The passage of the Inflation Reduction Act (IRA)—as well as the commitments made by the federal government to cut greenhouse-gas (GHG) emissions by 50 to 52 percent by 2030 and achieve a net-zero grid by 2035—has given new momentum in the United States to public- and private-sector efforts to moderate the effects of climate change. At the same time, these efforts have to contend with powerful headwinds arising from the war in Ukraine, disruptions to global supply chains, and exacerbated inflationary trends.
The net-zero transition is predicated on substituting electricity for fossil fuels. Therefore, a key enabling step is to decarbonize the electric sector, which currently accounts for 25 percent of US GHG emissions. Such a step will, by nature, have to be front-loaded. This will require new policies, market mechanisms, business models, and technologies to be developed and deployed at scale. Achieving all of these at the pace and scale required may prove elusive in the current, highly challenging environment. The net-zero transition looks set to be even more disorderly across the globe than feared a year ago. Nevertheless, we believe that maintaining focus on the goal of a relatively more orderly transition is critical. This will require business leaders and policy makers to thoughtfully plan, design, innovate, and act in concert and with great urgency. Conversely, if these shifts were to be delayed or not carefully managed, the result would be a significantly less orderly transition that would cost considerably more and entail much greater environmental damage.
We have identified six action areas that we believe are critical to enabling a more orderly net-zero transition. Such a transition includes near-term emissions reductions that would rapidly put the United States on a 1.5° pathway while remaining cognizant of affordability, reliability, resiliency, and security (see sidebar “Modeled scenarios underlying our analyses”). Such imperatives must be balanced with the need to maintain a resilient energy supply and to enable a least-cost pathway with equitably distributed economic growth opportunities. Although the actions we set out here will likely not be sufficient, they constitute, in our view, the necessary bedrock for this transformation and take priority at this stage:
- designing and deploying a capital-efficient and affordable system
- strengthening supply chains to provide stable access to raw materials, components, and skilled labor
- securing access to adequate land with high load factors for the deployment of renewables while taking into account the needs of local communities
- reforming transmission development to include proactive planning, fast-track permitting, and systematic consideration of transmission alternatives
- creating market mechanisms for expanding firm capacity to ensure reliable and adequate clean-energy supply
- accelerating technological innovation to ensure timely deployment of new clean technologies
Designing and deploying a capital-efficient and affordable system
Historically, energy sector spending has focused on ongoing fuel costs, but these costs are expected to be cut in half by 2050 as the system shifts toward renewables. By contrast, energy sector transition spending will have to focus on capital investments—for example, to deploy more renewable-energy facilities and boost electric-grid capacity. We estimate the energy transition could potentially require more than $500 billion in additional capital for generation, transmission, and distribution through 2030 in the United States.
Given the magnitude of this investment, making efficient use of capital will be critical. Businesses and policy makers will need to target capital expenses with a laser focus to mitigate the affordability challenges that end customers will face. Three key priorities would enable such a focus:
1. Plan investments for long-term decarbonization. Given the longevity of power infrastructure, customers would bear the costs over many decades. Getting long-term planning right today is critical to managing costs through the 2040s and 2050s. System planners and electric and gas utilities would gain from immediately adopting resource planning that is cross-sectoral and incorporates emissions caps. As an example, effective decarbonization planning that integrates across gas and electric utilities could lead to a system that is at least 15 to 25 percent more cost-effective.1
2. Deploy capital more cost effectively. Capital efficiency is more critical than ever today, especially in the context of steep inflation and supply chain challenges. Renewables developers, for example, have lowered capital expenditures by 10 to 20 percent through measures such as design-to-cost analysis, clean sheet–based negotiation, schedule optimization, and lean and digitalized construction. To motivate these and other cost-saving measures, the government and regulators could adjust incentives for utilities through performance-based measures or evaluation of a utility’s total expenditure.
3. Empower and educate customers to manage rising rates. Utilities and other energy companies can put in place programs to help their customers understand, prepare for, and adapt to potential changes. A key step would be to focus on rate-design options targeting lower-income households and other consumers who would be most affected by energy transition costs. Companies can also develop tools that encourage cost-effective demand-side management and distributed energy resources (DERs) where sensible for the system and the customer.
