Accelerating the journey to net zero

reforms, reviews of regulations, behavioral change, and large-scale capital outlays. EU policy makers recently introduced two reform proposals designed to help accelerate the transition. First, the Green Deal Industrial Plan, announced in February 2023, aims to strengthen local supply chains and to support the affordability and adoption of clean technologies. This plan’s ability to help ensure continued EU leadership in the energy transition will depend largely on the amount of financing, the ease of access to funds, and the simplicity of the policy instruments. Second, a recent proposal aims to ease the weaknesses in the current design of energy markets by strengthening forward markets, developing and supporting liquid PPA markets for renewables, and introducing long-term markets for flexible resources. Interventions in other areas could also be considered, including changes to the permitting process both for developing renewables and the grid infrastructure. Individual EU member states could consider simplifying administrative procedures and strengthening the capabilities required to comply with the maximum deadlines that the EU Council recently set for granting permits: three months for solar energy, compared with 12 months previously. For the European Union, a successful energy transition amid geopolitical and macroeconomic turbulence would probably require sustained will, cooperation, and coordination among all stakeholders—including operators, regulators, investors, and society at large.

generation and help integrate renewables into the system. Long-term contract options for customers could increase the appeal of active market participation and provide a shelter from volatile commodity prices. In Europe, demand resources are used to make the grid flexible less frequently than they are in other mature markets, such as the United States. Removing technical constraints (for instance, minimum size or duration) that limit access of demand response could accelerate the uptake of such solutions and increase the system’s flexibility. Finally, to address avoidable future bankruptcies that have raised costs for end users during the recent crisis, stakeholders may need to consider balanced interventions that protect consumers against volatility while avoiding excessive barriers to competition. These interventions could include strengthening the resilience of retailers through capital requirements (similar to those applied in the banking sector) or setting minimum backup levels, such as long-term supply contracts or hedging ratios for sales with fixed prices. The energy transition can unlock great benefits. These could include a cleaner and healthier environment, more affordable (and less volatile) energy costs for consumers and businesses, increased energy resilience and security, infrastructure investments, and significant job creation. However, realizing these benefits could entail far-reaching change, including institutional

Tommaso Cavina is an associate partner in McKinsey’s Milan office, where Lorenzo Moavero Milanesi is a senior partner; Hamid Samandari and Humayun Tai are senior partners in the New York office; and Raffael Winter is a partner in the Düsseldorf office. The authors would like to thank Marcelo Azevedo, Stahtia Bampinioti, Patricia Bingoto, Greg Callaway, Nadia Christakou, Julien Claes, Spencer Dowling, Magda Handousa, Emil Hosius, Blake Houghton, Jake Langmead-Jones, Sarah Mohamed, Simon Norambuena, Bastian Paulitz, Lukas Pöhler, Namit Sharma, Antoine Stevens, Christer Tryggestad, Antonio Volpin, and Alexander Weiss for their contributions to this article.

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