The Global Energy Perspective 2023 models the outlook for demand and supply of energy commodities across a 1.5°C pathway, aligned with the Paris Agreement, and four bottom-up energy transition scenarios. These energy transition scenarios examine outcomes ranging from warming of 1.6°C to 2.9°C by 2100 (scenario descriptions outlined below in sidebar “About the Global Energy Perspective 2023”). These wide-ranging scenarios sketch a range of outcomes based on varying underlying assumptions—for example, about the pace of technological progress and the level of policy enforcement. The scenarios are shaped by more than 400 drivers across sectors, technologies, policies, costs, and fuels, and serve as a fact base to inform decision makers on the challenges to be overcome to enable the energy transition. In this article, we examine integrated energy and pricing value pools and their outlook.
About the authors
This article is a collaborative effort by Marco Bevilacqua, Tamara Grünewald, Sebastian Overlack, Ole Rolser, Anna Schrum, and Christian Therkelsen, summarizing sector perspectives from across McKinsey and McKinsey Energy Solutions.
Growing global momentum is accelerating the energy transition. This was recently evidenced by the UAE Consensus, delivered at COP28 on December 13, 2023, that called on Parties to implement several key steps: triple renewable energy capacity globally and double the global average annual rate of energy efficiency improvements by 2030; accelerate efforts toward the phase-down of unabated coal power; accelerate efforts globally toward net zero emission energy systems by utilizing zero- and low-carbon fuels well before or around mid-century; and transition away from fossil fuels in energy systems in a just, orderly, and equitable manner and accelerate action in this critical decade to achieve net zero by 2050.
Recognizing the advancing transition could see a positive shift in market competitiveness for renewables as they are scaled up and unabated fossil fuels are scaled down. This perspective considers how developments in the past 24 months have led to a shift in the discussion on energy value pools, with industrial competitiveness being a key incentive and driver for the energy transition.
About the Global Energy Perspective 2023
Recent developments have deeply impacted the global energy system and have highlighted accelerators and challenges for the energy transition, including:
- a renewed focus on affordability, reliability, and industrial competitiveness alongside emissions reduction;
- variability across countries and regions on energy system modernization and which technologies will lead; and
- an increased awareness of the key bottlenecks, including critical materials and land shortages, that could impact the shape of the transition.
Transition accelerators that have emerged mostly relate to current government support and investment momentum in low-carbon technologies. The latest government initiatives that aim to support the energy transition, such as the Inflation Reduction Act (IRA) in the United States, the European Union’s Green Deal Industrial Plan, and Japan’s green transformation plan, aim to act as growth triggers for low-carbon investments and technologies.
The uptake of low-carbon technologies, including heat pumps and electric vehicles (EVs), continued to accelerate in 2022, and multiple low-carbon technologies are becoming increasingly efficient.1World Energy Outlook 2023, International Energy Agency, October 2023. The last two years have seen record investments into the energy transition, reaching around $1.8 trillion in 2022.2World Energy Outlook 2023, International Energy Agency, October 2023. Lastly, there have been continued commitments and investment decisions toward net zero by major industrial players, in, for example, the automotive, oil and gas, materials, and financial sectors, though more will be needed.3McKinsey analysis.
Transition challenges include increasing costs throughout the energy system following the European energy crisis, cost inflation on many renewable projects, affordability challenges, slower-than-expected realization of some low-carbon projects, such as green hydrogen projects, and, as a result, shifts in societal sentiment around renewable projects, and ongoing fossil fuel demand. Analysis from multiple sources, including the IEA, IPCC, and McKinsey, suggest that conventional fossil fuels are likely to remain a part of the energy mix to 2050, even in a 1.5° scenario, and may act as a bridge for an orderly transition. Renewable projects have seen cost increases for the first time in more than 20 years due to rising raw material costs and increasing interest rates.4WindEurope Intelligence Platform. There has been pipeline uncertainty for new wind, hydrogen, and carbon capture, utilization, and storage (CCUS) projects. Only 10 gigawatts (GW) of wind projects have been financed in the European Union over the last 24 months, falling short of the 30 GW per year needed to meet climate commitments, and only 9 percent of hydrogen projects reached final investment decisions (FIDs).5McKinsey Energy Solutions’ Global Energy Perspective 2023, McKinsey, November 21, 2023. Coal (the most carbon-intensive fuel source without CCUS) is expected to be phased out gradually. Coal demand is projected to decrease by between 25 and 85 percent between 2019 and 2050 depending on the scenario, driven mainly by the phaseout of coal plants in the power sector across regions.6McKinsey Energy Solutions’ Global Energy Perspective 2023, McKinsey, November 21, 2023.
