Energy transition in US and Europe suffers from ‘reality gap’ between targets and project starts

The report suggests that corporate, public and private investors are hesitating about deploying capital in green infrastructure projects due to softening business cases, technology cost-competitiveness, and project-enabling and market-forming policy support. This is underscored by a significant proportion of announced projects not yet reaching FID, amplifying the risk of project cancellation.

For example, McKinsey reports that, in renewable power generation in the US, more than 1,000 green or blue hydrogen projects have been announced since 2015, but fewer than 15% have reached FID.  

In more established technologies such as solar, PV capacity additions are projected to stagnate after 2028 at 220 GW because of a lack of firm commitments – and of the announced capacity expected to come online before 2030, ~60% is still pending FID.

In Europe, the report continues, the solar pipeline is not currently on track to meet 2030 capacity targets of 600 GW, with less than 390 GW of capacity planned to be online by the end of the decade. Of the ~114 GW of additional capacity expected to come online by 2029, less than 20% has reached FID.  

For offshore wind, the gap is only 18 GW remaining to meet its overall 2030 target of 176 GW. But, again, of the announced 124 GW of offshore wind capacity in Europe, ~65% is still pending FID.  

The situation is much worse for carbon capture, use and storage (CCUS) and hydrogen, according to the report authors, as they face bottlenecks including the need to build out entire value chains for technology deployment. The authors say: ‘CCUS project pipelines are full and ambitious, with 60 times and nine times the current CCUS capacity to be available in Europe and the US respectively by 2030. There is a pipeline of 148mn t/y in Europe and 170mn t/y in the US, but 44mn t/y and 132mn t/y of projects respectively are still lacking FID, underscoring a high risk of this not materialising.’

A number of causes, rather than one single cause, are offered to explain the current situation. They include economic reasons (both the ‘macroeconomic environment’ and fluctuating investment climates), plus long permitting procedures, grid reform challenges and carbon pricing fluctuations which delay the approval and deployment of new projects. Once projects do reach FID, a lack of skilled workers in green technologies slows down installation and maintenance.

Reflecting on the findings, report co-author Humayun Tai, Senior Partner at McKinsey, says: ‘Transforming the energy system hinges on the coordinated deployment of interlinked and interdependent technologies. A slowdown in deployment in one area of the energy system can cause cascading delays and hamper the growth of other technologies.’

Another co-author and McKinsey Senior Partner, Thomas Hundertmark, comments: 'While the gap is widening, there is still a window of opportunity for governments and companies to deliver the growth needed while meeting their net zero ambitions. Doing so will require revaluation of existing strategies and regulatory regimes, many of which were devised to assume a different economic and policy landscape than exists today. With a clear view of the reality gap emerging, now is the time for stakeholders across the energy value chain to revisit decarbonisation plans to pioneer the next wave of progress.’