By Tommaso Cavina, Lorenzo Moavero Milanesi, Hamid Samandari, Humayun Tai, and Raffael Winter
The 27-member European Union has long been a leader in the global energy transition, thanks to strong support for clean technologies and an ambitious decarbonization agenda. That agenda includes policy initiatives, such as the European Green Deal (in 2020) and the Fit for 55 plan (in 2021), which aim for a 55 percent cut in CO2 emissions by 2030 (from 1990 levels) and for net-zero emissions by 2050. Since 2021, however, those goals have encountered headwinds. The Russian invasion of Ukraine, the lingering effects of the pandemic, supply chain disruptions, inflationary pressures, and turmoil in the global economy have threatened energy security and affordability in EU countries. Many of them are net importers of oil and gas and thus particularly exposed to energy reliability and market volatility risks.
Although Russia’s natural-gas exports declined after the sanctions against it, the European Union has avoided mandated gas curtailments. One reason was the diversification of gas supply—in particular, liquefied-natural-gas (LNG) imports, which increased by more than 60 percent in 2022 from the previous year. In addition, the European Union reduced gas consumption in industry and buildings by about 15 to 20 percent in 2022 (compared with 2021), thanks to a relatively mild winter and the adoption of behavioral and energy efficiency measures
Several European nations sought to maintain a steady energy supply by taking steps such as delaying the decommissioning of coal-fired power plants and increasing their utilization, which helped to partially offset reduced generation from nuclear and hydro plants. But by highlighting the European Union’s exposure to Russian energy, the crisis gave a fresh impetus to the push for a more orderly energy transition that combines rapid decarbonization with energy security and economic growth. In early 2022, the European Commission announced the REPowerEU plan, which introduced measures “to rapidly reduce dependence on Russian fossil fuels and fast forward the green transition.” This sent a signal that the European Union aims to come out of the current crisis with a renewed commitment to climate action.
The European Union accounts for about 8 percent of global energy-related emissions. While it obviously cannot solve the global climate-change problem on its own, it could position itself as a global leader and serve as an example for other countries and regions if it can come close to achieving its commitments.
Still, fulfilling those commitments would require an unprecedented effort, and the current speed and scale of the transition would need to increase significantly . From 2019 to 2021, EU power sector emissions decreased at less than half the rate necessary to stay on track for a 1.5°C pathway. The European Union would now need to triple its current pace of renewable-energy-source (RES) deployment to avoid a less orderly transition, which would be far more costly and damaging to the economy and the environment than one that balances affordability, reliability, resilience, and security.
Benefits and costs
The energy transition could offer broad economic benefits for the European Union—such as increased energy reliability, economic growth, and job creation—for example, by developing supply chains for renewables such as solar-photovoltaic (PV) manufacturing. McKinsey’s net-zero report shows that Europe’s cumulative incremental investments toward net zero could reach around €1.7 trillion by 2030, equivalent, in real terms, to 11 times the spending of the post–World War II Marshall Plan. Although the transition could eliminate six million jobs through 2050, it could also create 11 million, for a net gain of five million. As job losses and gains will occur disruptively across the labor spectrum, training and transition support will be required.
In addition to reducing CO2 emissions, a successful transition would strengthen the region’s energy security by reducing dependence on fossil fuels and energy imports. The goal would be to raise the proportion of renewable energy in the final energy mix to 45 percent by 2030, compared with 22 percent today. By 2030, these changes could reduce the European Union’s total energy bill by 10 percent.
On the other hand, a less orderly transition—resulting, among other factors, from a lack of coordinated interventions among EU member states—could ultimately raise the cost of energy for households and businesses in coming decades. We estimate, for instance, that producing green hydrogen in Germany would cost 20 percent more than importing it from Spain. A failure to act would have severe negative environmental and economic costs across sectors, infrastructure, human health, and disaster management. These would far exceed the costs of action and adaptation.
EU member states would need to take transformative collective action to meet their goals. Implementing the transition would mean profound change: substantial shifts in both energy supplies and large-scale electrification—two endeavors of tremendous magnitude. On the supply side, for example, our research shows that the rate of installation of renewable-energy sources (RES), such as wind and solar, would have to increase three to five times from the 2018–20 average. On the demand side, substantial and cross-sector electrification would be required to reduce direct demand for fossil fuels. According to McKinsey’s 2022 Global Energy Perspective, the number of battery electric vehicles (BEVs) on EU roads, for example, would need to increase from 1 percent of the total today to about 20 percent in 2030.
Stakeholders could then begin the lengthy process of scaling up infrastructure, supply chains, and the availability of talent. The public sector could be called upon to play a significant role—for example, by considering institutional reforms if needed. Private-sector efforts could prove equally important. Individual operators could catalyze a more orderly energy transition by focusing on cross-value-chain and cross-industry partnerships to improve the resilience of supply chains. The private sector could also take a leading role investing in automation, innovation, and new capabilities; attracting and reskilling the workforce; and launching initiatives to increase the social acceptance of the measures needed to achieve net zero. Without these—and other—key enablers, Europe will not be able to deploy energy transition technologies at the necessary speed and scale.
