A world of change, and of contradictions: McKinsey on the future of energy

Plus ?a change, plus c'est la même chose. The more things change, the more they stay the same.

That contradiction informs this year’s Global Energy Perspective , McKinsey’s annual review of trends across 55 sectors and 146 countries.

No question: things have changed since 2021. The COVID-19 pandemic has receded. War has returned to the European continent. Both events have big implications for global energy supply and demand, as well as for progress on climate change.

On the other hand, many of the larger trends shaping the energy system are staying the same.

One is the long-term shift from higher- to lower-carbon energy. In terms of the power supply, for example, renewables now account for about 27 percent of global generation—a figure that McKinsey sees growing at a good clip to 2030, and then speeding up, reaching 83 percent by 2050 (see chart). Most of the growth is expected to come from solar and onshore wind, whose costs continue to fall.?

A related trend is that McKinsey’s estimate of peak demand for oil continues to creep forward. Last year, it estimated 2029 as the year when oil tops out; this year, it says not later than 2027. The reason: oil is predominantly used for transport, and with continued acceleration in the purchase and use of electric vehicles (EVs), demand will soften. Global EV sales have gone up 60 percent a year since 2018, and almost doubled in 2021. A large part of the reason is that EVs keep getting cheaper; McKinsey sees them reaching cost parity with conventional cars in the next few years.

?More good news: the use of energy keeps getting more efficient. By 2050, there could be another two billion people, and economic growth continues. Even so, McKinsey projects total energy consumption growing only 14 percent. I find that remarkable, and heartening.

?Another continuity is that more and more countries and companies are pledging to get to net-zero—meaning all greenhouse-gas emissions are reduced or offset. It also remains the case, McKinsey notes, that most of these pledges have not yet been matched with specific plans. Indeed, the 1.5-degree pathway—that is, working to ensure that global temperatures rise no more than that by 2100—remains a distant goal. Even if all countries with net-zero commitments deliver on their aspirations—and that cannot be taken for granted—global warming is projected to reach 1.7 degrees by 2100. On the current trajectory, it is 2.4 degrees; not great, but better than previous projections, which projected warming as much as 5 degrees.

?Then there is hydrogen, where McKinsey sees steady progress—and then very fast progress after 2035. By 2050, says McKinsey, green hydrogen , which refers to hydrogen produced through low-emissions sources, could account for 28% of power demand. Three things need to happen for hydrogen to scale up to this degree: the development of storage, transport, and carbon-capture infrastructure; continued cost reduction ; and government support to help improve the economics of hydrogen compared to high-carbon alternatives. Those are all big assumptions. The question isn’t really momentum; that is clearly happening. Announcements of new clean hydrogen production projects tripled in 2021. The question is how fast that momentum will be. While I agree that hydrogen is well beyond the hype , McKinsey’s is an aggressively hopeful outlook, considering the tiny role green hydrogen now plays.

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?There have, of course, also been significant changes—although in a sense this is also consistent with the energy’s sector history of volatility. Gas prices hit a 30-year low at the start of the pandemic, then reached a nearly two-decade-high point in 2021 . Power prices also rose.

?In a sense, the biggest thing that doesn’t change when it comes to energy is uncertainty. We can’t know how the war in Ukraine will change the dynamics of supply and demand. We don’t know how far, how fast, and even if, technologies like hydrogen and carbon capture will come into their own. We don’t know if nuclear power, which I believe is important to reliable decarbonization, will actually have the renaissance that some people project. We don’t know what governments will, or will not, do to support decarbonization or the development of new technologies. We don’t know what business models will work.

?But there is something I am sure of: we are in a world of change, and the energy transition is real

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