In the energy conversation, costs count. But so does the “eye-wateringly vast” physical system we’ve built to power our world—and the many interlinked ways that system needs changing. On this episode of The McKinsey Podcast, senior partner Humayun Tai, partner Mekala Krishnan, and global editorial director Lucia Rahilly discuss new research that takes stock of the physical realities shaping our trajectory toward net zero, as well as what needs to happen to address these challenges—and hasten progress—successfully.
In our second segment, we hear about how to improve the CEO–board relationship with senior partner Celia Huber, from our CEO Insights series.
This transcript has been edited for clarity and length.
The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly.
Why focus on the ‘hard stuff’?
Lucia Rahilly: The two of you recently coauthored a McKinsey Global Institute report called The hard stuff, by which you mean the physical realities that need to be reckoned with to transform our global energy system successfully. What prompted you to grapple with net zero in this way?
Mekala Krishnan: We wanted to begin with a reality check on the physical challenges of the transition. What do we actually need to build? Where are we on building that? Does what we build work? How do we get it to work? It was these physical questions, and physical realities, that we wanted to grapple with.
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Why did we decide to do this? One thing that’s underappreciated about today’s energy system is that it’s an eye-wateringly vast, complex, and interlinked physical entity. We’re talking about 60,000 power plants, a billion vehicles, and many billion tons of materials like steel and cement produced around the world. In some ways, it’s obvious that the starting point of any pragmatic reality check should be the physical nature of the transition.
Humayun Tai: If we are to think hard about the 2050 journey, getting to a common starting point and an understanding of these physical realities is important. Can we really draw a global baseline of where we are right now and what the challenges are?
It’s clear that we’re way short of where we need to be. If we think about 2050 as the marker—and the technologies that trigger the transformation to a clean pathway and some of the specific technology points—what we find is that we are 10 percent of the way there, with 90 percent to go.
We talked to many experts, inside and outside McKinsey, to figure out what it will take to get there. We collaborated with Sustainability, Global Energy & Materials, and other practices and did a comprehensive stocktaking that led to a synthesized catalog of 25 physical challenges that we need to overcome to pivot the pace of change.
We classified these challenges as being easier, less easy, or really tough to overcome. Of the 25, we found that 12 are really tough, requiring systemic changes. That was an important finding.
Mekala Krishnan: These 12 are areas where a massive set of changes needs to happen—not just in one part of the transition but in multiple interlinked areas. We’re very early in the overall transformation, and in these hardest challenges, we’re maybe only 1 percent of the way. We still need to address how we deal with variable renewable-energy systems when solar and wind become a large share of the generation mix. We need to address how we do industrial decarbonization, how we solve the low-emissions hydrogen problem or the carbon capture problem.
If we put all 12 physical challenges together, that’s about half the energy system’s CO2 emissions today. What this tells us is that about half the energy system’s emissions today are easier challenges, and about half are harder challenges. This helped me rationalize some of the debate out there in the world. When it comes to the transition, we have optimists and pessimists. What we find is that both realities are true.
When it comes to the transition, we have optimists and pessimists. What we find is that both realities are true.
We still have a long way to go in terms of executing on how to solve those physical challenges. How do we get electric vehicles to have lower emissions relative to internal-combustion vehicles when we look at their entire life cycle? How do we get electric vehicles to drive the range we need them to drive? How do we get heat pumps to work in extremely cold temperatures?
How to reckon with scale?
Lucia Rahilly: The energy system we rely on, as you described, is high performing in many ways. What will it take for low-emissions technologies to perform as well as fossil fuels, and is that even possible?
Humayun Tai: When we think about a fossil-based energy system, several attributes are quite important in running the physical system—for example, storing natural gas. The fungibility and flexibility of storing and converting that molecule is important because we can then reduce the cost and increase the reliability of that fuel. Natural gas for high-temperature heat in industrial processes, where the gas can burn at 2,000°C, is an application that’s quite important for society. The question is, how can we substitute those attributes with low-emissions technologies?
Lucia, back to your questions. Where are we? Is it possible? It is possible. We have examples with renewables, solar, and wind, where we see these cost points coming down over time and providing some attributes that fossil-fuel-based technologies are providing.