Strengthening supply chains to provide stable access to raw materials, components, and skilled labor
Supply chains, already under stress, will likely be stretched further as demand for materials, manufacturing, and labor scales not only in the United States but also globally, with many countries ratcheting up commitments. Companies would need to act in three main areas:
1. Secure availability of raw materials. To ensure the steady availability of raw materials and other resources that are critical to the energy transition, private-sector companies can commit to long-term supply agreements. Where those are insufficient, companies can innovate to reduce material constraints in four ways: innovating to increase supply; applying advanced analytics in mining and processing; reducing demand by developing alternative materials that are less constrained—boosting efficiency without increasing material usage—and by developing recycling processes and capacity; and proactively plan for constraints.2
2. Scale up resilient manufacturing. Companies can focus research and development on innovation for domestic production capabilities and use artificial intelligence to create optimized, flexible sourcing plans to scale up resilient manufacturing. For example, one global renewables developer is building a domestic, automated manufacturing facility to mitigate supply chain risk. While it will likely result in a near-term price increase, the risk reduction could pay off by minimizing project delays that result from supply chain issues.
3. Develop and acquire talent. With more than 550,000 new energy transition job opportunities in the United States expected by 2030, workforce gaps could delay execution at pace. To solve this, companies can tap into talent pools from fossil-fuel industries. In many instances, these workers have skills that are transferable to the jobs required for the energy transition, potentially filling 10 percent of the overall openings. To fill the remaining gap, companies could adopt more inclusive hiring practices, such as shifting to skills-based rather than credential-based hiring. Companies can also facilitate upskilling and reskilling through vocational schools and on-the-job training programs. This training and development are needed for the energy transition, but also facilitate the creation of good jobs.
The government can also support the scaling of resilient supply chains by developing a robust, multiyear national resource strategy to secure access to rare-earth materials, provide incentives to onshore manufacturing, and dedicate funding for training and vocational programs.
Securing access to adequate land with high load factors for the deployment of renewables
If the 2030 goals set by the US government are to be met, about 75 percent of all land with strong potential for renewables (that is, having a capacity factor in the 95th percentile or higher) and proximity to transmission lines would need to be developed for either solar or onshore wind power generation.
On the regional level, some areas—particularly the Northeast—have insufficient high-quality land to cost effectively produce all their renewables locally. These areas will have to rely on improved transmission or alternative technologies such as offshore wind, as described below.
Land for the development of renewables could be used more efficiently—for example, with improved solar and wind technology that is more efficient and therefore requires less land for the same power output. To address siting challenges, including community concerns, that could limit access to high-quality land, developers could share the economic value of high-quality land with owners and local communities. Communities that have recently experienced economic shifts could particularly benefit from the jobs and economic development, enabling a win–win situation for the developer and the community if value is appropriately distributed.
Reforming transmission development to include proactive planning, fast-track permitting, and systematic consideration of transmission alternatives
Transmission is critical to achieving a more orderly energy transition, given its role in connecting communities to renewable power. A McKinsey analysis evaluating the current US transmission interconnection queue estimates that 175 gigawatts of renewables—or nearly 500,000 gigawatt-hours of zero-carbon electricity each year—could be unsupplied if interconnection is not accelerated.
The challenges associated with transmission buildout in the United States have been widely analyzed, and some proposed solutions are being piloted or deployed.3 Most remain far from being realized, however, despite a number of attempts at transmission reform over the past decades.
To continue and accelerate the policy discussions and planning reforms that are under way, addressing three core planning issues will likely prove critical: the evaluation of diverse value streams unlocked by transmission; cost and benefit allocation across jurisdictions; and permitting and siting challenges.
However, given that these issues have proven hard to tackle in the past, it is prudent for businesses and governments to plan for alternative options in the event that the transmission gridlock does not get resolved. There are three ways to diversify transmission:
1. Deploy DERs. Companies, system planners, and policy makers could enable and offer incentives for the deployment of DERs—including distributed solar and storage, as well as demand-side management and energy efficiency—to create local capacity.
