Renewable energy is becoming more abundant—and cheaper. But the pace and nature of its expansion will vary considerably across markets. To see how the power industry could provide cheap, reliable, sustainable power, we mapped the world into four key market types, which collectively make up most of the global market and created pathways that show the most economical way to fully decarbonize each market type by 2040.

We conclude that getting to 50% to 60% decarbonization is not that difficult technically and is often the most economic option. Getting from there to 90% decarbonization is generally technically feasible but sometimes costs more. And getting to 100% is likely to be difficult, both technically and economically.

‘Islanded’ markets

As the name implies, these are remote or isolated markets (such as Hawaii) where today’s power systems are expensive—they import fuel and lack connections to other power markets. Many have sunny climates, and falling renewable prices mean that these markets could reach over 80% decarbonization, largely by choosing the lowest-cost power mix.

Our research suggests that climbing the ladder to 90% would mean sizeable new investments in solar, with battery storage for backup when solar cannot generate. That would impose some level of what the industry calls “curtailment costs”*—the inability to use all the renewables coming online efficiently—plus related costs of keeping underutilized thermal assets up and running as a backup. Still, this penultimate step could be achieved with lower overall system costs.


Batteries Cannot Save the Grid Or the Planet featured in the Oil and Gas Investor November 2019 issue

Getting to full decarbonization would require using an emerging technology known as P2G2P (power to gas to power), where renewables produce clean hydrogen fuel through electrolysis.** That clean hydrogen displaces fossil fuels for backup power. It’s a high-cost technology now, but the price tag might be contained since use will be mostly at the margin.

Thermal-heavy, mature markets

These markets have large populations, are heavily powered by thermal facilities today, and have major interconnections to other power markets to manage loads. Examples are the US PJM market 3 and Germany. Getting to 90% decarbonization would require more wind generation and battery storage. Going the final distance to 100% decarbonization would likely rely on carbon capture, use and storage (CCUS), where emissions from fossil-fuel plants are captured and stored. CCUS capital costs are high, but continuous use for power generation can temper them.

Baseload clean markets

These markets have a substantial core of baseload clean power, such as nuclear plants in France and hydroelectric facilities in Brazil and the Nordic countries. That’s a hefty structural advantage: building on a zero-emissions base, they can choose the lowest-cost decarbonization option—in this case, wind—at little or no additional cost (using the base power to balance renewable intermittency) to reach 90% decarbonization.

These markets also would be well-positioned to achieve full decarbonization through innovation in negative-carbon technologies. The combination of their clean base and renewables would create an opportunity to offset remaining emissions from the small amount of gas-fired “peaking” capacity needed (about 3%) with direct air capture (DAC). This technology effectively inhales CO₂ from the atmosphere and stores it underground or dispatches it for industry use. Costs are high but would be manageable in narrow-cast usage.

Large, diversified markets

This market type comprises large territories, such as California, Mexico and parts of eastern Australia, where renewables represent only a modest chunk of base power today, and substantial potential exists for additional renewables—principally solar and wind, but also river-based hydro. Our analysis suggests that the most direct path to 90% emissions abatement would be greater solar generation, plus storage—backed up by gas facilities to manage intermittency. Although efforts to connect renewables to the grid at large scale would impose some inefficiencies (curtailment costs), overall system costs might decrease as the costs of solar and storage continue to fall.

Getting to 100% decarbonization in these markets would require overbuilding of renewables and storage, which in turn would pile on curtailment costs as these new assets are cycled through the system. These markets would need to keep some thermal plants, supported by hydrogen through P2G2P technologies, to run the facilities. While expensive, P2G2P would kick in only if renewables could not produce for multiple days to supply power.

Technology advances could lower costs and accelerate the transition pathways we have described. In addition to direct air capture, CCUS and P2G2P, advances in longer-duration storage and biomass fuel technologies could also move the needle, as could advances in more traditional areas such as nuclear generation and transmission. Significant penetration levels of electric vehicles could displace a meaningful portion of the stationary batteries that would otherwise be built. Paradoxically, however, they are unlikely to substantially affect system costs, since they do not solve the puzzle of achieving the transition from 90% to 100% decarbonization. That requires a breakthrough in storage.

The challenge, of course, is that even though the outlines of a new environment have begun to emerge, the power industry operates with time horizons in the decades. The implication is high-stakes strategic decision making under uncertainty, from utilities, regulators, and investors, and an innovation imperative that will vary considerably by market and company.

* Curtailment, defined as the purposeful reduction in the output to the grid of a generator from what it could otherwise produce, is a concept that is particularly applicable to renewables because they cannot be controlled like thermal plants.

** In its most basic form, electric power from renewables drives a current through water to produce clean hydrogen gas.

About the authors:

Jason Finkelstein is an associate partner in McKinsey’s San Francisco office, David Frankel is a partner in the Southern California office, and Jesse Noffsinger is an associate partner in the Seattle office.

Amy Wagner also contributed to this article.