The transition to net zero is well underway, but it is not happening fast enough. Growth in key climate technologies, including wind and solar power and electric vehicles (EVs), has helped accelerate decarbonization efforts worldwide. Solutions such as green hydrogen and long-duration energy storage (LDES) are becoming available and, if scaled, could reduce global emissions even further. But the pace of scaling these technologies has not kept up with projections for a warming planet. Governments and companies have done an admirable job developing and deploying climate technologies to date, but a significant acceleration is required to meet net-zero targets—and stave off the most dire effects of climate change.
Last year, we released a framework for launching and scaling green businesses, based on our work with both incumbents and start-ups.1 A few of the key actions include leading with game-changing ambition, signing up captive demand before scaling, and building capacity with parallel scaling. In the interim, as the economic and geopolitical backdrop has changed, market dynamics for green business builders have shifted in both nuanced and fundamental ways. On the one hand, capital markets and public-sector institutions have started to galvanize behind green investments. Policy, including the Green Deal Industrial Plan in Europe and the Inflation Reduction Act (IRA) in the United States, promises to support companies looking to scale climate technologies. At the same time, inflation, economic uncertainty, and the invasion of Ukraine have all complicated the path to net zero.
Three areas have emerged that should now be priorities for those navigating the challenges and seeking opportunities: building up supply chains (often through cross-sector partnerships), proactively addressing an emerging skills gap, and exploring different avenues for financing and investments.
Many of the unique challenges to scaling green businesses remain—high capital expenditures on physical assets (compared with building digital businesses), higher short-term costs, and customer education and adoption barriers for many sustainable products. However, the urgency to reach net-zero targets has only grown in many markets, and the industrial economy is now being reinvented around a lower-carbon energy system, circular-economy practices, and other emerging models. Companies that can innovate and scale during these fast-moving, uncertain times could set themselves up for exponential growth. Our analysis shows that growing demand for net-zero offerings could generate $9 trillion to $12 trillion of annual sales by 2030 across 11 value pools, including transport, power, and consumer goods.
In this article, we lay out the evolving landscape for scaling climate technologies and explore three areas of potential action for green business builders.
A significant scaling gap
More than 4,000 companies have set or are in the process of committing to emissions reductions2 and 70-plus countries have set net-zero targets.3 How quickly would key climate technologies need to scale to help meet such goals?
To arrive at projections, we conducted an analysis of the current growth trajectory for climate tech relative to current net-zero commitments. Based on our analysis, even mature technologies—including wind and solar power—would need to scale by a factor of six to 14 times faster to remain on track for a 1.5° pathway by 2030 (exhibit).4
Historically, growth in solar and wind has often outpaced projections, and new players entering the market (oil and gas companies, private equity players, and institutional investors, for example) show signs that the current pace of deployment could speed up.5 Nevertheless, the potential gap for renewables to meet net-zero targets looks steep.
Climate technologies that are high-potential but relatively less advanced in their commercialization (compared with renewables) would need to scale at an even greater rate. Consider hydrogen. Our analysis indicates that supply of green hydrogen, which is produced with renewables, would need to grow by a factor of 200 times.
Next moves for green business builders
Scaling climate technologies often requires companies to think and act in bold and innovative ways. While our seven actions for scaling green businesses hold true, they continue to evolve (for a summary of the original framework, see sidebar, “Seven actions for scaling green businesses”). Economic uncertainty, inflation, new public funding, technological risks, and supply chain considerations have altered the landscape for green business building.
Actions that have become particularly important for organizations during these volatile times include creatively developing supply chains (including through partnerships), proactively addressing emerging skills gaps in the workforce, and exploring new avenues for financing and investment.
Build up the supply chain through cross-sector partnerships
Green business building efforts are often supply chain building efforts. For hydrogen-powered vehicles to scale and help decarbonize long-haul freight transport, for example, a supply of hydrogen and hydrogen infrastructure also needs to scale. We are increasingly seeing green business builders develop their supply chains by forging partnerships across sectors and, in some cases, creating a growth strategy with complementary players as collaborators. These partnerships are getting a boost from major climate legislation packages in the United States and the European Union. For example, the IRA in the United States allocates $369 billion for climate and energy spending,6 with a focus on ventures that address critical gaps in the North American supply chain. These collaborations happen upstream, downstream, or horizontally in the value chain.
