Navigating the challenges and opportunities of the energy transition

We are in the middle of a significant energy transition, unprecedented in both scale and speed. There are many interdependencies that must align and crossroads that economies and businesses must navigate on their energy transition journey. Understanding the challenges presented, but also the opportunities afforded, will allow them to establish a strong pathway so as to navigate that journey successfully.

Challenge/opportunity one: scale

The current transition to clean, sustainable energy sources is one of the most significant undertakings in recent history. The Paris Agreement set a goal to limit global warming to below 2 degrees Celsius above pre- industrial levels (with an ambition of 1.5 degrees) by 2050. To achieve this requires a huge, immediate push in the scale and pace of technology deployment. The time between now and 2030 is critical to meeting the ambition. According to the International Energy Agency (IEA), annual progress in global energy intensity improvement must rise from a 2022 baseline of 2% per year to a little over 4% per year between now and 2030.¹

Recent research by McKinsey has found that to overcome the physical challenges presented by the energy transition, “billions of low-emissions assets – for instance, about one billion EVs, over 1.5 billion heat pumps, and about 35 terawatts of low-emissions power generation capacity – would need to be deployed by 2050 alongside scaling supporting infrastructure such as the grid, EV, charging stations, and supply chains”.²

As the energy transition advances, McKinsey identified 11 high potential sectors that could be worth USD 12 trillion in annual revenues by 2030: industrials (including steel and cement); hydrogen; agriculture and land use; water; buildings; carbon management; waste; oil, gas and fuels; consumer; power; and transport.³

The transition is in its early stages. It is ever evolving and the markets and technologies for emissions reduction are still maturing. While it is not quite a case of “one step forward, two steps back,” the nature of the physical power system means that developments are often faced with interdependent challenges.

Challenge/opportunity two: practical and physical realities

The energy transition requires physical and structural transformation. Achieving this presents both challenges and opportunities.

In 2023, the world’s capacity to generate electricity from renewables increased faster than at any time in the past three decades.⁴ Developments in certain areas like EV sales (with global sales set to reach 17 million in 2024) and the addition of new renewable capacity have been significant and record-breaking year on year⁵.

However, overall, progress has slowed. There are various reasons for this, but many stem from the physical reality of the energy system. It is hard to change that system quickly – yet that must happen in order to meet the Paris Agreement ambition.

Globally, there have been significant investment announcements but many have not reached FID⁶ (and likely won’t until after the critical 2030 period). We have seen this trend particularly in nascent industries like hydrogen and carbon, capture, utilisation and storage (CCUS). The IEA recently reined in forecast growth in Spain, Australia, Oman and multiple ASEAN countries. Reasons for this include undersubscribed renewable energy auctions, slow progress in large-scale renewable capacity for hydrogen and production, long project development lead times, sustained policy uncertainty and power supply gluts limiting additional renewable deployment in the short-term.⁷

According to McKinsey’s analysis of project commitments in the EU and USA, the major issues threatening deployment of technologies are certainty of economic returns, many technologies not yet being cost competitive for consumers, and key technologies having not yet been tested at scale.⁸

The scale and complexity of the physical transformation is illustrated by McKinsey’s analysis which suggests that globally, there are seven, interrelated physical domains that must change in order to achieve it. The first is the power domain (by reducing emissions and providing clean energy). This feeds into the mobility, industry and buildings domains. Then there are the enabling domains of raw materials (including critical minerals), new fuels and carriers, and carbon and energy reduction.⁹ We consider some of these domains and what this analysis means for businesses and advisers below.

Challenge/opportunity three: the domains

The power domain

A major issue in the move to ready power systems to operate on 100% renewable energy is how to manage the associated high degrees of intermittency and variability.

During the transition, the firming baseloads of gas and coal power must be reduced and replaced. While energy storage technologies are advancing, we need a flexible power system, with interconnections and transmission upgrades so as to unlock planned renewable energy projects. Private investment must also be stimulated. The Australian Government is trying to achieve this with underwriting agreements for large-scale renewable energy and clean dispatchable storage projects, and a AUD 20 billion concessional fund for transmission infrastructure developments and upgrades.

