net zero
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