The rapid maturation of wind and solar power has been nothing short of astonishing. Not long ago, the development of new solar and wind farms was typically driven by small regional players, and the cost was significantly higher than that of a coal plant. Today, the cost of renewables has plummeted, and many solar and wind projects are undertaken by large multinational companies, which often also announce staggering development targets.
This article is a collaborative effort by Florian Heineke, Nadine Janecke, Holger Klärner, Florian Kühn, Humayun Tai, and Raffael Winter, representing views from McKinsey''s Electric Power & Natural Gas Practice.
Over the past decade, the growth of renewable energy has consistently and dramatically outperformed nearly all expectations (Exhibit 1). Upward corrections of estimates have become something of a ritual.
This race to build additional solar and wind capacity increases the pressure on developers to execute efficiently and heightens competition for finite resources. Still, the three winning capabilities we identified three years ago as important for building or expanding a renewables business are even more critical now. They form the bedrock required to tackle upcoming challenges:
Leveraging these capabilities as a strong foundation, successful renewables developers must navigate an increasingly complex and competitive landscape. Specifically, they will have to focus on and address four emerging challenges:
Renewables developers will need to act decisively to prepare for these upcoming challenges. In a series of future articles, we provide detailed insights on each of these pressures and share potential ways players can take action.
Florian Heineke is a consultant in McKinsey’s Frankfurt office; Nadine Janecke is an associate partner in the Hamburg office; Holger Klärner is a partner in the Berlin office; Florian Kühn is a partner in the Oslo office; Humayun Tai is a senior partner in the New York office; and Raffael Winter is a partner in the Düsseldorf office.
The authors wish to thank Nadia Christakou, Florent Erbar, David Frankel, Emil Hosius, Anna Kemp, Nadine Palmowski, Andreas Schlosser, Sophia Spitzer, Christian Staudt, and Jakub Zivansky for their contributions to this article.
The acceleration in clean, renewable energy power generation comes not a moment too soon for policymakers and advocates concerned with climate change caused by greenhouse gas emissions.
At 2023''s United Nation''s Climate Change Conference (COP28), governments set a goal to triple global renewables power capacity by 2030. This will ideally help advance decarbonization, mitigate climate change and achieve net-zero emissions, according to the IEA (link resides outside ibm ).
Broad policy measures notwithstanding, policy support often varies depending on the type of renewable energy in question. Let''s take a closer look at several types of renewable energy resources and the trends taking shape in each category.
In 2023, solar photovoltaic energy made up three-quarters of renewable capacity additions around the world, according to the IEA. Capacity growth stemmed from both utility-scale plants and consumer adoption of distributed PV systems—on-site solar power generation at homes and businesses—accounted for the other half (link resides outside ibm ).
Continued policy support from governments around the world remains the primary driver of this growth. For example, some policymakers incentivize renewable power generation by individuals and businesses through net-metering programs that allow utility customers to send excess energy generated back to their utilities for credits. Other incentives encouraging the production and use of solar power include feed-in-tariffs, tax credits and auctions in which solar power providers compete on energy market price to win contracts.
As with solar power, public policies have been key to driving wind energy expansion, but growth projections vary by region. China saw a 66% increase in wind power capacity in 2023 and is on track for more additions in the coming years. Project development, however, has been slower than initially expected in Europe and North America. Offshore wind projects have been especially vulnerable: In 2023, in the US and UK alone, developers canceled offshore projects (link resides outside ibm ) with total capacity of 15 gigawatts (GW).
For wind power to meet the goals of the IEA''s NZE, average annual growth would need to reach or surpass 17% per year until 2030 (link resides outside ibm ).
Currently, hydropower generates more power—reaching 4,300 TWh in 2022— than all other clean energy sources combined and will remain the largest source through 2030, according to the IEA. Despite small but steady growth and proven reliability, new hydropower additions are forecast to decrease 23% (link resides outside ibm ) over the next decade due to development slowdowns in Europe, China and Latin America.
Over the past 20 years, energy industry focus has shifted from hydropower, with most countries focusing policies and incentives on expanding solar and wind power. Today, less than 30 countries (link resides outside ibm ) offer policies to support new hydropower development and refurbishment of existing plants versus over 100 countries with policies to support wind and solar PV.
Global biofuel expansion is underway, thanks largely to supportive government policies in emerging economies such as Brazil, India and Indonesia. Demand is largely driven by the transportation sector in those countries, while supply is enabled by the availability of biomass feedstock. Brazil leads the way in biofuel expansion, accounting for a projected 40% of growth by 2028 (link resides outside ibm ).
Biofuel expansion is more limited in the EU, US, Canada and Japan due in part to high costs and the growing popularity of electric vehicles. The main areas of growth for biofuels in these countries are the renewable diesel and biojet fuel segments. Overall, biofuels such as bioethanol and biodiesel, in combination with electric vehicles (EVs), have the potential to offset the oil equivalent of four million barrels by 2028. Such milestones notwithstanding, the IEA predicts (link resides outside ibm ) that biofuel expansion will still fall short of 2030 NZE goals.
Biogas: While the growth of the biogas industry began in the 1990s, the last two years have seen an increase in policy support for the natural gas alternative. Currently, almost half of all global biogas production comes from Europe, with 20% of that from Germany alone (link resides outside ibm ).
Historically, biogas has been used at heat and power plants. More recently, however, governments have encouraged industrial and transportation uses for biomethane, a biogas which, as its name suggests, contains a substantial concentration of methane. With 13 countries implementing strong new policies supporting biogas since 2022, the IEA projects (link resides outside ibm ) that biogas production growth will accelerate through 2028.
Technological developments are creating opportunities to bring geothermal energy to more places. For example, through Enhanced Geothermal Energy Systems, fluid is injected underground in areas without naturally occurring hot water sources. The fluid heats up underground and then is pumped to the surface, where it generates electricity (link resides outside ibm ). Various geothermal projects are planned or underway around the word, including in North America, Europe and Asia.
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