Hydrogen comes of age and coal decays: McKinsey’s perspective on the future of energy

Drops in energy demand all over the world. Falling valuations for many oil and gas companies. Green (or greenish) stimulus plans. A new President elected in the United States. To state the obvious: 2020 has been a tumultuous year for the energy industry. What does this augur for the future? That is the question my McKinsey colleagues address in their most recent Global Energy Perspective (GEP), which looks at 30 sectors, 50 energy products, and 146 countries.

Here are some specific insights that I found compelling.

• Hydrogen’s time is near. Really. The idea of hydrogen has been around the corner, in terms of affordability and usefulness, for a good 30 years. We know hydrogen works; it was used in the NASA moonshots and there are hydrogen taxis on the road right now, powered by hundreds of fueling stations. The problem has always been that it is expensive. Now, according to the GEP 2021, low-emissions “green hydrogen” could become cost-competitive by the 2030s. Hydrogen is not a source of energy; it is a carrier of it. As the most common chemical element, it is theoretically capable of all kinds of uses, from heating buildings to storing energy. Among other things, then, hydrogen could be a major source of emissions reductions, accounting for as much as a quarter of reductions by 2050. The term “game-changer” is over-used—but hydrogen could be just that, going from next to nothing now to as much as 40 percent of new demand between 2035 and 2050.
• Renewables are the future of new generation. As a prediction, this isn’t much a stretch, considering that in some major markets, including the United States, the majority of new capacity already comes from renewables. The key is that this will be the case in most markets, according to GEP 2021 , by the end of the decade. And by 2036, it foresees a majority of the global power supply coming from intermittent renewables, such as solar and wind. However, for these sources to be efficient and cost-effective, grid systems need to integrate them better. And for those who think the rise of renewables are the death knell of fossil fuels, not so fast. As the report points out, until batteries and other kinds of energy storage are in place, gas peaker plants are necessary to guarantee output.
• COVID-19 hurt, a lot, but its long-term effects in terms of overall demand probably modest. The GEP 2021expects demand to bounce back when economies get back to normal in the next one to four years—as has been the case in China and Australia, which are ahead of the recovery curve. All told, it sees demand for power doubling by 2050, with most of that growth coming from Africa, India, and Southeast Asia. (China levels off by 2030, and in Europe and the United States, demand falls by 20 percent). That said, the shape of recovery will differ. Coal, for example, may never see 2019-level production again, and by 2050, demand could be 40 percent less. Meanwhile, gas continues to increase its share of global energy demand, not peaking until the late 2030s. Oil is in the middle—the rate of growth slows, and then begins to decline around the end of this decade, due to greater efficiency and more electric vehicles.
• Energy use gets smarter and more efficient. The world needs energy to grow, and economic growth is a good thing, allowing more people to live lives of good health and possibility. There is nothing positive to be said about wasting energy, or taking it for granted. In this regard, the world is doing much better—and likely to continue to. One metric to look at is “energy intensity,” meaning the ratio of total energy consumption to GDP. In the United States and other developed countries, energy intensity has improved steadily for decades—that is, GDP is growing faster than energy use. And this will continue to be the case; the GEP 2021sees global energy intensity improving another 40 percent by 2050 and energy consumption per capita falling 5 percent, even as millions more people move out of poverty and up the economic ladder.

In short, as disruptive and tragic as COVID-19 has been, the broad theme brimming from  the GEP 2021 report is that in terms of the global energy system, the near future is likely to be defined by the acceleration of existing trends, not sudden change. For example, the GEP 2021 sees fossil fuels continuing to play an important role in the global energy system for decades to come, but that peak demand for both oil and gas will come a few years sooner than previously projected. In terms of decarbonization, the GEP foresees deeper emissions cuts sooner—25 percent by 2050. But that is still nowhere near enough to meet the goal of limiting temperatures to no more than 1.5 degrees higher by the end of the century. As for energy investment, the GEP 2021 analysis is that the level will stay roughly the same for the next 15 years, but the composition will shift more toward renewables.

Does McKinsey have it right?  We will only know when the future arrives. I don’t expect that every detail will be spot on, but this latest perspective is an interesting take on the technology and economics of the energy transition—one that I think is not only well under way, but inevitable. 

All views are mine and not those of McKinsey & Company.