Across scenarios, total energy-sector investments are projected to grow but to remain in line with historical shares of GDP
Total annual investments in the energy sector are projected to grow by up to 4 percent per annum until 2040, reaching between $2.0 trillion and $3.2 trillion.
Decarbonization technologies are projected to show the highest growth in investments at 6 to 11 percent per annum, driven by strong uptake of EV charging infrastructure (EVCI) and CCUS. The EVCI market for hardware components is projected to reach between $17 billion and $35 billion by 2030, representing a growth of at least 10 percent per annum.1McKinsey Energy Solutions’ Global Energy Perspective 2023, McKinsey, November 21, 2023.
While the overall shift toward more capex-intensive technologies, such as renewables, means higher investments are expected in faster energy transition scenarios, these are projected to be mostly offset by the lower total operating expenditure of renewable assets, such as saving the fuel costs that fossil plants require.
Going forward, there is projected to be a substantial shift in investment from fossil fuels to renewables. However, despite the increasing push for decarbonization and the declining demand for fossil fuels projected in the medium term, around 20 to 40 percent of investments (excluding power T&D)2Transmission and distribution. in 2040 are projected to still be deployed in fossil fuels, across all scenarios. As such, a further shift in investments would be needed for a 1.5° pathway.
Even with lower projected volumes of oil or gas for power generation, continued investment in fossil fuels is mainly driven by the fact that marginal fossil fuel projects are increasingly expensive with higher development costs, and will still see significant investment, while marginal costs and capex for low-carbon technologies continue to decline with technological learning curves.
Investment into low-carbon technologies is projected to overtake fossil fuels by 2025
Investments in low-carbon technologies are projected to outpace fossil fuels before the end of the decade, building on current momentum, investor appetite, and government support as 2030 targets come closer.
As demand growth flattens, overall investment in fossil fuels is projected to gradually decline starting the second half of this decade, although fossil fuels are expected to remain part of the energy mix even in the faster energy transition scenarios. Investments in low-carbon technologies and power T&D show a significantly wider range of uncertainty between scenarios. This is partially driven by uncertainties surrounding implementation and varies significantly between markets and even between different regions within the same country. In particular, increasing generation from intermittent renewables may require a stronger uptake in grid build-out.
Government support could play a critical role for building global momentum by improving low-carbon economics via subsidies and incentives and by setting specific deployment targets between 2025 and 2030. For example, in the United States, the IRA plans to expand wind and solar capacity by 250 GW and 475 GW, respectively, until 2030, REPowerEU aims to increase renewables capacity in the European Union by up to 42.5 percent by 2030, and China’s 14th Five-Year Plan is designed to achieve 3.3 terawatt hour (TWh) annual renewable energy generation by 2025, up from 2.2 TWh in 2020.1“China releases five-year plan for renewables,” Taiyung News, June 2, 2022; Inflation Reduction Act of 2022, US Congress; “One year of the IRA: Tailwind for the energy transition,” en:former, October 16, 2023; “REPowerEU at a glance,” European Commission.
Cumulative investment is $20 trillion higher in the Achieved Commitments scenario than Fading Momentum
Cumulative investments by 2040 are projected to vary significantly between scenarios, with around $20 trillion more investments expected in the Achieved Commitments scenario than in the Fading Momentum scenario. This is due to the higher investments in power renewables, power T&D, and decarbonization technologies in the Achieved Commitments scenario.
Slower scenarios are projected to see higher investments in oil and gas due to lower decarbonization ambitions and limited incentives to advance clean energy supplies. On the other hand, capital spending for conventional power is expected to be higher in faster scenarios due to projected higher electricity demand, and as the uptake in renewables requires additional conventional capacity for flexible generation.
Low-carbon technologies could see EBIT growth between 2.0 and 3.5 times by 2040, compared to 2021
Global EBIT1Earnings before interest and taxes, a common metric used to compare profits across different geographies and operating models. in the energy sector is expected to stabilize at around $1.6 trillion to $2.0 trillion by 2040.
EBIT for low-carbon technologies is projected to see growth of 3 to 8 percent CAGR until 2040, mostly driven by strong volumes uptake. Nonetheless, margins are expected to remain tight due to strong competition in the market.
By the end of the decade, a decline in EBIT from fossil fuels is projected, resulting in a total pool of $1.5 trillion to $1.9 trillion. Nonetheless, after 2030, the decline may be partially offset by significant EBIT growth from low-carbon technologies (a growth between 2.0 and 3.5 times by 2040 compared to 2021).