Upstream partnerships are operational partnerships that propel vertical integration. They occur when a company partners far upstream to secure critical supply of a product or service. In one example, the Volkswagen Group announced a joint venture with Umicore,7 a circular-materials technology company, to boost the supply of low-carbon battery materials. The collaborators aim to scale capacity to meet demand for 2.2 million EVs per year. Such a partnership could not only help fortify the supply chain for battery recycling, it could also help solidify demand for players across the EV and energy storage value chains (charging infrastructure, grid storage markets) and help reduce commercial risk for investors. In another example of a large-scale upstream partnership, Dow Chemical and Mura Technology, an advanced-recycling company, announced they will pair up to construct multiple recycling facilities for plastics that could add up to 600 kilotons of capacity by 2030.8
Downstream partnerships are demand-based partnerships that drive vertical integration. They occur when a company uses a demand commitment from a purchaser to help stabilize or enable their financing. As an example, advanced-market commitments are one tool for helping to guarantee future demand for technologies. Take Frontier, a joint effort among organizations including Alphabet, Meta, Shopify, and Stripe.9 These organizations have collectively made a $925 million commitment to purchase carbon removal, enabling carbon removal suppliers to have a line of sight to their end customers while they are still scaling operations.
Horizontal partnerships are ecosystem partnerships that bring together a cross-section of organizations along the value chain. For example, the Center for Houston’s Future and the Greater Houston Partnership have laid the groundwork for a clean-hydrogen hub in the Gulf Coast region by bringing together both public and private entities that span production, infrastructure, and electrolyzer capacity.10 Another example is the LDES Council, a group of more than 60 member institutions that has committed to accelerating the scale of LDES technologies.11 Members include technology providers, customers, and investors.
Get ahead on the skills gap
The net-zero transition has created a shift in needed job skills, as markets are reshaped and organizations institute new operational practices and processes. The range of skills is broad: from honing technical skills in manufacturing EVs, solar panels, and wind turbines to engaging with low-emissions suppliers to having executive expertise in carbon accounting and project finance. Green business building opportunities have encouraged many entrepreneurs, but the available talent to scale operations—in infrastructure, engineering for capital projects, and in process engineering, for example—has not quite caught up.
Looking into the next decade, skills shortages12 could loom for certain sectors, particularly as more companies concurrently scale up manufacturing and operations in the United States to access the incentives offered by the IRA and the Bipartisan Infrastructure Law. For example, McKinsey analysis shows that bursts of factory building in Michigan could strain labor supply by close to 200 percent and manifest differently across skill categories of workers, with growing needs for architectural, equipment, and electrical work. To address these potential shortages, companies must not only acquire the right talent, they also need to figure out how to upskill and reskill labor for future opportunities. In the United Kingdom, for example, Octopus Energy has opened a heat pump R&D and training facility to help accelerate adoption of the technology.13
Building up the talent pipeline at academic institutions is another way for companies to fill the skills gap. For example, Shell is a founding partner of the Energy Transition Institute at the University of Houston, where students work with Shell scientists across three core areas: hydrogen, carbon management, and circular plastics.14 Governments can support such talent-building efforts at universities. The US Department of Energy, for example, has funded a new research center at the University of Michigan for EV battery technology.15 Private and public entities will both need to contribute to workforce development going forward.
Explore different avenues for financing and investments
Financing the scale-up of climate technologies can come with challenges, as many technologies rely on significant up-front investments in physical assets, including large-scale facilities and infrastructure. Technologies that haven’t yet reached technical maturity or commercialization can come with a higher risk profile for investors. As we have written about before, securing purchase agreements and inviting customers to invest in the business up front are some ways that green business builders have successfully addressed these challenges.
Project finance is an increasingly common approach for green business builders that can help mitigate the risks for capital-intensive infrastructure projects. Project finance is a nonrecourse or limited-recourse structure in which the project company shareholders’ liability is limited to their equity investment and the project lenders rely primarily on the project’s cash flow for repayment—meaning principal repayment usually begins after the project is operational. Northvolt, a Swedish battery maker, quickly turned to project financing and has plans for at least a third gigafactory manufacturing plant.16
Many green business builders look to blended finance models, which rely on a mix of private capital and public or philanthropic funding. Public-funding pools utilize grants as a means of reducing debt and mitigating risk, for example, and multilateral climate funds, such as the Green Climate Fund, have factored into these blended finance models.
Financing partnerships are also playing a larger role, from joint ventures between local start-ups and global technology companies to multistakeholder-funded research, development, and demonstration (RD&D) programs that provide early-stage and growth-stage equity capital for high-risk first deployment projects. These RD&D programs are particularly showing up in developing countries, to help increase private investments into businesses that serve underrepresented communities most affected by climate change.
When it comes to purchase agreements, inflation could be a top concern for suppliers and buyers. In response, we’re seeing green business builders offer agreements to customers that have inflation-adjustable price formulas.
Scaling new, green businesses may seem more challenging than it did a year ago, but we see many companies addressing the complications with determination and foresight. Organizations that evolve with the times and embrace a new set of actions could set themselves up for significant growth opportunities—and help the climate get back on track.