Land access and approvals for renewables projects is another factor which can stall investment and progress. Availability of land, with both the right characteristics for solar and wind projects and in the right location for grid connection, is often a challenge, even in Australia where there are seemingly endless vast open spaces.

Industry and the big 4 pillars

Industrials are lagging behind in the energy transition, with processes still reliant on fossil fuels and carbon- heavy raw materials. For example, the cement and steel sectors account for nearly 40% of European industrial emissions.¹⁰ With CCUS hubs anticipated to store an average of 10 million tonnes of carbon dioxide per year by 2030,¹¹ the introduction of shared CCUS hubs to decarbonise the big four industrial pillars of steel, cement, plastics and ammonia requires scaling up.

As energy intensive industries, these four pillars are ideal candidates to use hydrogen as a feedstock, with facilities often co-located in regions favourable to hydrogen production. The need for green steel, processed using renewable energy (including hydrogen), is particularly acute, especially with a reported downturn in China’s steel sector. To achieve this, project lead times need to reduce and policy must focus on creating demand for low-emission products. The Australian Government has just released its 2024 National Hydrogen Strategy,¹² with one of its objectives being to identify and support the most likely sectors for hydrogen use (including steel and ammonia). It has also signed a bilateral agreement with Germany to deepen cooperation on green hydrogen supply chains, ensuring European buyers for Australia’s renewable hydrogen producers.

Enabling sufficient supply raw materials

Enabling sufficient supply of the raw materials required for producing solar panels, batteries and wind turbines – including the critical minerals of lithium, nickel, cobalt and copper – is key to the successful deployment of decarbonisation technologies. How will the supply for these materials keep pace with demand, if the transition is to stay on target? Will policy development allow countries to benefit from a green premium on the materials? These questions are facing countries around the world. The Minerals Council of Australia¹³ recently outlined the need for a strong mining sector and good policies that unlock private sector mining investment and improve the chance of projects reaching FID, improve links with strategic overseas partners and allow integration into the fast growing, high demand global clean technology supply chains. It is hoped that this will foster Australia’s ambition of becoming a renewable energy superpower.

HFW Comment

The energy transition journey may be a bumpy one, but it cannot be avoided. To date, “deployment of low-emissions technologies is only at about 10 percent of the levels required by 2050 in most areas, and that has been in comparatively easy use cases.”¹⁴ Innovative decarbonisation technologies like CCUS are required at scale, and quickly. What complicates the roll- out is that the entire value chain is involved, and there are kinks in some of those chains (as noted above). Despite the challenges, the energy transition is full of opportunity, now and going forward, both from an economic, social and value creation perspective. Overcoming one challenge often unlocks a raft of opportunities in another area. Above all, understanding the challenges presented and the opportunities afforded by the global energy transition can assist business and advisers in navigating it successfully.

Footnotes

1. International Energy Agency, Energy Efficiency 2023, page 96.
2. McKinsey Global Institute, “The hard stuff: Navigating the physical realities of the energy transition”, August 2024, page 9.
3. McKinsey Global Institute, “Accelerating toward net zero: The green business building opportunity”, June 2022.
4. See, International Energy Agency, Renewables 2023: Analysis and forecasts to 2028.
5. International Energy Agency, “The world’s electric car fleet continues to grow strongly, with 2024 sales set to reach 17 million”, 23 April 2024.
6. Final Investment Decision.
7. Ibid, no. 5, page 18.
8. McKinsey Global Institute, “The energy transition: Where are we, really?”, 27 August 2024.
9. Ibid, no. 2, pages 11, and 63 – 173.
10. Equinor, Energy Perspectives 2024, page 34
11. The CCUS Hub, “CCUS Basics: Understanding CCUS”.
12. Department of Climate Change, Energy, the Environment and Water, National Hydrogen Strategy 2024.
13. Minerals Council of Australia, An investment strategy for a resource-intensive future: Minerals+, September 2024.
14. Ibid, no. 2, page 9.