Accelerating a more orderly energy transition
In 2021, the EU market was the third-largest source of greenhouse-gas emissions, behind only China and the United States. Within the European Union, emissions were highest in Germany, with 23 percent of the total, followed by Italy and Poland, with 11 percent each. The majority of these emissions come from five sectors: transportation (about 28 percent), heavy industry (about 25 percent), power (about 22 percent), buildings (about 13 percent), and agriculture (about 12 percent). Fossil fuel combustion accounts for 80 percent of EU emissions.
The challenges of reducing them vary from country to country. The Benelux nations, for example, rely on heavy industry and serve as a hub for air freight and shipping—relatively difficult sectors to decarbonize. Other countries, such as Poland, rely on coal-based power generation. Despite these differences, EU member states could act in similar ways to overcome the challenges and help realize the region’s climate goals. McKinsey’s 2022 report on the transition highlighted nine requirements for reaching net zero. Our research has identified five action areas that EU nations could consider to accelerate the energy transition in an orderly manner:
- creating resilient, at-scale supply chains for key decarbonization technologies
- building out the energy grid infrastructure to support resilience and reduce barriers to in-region renewables
- reexamining land use, societal, and regulatory constraints to accelerate the development of renewables
- redesigning power markets in line with decarbonization and affordability objectives
- ensuring the affordability of clean technologies to foster their adoption and accelerate the energy transition
Action area 1: Creating resilient, at-scale supply chains for key decarbonization technologies
The European Union currently imports many of the critical inputs that clean technologies need, including solar panels, wind turbines, and batteries. Supply chains for some of these key technologies are already stretched, and geopolitical tensions have exacerbated the existing problems. Supply chain blockages risk delaying or increasing the cost of the energy transition. A shortage of labor presents a further obstacle.
Action area 2: Building out the energy grid infrastructure to support resilience and reduce barriers to in-region renewables
Boosting the share of renewables in the energy mix to 45 percent by 2030 could require a substantial expansion and enhancement of the grid infrastructure to support the integration of new green technologies, such as utility-scale and distributed RES, EVs, and heat pumps. A more up-to-date system could also ensure the security of the gas supply.
Action area 3: Reexamining land use, societal, permitting, and regulatory constraints
To reach its 2030 climate targets, the European Union would need to shift rapidly to renewable energy. Our research indicates that from 2022 to 2030, the annual number of solar and wind installations would need to increase by two to five times their 2020–22 levels to meet the region’s goals.
Indeed, REPowerEU targets include a total solar capacity of 600 GW by 2030, up from 209 GW in 2022. Annual additions of PV technology would need to more than double, from 30 GW a year (2020 to 2022) to around 70 GW a year (2022 to 2030). Annual additional onshore wind generation would need to almost quadruple, to 40 GW, from 11 GW, over the same period. Additional offshore wind generation would need to quintuple. What’s more, 60 percent of the region’s coal capacity might need to be retired.
One critical condition of accelerating the use of renewables is the availability of land. Europe’s population density and growing concerns about land use have made it more challenging to find adequate areas for onshore wind and solar power. The land requirements for deploying the target capacity of renewables are significant. The 2040 RES targets in France, Germany, and Italy, for example, would require an additional land area of 23,000 to 35,000 km2—equivalent to the size of Belgium.
To achieve the necessary deployment of renewables, policymakers could consider accelerating permitting procedures—the part of the RES and transmission-line-development process that typically takes the longest amount of time. In major EU countries, permitting times range from three to ten years for onshore wind installations and from two to six years for solar. As a result, recent tenders across the European Union have been largely undersubscribed. Around 80 GW of capacity—some 30 percent of the additions required to achieve the 2030 EU target for onshore wind—is still going through the permitting process.
Action area 4: Redesigning power markets in line with decarbonization and affordability objectives
Power and commodity markets have been designed around energy systems with variable expenditures, so these markets fluctuate according to the cost of commodities. The natural gas burned by a combined-cycle gas plant built in the mid-2000s might have been expected to account for 60 to 70 percent of its lifetime cost. But variable expenses over the life of a solar or wind farm are very low: operations and maintenance costs are just 10 to 20 percent of lifetime costs, according to our analysis.
Action area 5: Ensuring the affordability of clean technologies to foster their adoption and accelerate the energy transition
If the energy transition is carried out in a more orderly manner—that is, if renewables account for 45 percent of EU supply by 2030 and the electrification of energy demand meets 2030 targets—it could reduce average EU energy costs by about 10 percent (compared with 2019) by 2030. This reduction could be achieved through a combination of lower energy consumption and the substitution of lower-cost clean energy for carbon-intensive energy.
This cost decrease could have two main drivers. First, final energy consumption could fall by 10 to 15 percent through the electrification of final consumption and through energy efficiency (including energy management, HVAC improvements, insulation, and smart lighting, among other things). A fully electric household, for example, consumes around one-third as much energy as an average one. Second, the unit cost of supplying power can be reduced as renewable-energy support programs expire and the levelized cost of electricity (LCOE) of newly installed renewable energy lowers the average cost of generation. These decreases will probably more than offset the increasing costs of flexibility and of transmission and distribution.
This is an extract of an article from McKinsey & Company and the complete article can be accessed here