We’re not there on a number of these technologies. We need to scale these technologies and the entire physical system. For example, heat pump technology is drastically improving. Even in cold-climate patterns, we’re seeing deployments that are quite successful and really compete with natural gas heating. Nuclear also runs baseload, and there’s a big push and a resurgence of interest in building nuclear. These are a couple of examples of low-emissions technologies that will, over time, supplant high-emissions ones.
Lucia Rahilly: Low-emissions technologies depend for now on critical raw materials such as lithium, cobalt, et cetera. Will scarcity be an issue if we enact the energy transition at meaningful scale?
Mekala Krishnan: Part of why we did this work was to look not just at the low-emissions technologies but also at the system that needs to be built around these technologies. There’s a whole range of critical materials, from lithium to rare earth materials, that we need for transition technologies from batteries to electrolyzers.
The demand for certain minerals could grow by as much as seven times today’s levels by 2030, under one scenario, and supply is not going to be sufficient by 2030 to meet that demand. If you look at lithium, for example, demand could be as much as 40 percent higher by 2030 than the current line of sight on expected supply.
There isn’t a shortage of raw materials; the challenge is, how quickly can the materials be accessed? A handful of countries might account for 50, 60, 70 percent of extraction and refining capacity, which can create risks of bottlenecks and other challenges.
There are a range of ways to bridge the supply-and-demand gap. We can increase ways of getting supply and reducing the timing for some of these projects getting off the ground. We can think about getting supply from recycled materials. We’re also seeing exciting examples of innovation on the demand side itself. Essentially, are we able to reduce our need for these materials by using less or alternate materials? It’s quite exciting.
Lucia Rahilly: Generative AI has massive implications for energy usage and for the electricity necessary to power data storage. How do we see generative AI affecting the calculus for net zero?
Humayun Tai: We’re in the early stages. We see mining companies that are doing very interesting pilots and projects applying generative AI to improve both the production and extraction of resources, plus make production cleaner. It’s also being used to locate new material deposits. This increases the likelihood of good deposits, low-cost deposits, and getting time to market down. The ultimate question is, how fast will these pilots scale?
Mekala Krishnan: What we’re talking about under any strong energy transition scenario is a power system in 2050 that has about five times more gigawatts installed than today’s power system. If you look at just the low-emissions portion of that—which would come from solar, wind, and other sources that don’t have emissions—the scaling would be ten times that of today.
In the near term, data centers and generative AI are shifting the energy demand profile, but it’s small relative to the scale-up we’re talking about.
Humayun Tai: Yes, there’s a much larger challenge at hand, but I would not underestimate the innovation going on in the supply-and-demand side with an eye to 2030. We’re serving clients, across both end uses and supply and extraction, that are really figuring out substitution and reduction of use in the production of clean technologies. But the geopolitics behind minerals is extremely real.
What do physical challenges mean for performance?
Lucia Rahilly: When we’re thinking about the renewable-energy debate, one thing that comes up a lot is variability. The sun doesn’t always shine. The wind doesn’t always blow. What might greater reliance on renewables mean for our power systems?
Mekala Krishnan: The nature of these physical challenges means that the response needs to be a system response. It’s not substituting existing coal or gas power one for one with solar and wind but rethinking how you design the entire system around supply and demand for power.
It’s a perfect example of why a physical challenge creates the need for a system response, but it also involves doing something quite differently in the future and really trying to understand how to do that well, how to incentivize it, how to make that “from–to” shift.
Lucia Rahilly: One thing we hear a lot about is the hydrogen economy—both pro, with hydrogen as a kind of panacea, and con, in terms of inefficiency and waste. Is hydrogen effective, and what does the potential realistically look like?
Humayun Tai: Hydrogen has a very important role, and we should think about it from a use case and application perspective. If you think about using it for some heavy mobility uses, it’s in the money when we run the economics. If you think about ammonia conversion and transport, it’s in the money in many of the geographies and sites we think about. You must get specific about its use cases. We think something like hydrogen could play a role in the final 10 percent of the energy transition.
This speaks to the physical characteristics and challenges of hydrogen. On the positive side, hydrogen is a lighter, more fungible molecule, and you can use it for various applications. A challenge with hydrogen is there’s a lot of leakage along the way. The actual round-trip efficiency of hydrogen is something we’re still working on.
The other physical challenge is infrastructure. You may be able to produce and use it, but there’s not enough incentive to build the infrastructure needed to transport it. Hydrogen must be carefully managed for safety reasons, so the infrastructure must be there.
How does cost factor in?