2. Optimize electric transmission with the existing gas network. System planners and utilities could use the existing gas network to manage winter peaks and lower transmission capacity needs while reducing overall gas throughput and transitioning to zero-carbon molecules.
3. Transition to dispatchable zero-carbon resources. In places where transmission buildout to connect renewables to population centers does not materialize, system planners and companies could transition to dispatchable zero-carbon resources—for instance, offshore wind, the combustion of zero-carbon fuels (such as renewable natural gas, synthetic natural gas, or hydrogen), nuclear power, and long-duration energy storage—that can be sited closer to population centers.
Creating market mechanisms for expanding firm capacity to ensure reliable and adequate clean-energy supply
About 80 percent of today’s power system is made up of flexible power sources such as natural-gas plants that can ramp up and down quickly to meet sudden shifts in supply or demand. But as penetration of intermittent renewables increases, lack of flexible resources will likely become a risk to system reliability. To mitigate this risk, system planners, utilities, generators, and policy makers should collaborate through data sharing, simulation planning, and stakeholder engagement to establish and implement the market mechanisms needed.
System planners can evolve market mechanisms to incentivize sufficient flexible resources in three ways:
1. Revise methodology for resource planning to avoid overstating firm capacity. Today, most capacity markets allow some share of a renewable plant’s power to count as “firm” power that can be called upon when the system is in need. However, given renewables’ intermittency, they cannot reliably deliver in every instance. In most capacity markets, renewables’ stated flexibility should be adjusted to reflect this reality. This issue is not limited to renewables; system planners could also carefully assess other resources to reduce the risk that firm capacity is overstated.
2. Expand forecasting to account for changing supply and demand, particularly as climate shifts. Under a 2.0°C degree warming scenario in Texas and California, the number of yearly heat waves would increase by about 20 to 30 percent. More frequent extreme weather events result in three system problems: power generation can decline (for example, solar panels operate at lower efficiency in heat); demand can spike (for instance, increased demand for air conditioning); and if the weather event affects an entire region, energy imports from nearby can become unavailable. Given these shifts, system planners would need to forecast more conservatively rather than relying on historical trends.
3. Provide adequate incentives to flexible power sources that can generate power for long periods of time. As an example, during a week of low wind in February in a northern region, the system would be put in a bind by electrified heating and limited solar output, coupled with an occasionally expected “drought” of wind power. During such periods, the power system will require resources that are not energy or duration limited. Regulators can consider policies that avoid incentivizing a single threshold, such as by creating mechanisms that auction capacity in tranches of duration.
Accelerating technological innovation to ensure timely deployment of new clean technologies
Historically, clean technologies have come onto the grid over several decades, from initial small-scale deployment to broad commercial deployment. For example, offshore wind took 25 years to progress from the first commercial demonstration in Europe to starting to scale in the United States. Such a timescale is too slow to develop and deploy the newer technologies that would be needed to affordably meet 2030 decarbonization goals.
This is the case with wave power, for example, which offers an attractive load profile that mitigates some of the challenges of renewables intermittency and that can be sited near population centers on the coast or placed alongside offshore wind farms. The first commercial contracts for this technology were recently signed in Europe. Other innovative technologies that could solve energy transition challenges include perovskite solar cells to reduce the cost of solar; long-duration energy storage to provide grid reliability; small modular reactors to enable zero-carbon baseload power; and direct air capture to reduce carbon. Businesses and policy makers would benefit from considering three key priorities to accelerate technological innovation: investing to reduce risk, providing long-term market and regulatory clarity, and investing in the shared infrastructure needed to scale.
The time to act
The United States’ accelerating momentum toward an energy transition puts it, at long last, on a path to achieving necessary decarbonization, even though the short-term global headwinds cannot be ignored. If carefully planned and executed—with attention to socioeconomic impacts and affordability concerns; supply chain, transmission, and land constraints; technological innovation; and enabling market mechanisms—the United States can make marked progress toward a relatively more orderly energy transition. Equally important, it could do so through a path that creates new economic opportunities for individuals, communities, and companies and that sets the tone on a global scale.
