Constructing new decarbonisation assets can help achieve net-zero targets—but doing so requires fundamentally rethinking project costs to accelerate development.
About the author(s)
Zak Cutler is a senior partner in McKinsey’s Toronto office, and Sam Linder is an associate partner in the Houston office.
Capital is critical to tackling climate change. According to McKinsey analysis, meeting net-zero targets will require spending USD 9.2 trillion a year on physical assets between now and 2050, up from USD 3.5 trillion today.1 By then, the energy mix would also include nascent energy technologies such as clean hydrogen; battery storage; and carbon capture, utilization, and storage (CCUS).
Capital projects, including those crucial to the energy transition, typically take many years and many hands to design, build, and launch. The number and scale of projects in the current pipeline will not suffice. Labor costs are increasing as raw materials and components remain in high demand, and the global supply chain has strained to keep pace, making the transition to newer technologies with different cost structures even more challenging. And, by definition, nascent technologies don’t have a track record of lessons learned to inform cost productivity improvements to accelerate scaling.
That said, investment in the energy transition is accelerating. As an example, when the Inflation Reduction Act was signed in 2022, the US federal government released USD 370 billion in funding to provide tax credits for clean-energy projects.2 With this in mind, the challenge moving forward will be securing the right people, resources, and physical space while overcoming supply chain constraints and financing for non-established players.
The time is now for industry players to fundamentally rethink how they approach projects to deliver them faster, cheaper, and more efficiently than ever.
A once-in-a-generation call for capital investment
McKinsey analysis suggests that global annual capacity needs to be drastically increased across four areas—renewables, hydrogen, battery storage, and CO₂ captured—in the next 30 years (Exhibit 1). Each of these decarbonization technologies will be critical to tackling climate change.
In some areas, such as solar and wind, the global industry has already made significant strides in expanding installed renewable capacity. But other areas, such as carbon capture technologies, are still in early stages.3
Batteries are projected to see a meteoric rise in demand in the coming decades if the industry can overcome ongoing challenges in securing the raw materials, such as lithium, copper, and nickel, needed to produce at scale. On this point, recent McKinsey estimates show that meeting global demand for copper and nickel alone could require capital expenditures of USD 250 billion to USD 350 billion by 2030, both to grow new capacity and to replace depleted existing capacity.4
The pathway for hydrogen perhaps best illuminates the challenges of scaling new energy technologies. McKinsey estimates that by 2050, two primary fuels—electricity and hydrogen—will make up an estimated 50 % of the global energy mix.5 This growth will be seen across different forms of hydrogen, including renewable “green” hydrogen, which is produced via the electrolysis of water.
Recently announced projects would add about 22 million metric tons of capacity, but their financing is still unclear—and collectively they would account for only 15 to 20 % of the estimated 2035 need.6 Regarding cost parity, improvements are possible in terms of the levelized cost of hydrogen,7 but this will require the industry to rapidly improve electrolyzer systems, increase hydrogen plant capital expenditures, and lower electricity costs (Exhibit 2).
In an accelerated scenario, clean hydrogen could account for approximately 95 % of total supply by 2050, helping to meet the anticipated fivefold increase in demand driven by the road transport, maritime, and aviation industries.8 Thus, significant scale-up in renewable-energy production, electrolyzers, and CCUS is needed to make hydrogen, renewable fuels, and other clean technologies cost competitive with conventional-energy production, particularly in transport, which is expected to account for more than 50 % of demand growth by 2050.
The path forward: Rethinking capital project costs
Considering the starting points of technologies such as hydrogen, batteries, and CCUS, their respective growth potentials are high. Effective hyperscaling—that is, large-scale and repeatable new-asset development—would require project owners to increase their metabolism while rethinking the cost of project delivery. The “plant as a product” approach, which uses manufacturing methodology to help companies scale green capital expenditures quickly and make construction projects repeatable, can help owners and builders deliver these projects more efficiently and cheaply.
Several projects currently underway could produce hydrogen at a cost of USD 6 to USD 8 per kilogramme. For hydrogen to be economical, however, it will need to be produced at roughly USD 3 per kilogramme for most applications.9] This means industry leaders need to fundamentally rethink capital costs for future projects. Some of the necessary efficiency will come from experience, reducing costs—particularly for electrolyser system improvements for power density and efficiency—and some will come as more projects are built and others are scaled. However, cost competitiveness won’t happen within the necessary time frame if industry players don’t approach things differently.
With this in mind, the following decisions throughout the project life cycle can help facilitate the required timelines, costs, and levels of efficiency of green projects.
Rethink the approach to project design
Moving forward, players—particularly incumbents accustomed to large-scale capital projects with massive specifications and scale—can help make these projects economical by rethinking how they are designed for the minimum technical solution. This can be done in part by taking a radical approach to design and standardisation. For example, Tesla claims that it has been able to reduce the capital expenditures per gigawatt-hour of its gigafactories by 70 %, which has led to knock-on benefits of standardized materials and supplies.10 In addition, this approach has been facilitated by the creation of an ecosystem of partners and suppliers that are aligned on aspirations related to speed, massive scale, and low costs.
Engage in collaborative contracting
Players can pursue strategic partnering models across the value chain with suppliers that are new to the industry. Companies can also consider investing time and energy into building more collaborative partnerships with contractors rather than relying on transactional bid–buy relationships. One option is developing an ecosystem of contractors, for which shared incentives and partnerships can be improved with each subsequent build, as opposed to changing up contracts each round. Our analysis shows that undertaking multiple projects in parallel and using the same contractors can improve performance by an additional 15 to 20 % beyond the average.
Build next-generation capabilities
Simply put, the industry needs more people with clean-energy expertise. Although training can help upskill current employees and ensure they’re ready to tackle climate change on the ground, more skilled workers will be needed. On this point, players can partner with unions, trade schools, and vocational schools to build their talent pools. For instance, in 2018 Quanta Services acquired Northwest Linemen College, which focuses on the electric power industry.11 This allowed Quanta to create a pipeline for certified line technicians, who are in high demand. As another example, Ontario’s Express Entry Skilled Trades Stream has removed requirements for domestic experience for foreign nationals with experience in skilled trades. Now, those with the right work experience can transfer their accreditations by passing an exam.
Apply digital tools
Project owners can build smart, data-driven setups across the value chain and life cycle. Advanced analytics and digital twins are now table stakes; including them from the outset will help optimise the system as a whole. Digital twins in particular are needed not only for operations but also for optimising or right-sizing project designs and delivering the lowest life cycle costs needed to make projects economical. Advanced analytics or an AI-enabled digital twin can add 5 to 15 % savings over so-called basic techno-economic models. This is achieved by subcomponent granularity, a look “inside” the chemical or physical properties, and increasingly accurate dynamic optimization. In addition, if the digital twin is set up correctly during the design phase, it can serve as the basis for a variety of use cases throughout the plant life cycle, ranging from operations and maintenance to strategic investment.
Without a large pool of project examples to learn from, many project owners may feel that they’re starting from scratch, and they may be tempted to take it slow and steady. But at the current pace, the world will never hit its 2050 goals. Capital project leaders have a range of options to reconsider how they approach project costs, from project design to future-proofing the partnerships and capabilities that will provide the foundation for hyperscaling.