Lucia Rahilly: We’ve woven some discussion about cost throughout this conversation. At a high level, how does cost factor into the calculus?
Mekala Krishnan: Every time we talk to people about this research, the first questions asked are, “What about cost? Why did you start with physical reality instead of cost?”
One of the pieces of work we did a few years ago looked at a whole range of spending on the power system, electric vehicles, building, et cetera. We found that if you look at those systems today, we’re spending about $5.7 trillion on both high-emissions spending (gas power or internal-combustion-engine-based vehicles) and some low-emissions spending.
Under a transition scenario, over the next three decades, that $5.7 trillion would need to rise to $9.2 trillion. Also, about 75 percent of that $5.7 trillion is going to high-emissions spending. Going forward, 75 percent would need to go toward low-emissions spending. So it’s not just a scale-up of capital; it’s a reallocation of capital.
We’re trying to build a physical system in a feasible and reliable way. Understanding the physical transformation needs to go hand in hand with the cost discussion, like the hard tasks of deploying billions of electric vehicles and putting tons and tons of steel in the ground as we build new facilities for power and new industrial facilities.
Understanding the physical transformation needs to go hand in hand with the cost discussion.
Costs are influenced by a variety of factors, and physical realities are one. If we think about carbon capture as a technology, it’s a technology that works much better at high concentrations of CO2. So it works really well when the exhaust gas that you’re trying to capture has high concentrations of CO2 and less well at lower concentrations of CO2. In that case, you need different and more expensive forms of equipment, which raises the costs of carbon capture. The physical reality of how the capture process works influences the cost.
What should leaders do differently?
Lucia Rahilly: How have you seen the overall dialogue about the transition evolve over the past several years?
Humayun Tai: I see a very bifurcated conversation happening. On the one hand, it’s encouraging to see the commitment from private, public, international, and national organizations continue. The momentum at COP28 was very impressive. COP26 in Glasgow is where the discussion of methane started. In just two years, it led to a methane pledge at COP28. I look at those markers in the past few years and say, “The commitments are real. There’s a real, substantive conversation happening about how to get to 2050.”
On the other hand, with the macro shocks, with the geopolitical situation, with this concern around physical realities and system resiliency, the conversation is around, “What are the limits that are going to get in the way, and how do we pragmatically think about overcoming those limits?”
Lucia Rahilly: What should CEOs be doing differently based on this latest research?
Mekala Krishnan: What CEOs can do with the playbook we provide is to say, “Let me parse out my decarbonization journey. Let me think about relatively low-hanging fruit, where we have the technologies and I can focus on execution. And for the harder challenges, let me try to understand how to tackle them.”
The research reveals that just individual technological innovation, like better density of batteries and improved electrolyzer technologies, won’t solve the technical challenges we face. We also need systemwide innovation, which means collaboration across sectors and supply chains and with investors and policy makers. At its core, this is a big system shift. CEOs will need to build that muscle around how to partner and collaborate.
Humayun Tai: We hope this report helps companies with higher emissions, and aspirations to reduce them using a set of technologies, to think about and execute a plan. From an investor standpoint, we do so much work around clean-tech investments—innovations happening for private capital, small start-ups, or large companies getting into these technologies. We hope our research brings more of the conversation on what’s needed for that innovation and the role of financing, then policy, to really unlock these physical challenges.
The CEO–board relationship
Lucia Rahilly: Next up, how can CEOs and boards work together, better? Here’s our managing producer, Laurel Moglen, with senior partner Celia Huber.
Laurel Moglen: What is the role of the board?
Celia Huber: That is either a simple question or a very complicated one. The role of the board at its most basic is for overseeing and guiding the company’s strategic direction and ensuring its success. And maybe the board’s most important job is figuring out who the CEO might be and CEO succession. All of this is put together to safeguard and look out for the interest of stakeholders, in particular, the shareholders. What we’re also seeing now is that boards have evolved to think about the broader implication to stakeholders, not just the direct shareholders.
Laurel Moglen: That seems like such a critical change in priority.
Celia Huber: It has been a change in priority. If you go back roughly 20 years, boards were much more focused on the shareholders. They were picked by the CEO and didn’t act that much as critical thought partners, but more as supporters of the CEO.
They were people in the same social circles. What we see today is a lot more diversity in board members, a lot more of boards being the genuine thought partner to the CEO and the rest of the management team. Boards are really acting as a foil to test and stress-test a lot of different actions that the company could take.