EBIT for fossil fuels is projected to stabilize at different levels in the long term, at around $1.4 trillion by the end of the next decade in the Fading Momentum scenario compared to $0.4 trillion in the Achieved Commitments scenario.
As local energy production grows, EBIT pools are projected to move from oil and gas suppliers toward demand centers
Total global EBIT is expected to remain constant or to decline slightly in all regions at between 0 and –2 percent CAGR, except in India, where a yearly growth of 6.7 percent per annum is projected, mostly driven by a more than tenfold growth in power renewables, and in the Commonwealth of Independent States (CIS), where a projected 6 percent decline of the EBIT pool is mostly driven by a large decline in oil and gas production. Overall, EBIT value pools are expected to become more geographically distributed, moving from supply to demand centers as most low-carbon technologies favor or even require local energy supply rather than global trade.
Major fossil-producing regions, such as the Middle East and Africa (MEA) and North America, are expected to remain among the regions with the largest EBIT value pools by 2040 as growing profits from low-carbon technologies offset profits from fossil fuels.
By 2040, renewables are projected to become the single largest source of EBIT across most regions, except for MEA and the CIS, where around 85 percent and 60 percent, respectively, of the pool is still expected to remain fossil based.
To manage a system which is moving more toward fixed costs, updates to power market designs may be needed
In most markets today, conventional assets (such as coal, gas, oil, nuclear, and hydro) provide energy in the market as well as firming capacity. With the further expected growth in solar and wind capacity, the role of conventional plants may be decoupled, moving from providing both the primary source of energy and firm capacity to largely providing firming and flexibility in the system. As a marginal market price is projected to correlate with short-run marginal costs across the system, additional remuneration could be needed for asset types to remain profitable to enable their continued operation and especially to fund the technologies required to abate emissions from these operations. By 2040, up to 15 percent of revenues from nuclear assets, 50 percent of revenues from gas assets, and 65 percent of revenues from coal assets may need to come from market mechanisms other than marginal energy production payments for these technologies to remain viable in order to meet remaining transition demand.
Renewable assets with fixed (non-dispatchable) outputs may be subject to correlation effects that drive down prices during periods of high wind and solar production. This will tend to decrease the capture price of those technologies, where variable prices no longer link to total lifecycle cost of production. Out-of-market payments, such as contracts for difference or power purchase agreements, which often include renewable energy certificates which show that a given plant produces renewable power, will likely continue to be needed to secure financing.
Dispatchable thermal capacity, such as gas plants, are more likely to maintain positive returns in geographies with lower fuel costs, such as in the United States. Similarly, clean technologies, such as CCUS, are expected to leverage a variety of market payments as well as support initiatives to maintain profitability.
Regarding older conventional technologies, coal is likely to be largely retired in the near future, while other unabated carbon-emitting technologies will likely run less frequently than they do at present. Nevertheless, as renewable power is ramped up, managing conventional technologies still in use to minimize their environmental impact could be an important concern.
Revenue mechanisms could include capacity markets and payments, subsidies, regulated prices, active markets for clean energy certificates, and contracts for difference to limit uncertainty. Some of these mechanisms already exist in markets globally.
Only certain renewables match strong growth with high EBIT pools
To examine the projected market growth and potential EBIT pools of specific technologies, the projections of the Current Trajectory scenario were used, but note that these may differ significantly across scenarios. Overall, for the Current Trajectory scenario, power renewables and decarbonization technologies are projected to see the highest market growth (most between 2 and 9 percent per annum) as a result of strong demand uptake across all scenarios.
Long-term EBIT projections vary significantly between technologies. The largest value pools are expected to be oil upstream, liquified natural gas (LNG), and wind onshore, with profits above $200 billion in 2040. The other segments are projected to remain below $100 billion per annum by 2040.
Certain renewable technologies could provide high margins thanks to additional revenue streams such as capacity payments and storage (such as pumped hydro).
Strong profitability and market growth do not directly imply high attractiveness of the segment due to market barriers such as strong competition or critical core capabilities needed to succeed.
To request access to the data and analytics related to our Energy value pools outlook, or to speak to our team, please contact us.
Marco Bevilacqua is a consultant in McKinsey’s Amsterdam office, where Ole Rolser is a partner; Tamara Grünewald is an associate partner in the Zurich office, where Anna Schrum is a consultant; Sebastian Overlack is a partner in the Frankfurt office; and Christian Therkelsen is a partner in the Oslo office.
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