Laurel Moglen: Based on what you’ve experienced on the ground, plus with McKinsey’s research, how knowledgeable do board members feel about the companies they serve?
Celia Huber: For the most part, board members would say that they’re not that knowledgeable about the industry and some of the changes in technology and the dynamics of their industry. Onboarding and continuing education for board members is a number-one priority that helps board directors to stay abreast of current issues, changes in technology, and the industry that they’re in.
Laurel Moglen: So big picture, what would you say CEOs need to do to achieve that ideal partnership?
Celia Huber: Today, most board members say that being a board member is getting more complicated. The issues are more complex. They’re spending more time on it—roughly 30 days a year. I think there are several things that are stylistic depending on the CEO, but fundamentally, there needs to be an ongoing trust-based relationship between the CEO and the management team with the board.
What do I mean by that? Understanding that the questions that come up in the boardroom are not personal attacks, that there should be a level of collaboration—asking questions back and forth, and that board members understand where their role ends and the management role begins.
A second thing that the CEO can do is plainly share insights and learnings that they have about the company and how they’re moving forward. An example of that might be continuing education, or a board off-site meeting where a half day is spent discussing how AI might affect the business. It also could be, depending again on the CEO’s leadership style, having regular meetings one on one, once a year, and/or also sending out monthly board memos. I know a CEO who spends a lot of time texting their board with hot topics. There are many ways to interact.
What underpins all of this is a level of transparency, and without that transparency the conversation doesn’t hit the most important issues. You don’t really cultivate that trust level. We see CEOs who are confident in their role often bringing in either outside advisers or thought leaders who take a different perspective from the company, to push and pull on where we think the future is going, and what scenarios are important to us.
Laurel Moglen: What is the best way to prep for board meetings?
Celia Huber: What directors tell us repeatedly is that they don’t want to be buried in information that is not relevant. They don’t want to walk through pages of a PowerPoint with the management team. They want to understand the context for the discussion and the prereading is a prerequisite for that. In the board meeting, they want to discuss the most important issues and risks related to the topic at hand.
There is a lot of diligent preparation on the management team’s part, and they are often as frustrated as the board members when it comes to getting to the right balance of how to communicate what you need to know at a high enough level so it’s not too voluminous, but at a low enough level so that the board understands the key issues.
One way is to start with a short note on an issue that says, “Here’s where the management team sees our strengths, our opportunities, and risks, as well as how they affect how our business model creates value.” That can be a very short piece or cover memo or even a synthesis of the executive summary.
One of the things I’ve talked to with clients is always having a return-on-invested-capital tree or some other depiction of how profit is made, where expenses fit into the business model so that you can literally say this topic is moving these two branches of the tree.
Laurel Moglen: We’ve handled the prep. What’s the best way to run the meeting?
Celia Huber: First, the CEO and the chair together set the agenda. The CEO can direct the conversation to make sure the things talked about in the prep are coming out in the discussion. This level of facilitation doesn’t just fall on the chairman of the board or lead director. It’s for the CEO, who knows both their team and the issues better than anyone else in the room. This also gives quieter board members a chance to get a word in edgewise.
It allows the CEO to understand the questions that have been brought into the room, so that those questions are answered dynamically. The CEO keeps an eye on the time to make sure discussions happen efficiently and makes sure the management team is able to answer questions that might be a bit more complicated for the board. And before closing the meeting, the CEO should work with the chair to recap not just decisions that were made but also the important issues that they’re going to see again.
Laurel Moglen: We know that relationships are two-way, so what can board members do to be the best partner to that CEO and the company?
Celia Huber: Absolutely, it’s a two-way street. The boards have a fiduciary duty to do their best. This means they should not just do the reading the company gives them, but they should actively seek information, whether in the Wall Street Journal about what’s happening to competitors, a news feed on what’s happening in the industry, or going to other board meetings, bringing back ideas on governance that works well for other companies, while also investing in education outside of the boardroom, like a university course on cybersecurity. If just one or two board members don’t do their prework before coming into a meeting, it can create an enormous disruption.
Laurel Moglen: Any other thoughts you might want to share?
Celia Huber: When we study effective versus less-effective boards, what we find is that the most pivotal position is the chair or lead-director role. They really are the coach for the CEO and can tell them honestly if what they said landed with the board. That type of straightforward communication is so important to give to the CEO.
