A macro view on the state of climate tech

We need to invest many trillions of dollars every year to build a climate-positive economy. We know what those technologies are — but they're all at very different levels of readiness.

So what would it take to scale critical climate technologies? That was the simple-but-complicated question recently posed by a group of energy, industry, and high-tech experts at McKinsey.

The research offers a clear account of the state of a dozen types of climate technologies, which could collectively slash emissions by 90%. We sat down with co-authors Anna Orthofer and Mark Patel to walk through the adoption pathways for everything from renewables to hydrogen to lab-grown meat. What's ready to scale, and what's behind schedule?

Utility rates could make or break the energy transition — so how do we do it right? On June 13th, Latitude Media and GridX are hosting a Frontier Forum to examine the imperative of good rate design, and the consequences of getting it wrong. Register here.

And make sure to listen to our new podcast, Political Climate — an insider’s view on the most pressing policy questions in energy and climate. Tune in every other Friday for the latest takes from hosts Julia Pyper, Emily Domenech, and Brandon Hurlbut. Available on Apple, Spotify, or wherever you get your podcasts.

Transcript

Stephen Lacey: I am willing to bet that many of you get this question, "Oh, you work on climate stuff. Are you optimistic or pessimistic? How should I feel?" I often get this question. I often ask it in different ways of the people I interview, and the answer I often give is similar to the one I got from McKinsey's Anna Orthofer.

Anna Orthofer: I go back and forth between huge optimism and energy when it comes to climate technologies and energy transition, and a huge amount of concern of how hard it is to get some of these solutions deployed in practice in a way that is really cost-competitive and that works for many of the companies in space.

Stephen Lacey: Anna is a partner at McKinsey. She's an economist and an expert on energy and materials, and she co-authored a recent analysis that asked a simple but complicated question, a question that's on all of our minds, and a question that forms the foundation of this podcast. What would it take to scale critical climate technologies?

Anna Orthofer: So what we wanted to do is to do a stock take on where we stand on climate technologies, which ones are relevant, which ones are deployed in practice, how are we tracking on the way to net-zero? Are we on and off track? And what are the barriers to scale them faster?

Mark Patel: We wanted to understand at one level, what do you have to believe to be true in terms of the industrialization of the right technologies to be able to reach that level?

Stephen Lacey: Mark Patel was a co-author on the research. He's a senior partner at McKinsey who co-leads a program focused on climate solutions deployment. His expertise is in the industrial and high-tech sectors.

Mark Patel: Question number two was how should we understand and prioritize the respective technologies that will contribute towards a much lower carbon future version of the world? And what I mean by that is consistently interrogate what the potential of each of the technologies is from a carbon impact perspective, what it's going to take from an operational and from a financial perspective to achieve that.

Stephen Lacey: The report offered a really clear account of the state of a dozen types of climate technologies, which together could slash emissions by 90%. And I sat down with both Anna and Mark to walk through what's ahead of schedule and what's behind schedule.

Anna Orthofer: What's really interesting here is not only how are we deploying these technologies, but how far away are we from cost competitiveness from many of these technologies? Why have some come down faster in cost than others and how can we accelerate the cost down curve?

Stephen Lacey: What has surprised you about deployment trajectories? Did any particular trend stand out to you as you surveyed the landscape?

Anna Orthofer: I think we were struck by how bad we are at forecasting climate technology, but also how inconsistently we get it wrong. So there's some sets of technologies that we consistently overestimated and those are the technologies that are always just around the corner, but somehow they haven't panned out to the extent that we predicted. And those are things nuclear fusion or things like hydrogen, CCS to some extent, where historic forecasts are much higher than what we're currently seeing, we're currently projecting. And it's surprising that we didn't predict that correctly as a society. I think the second thing is indeed to what extent we keep underestimating the speed at which solar and batteries, to some extent also wind, but to a less extent, have achieved cost savings and actually are deployed. So somehow we seem to look at averages of climate technology more than really recognizing the differences and being able to forecast these correctly.

Mark Patel: I think on the positive side of what surprises us, you can actually predict what it takes to get momentum going. The beauty of now having a few case examples and the data behind them is that we've been able to analyze what it takes to get to scale and what it means to get that flywheel moving. And we have the sort of heuristic almost of saying, look, if you can drive 100x scaling, then you can drive 70% cost down. That appears to be a relatively consistent theme regardless of the maturity of the technology. We should derive some confidence from the fact that technologies can scale and do scale faster. And frankly, I was quite surprised that the heuristic holds and I feel that we should be talking about it more and more.

Anna Orthofer: It's probably hard in general to predict the uptake of a new technology, but there's also some factors that make it extra hard for climate tech.

Mark Patel: It's hard to understate, I think, just how hard it is to engage in established markets when you have something that is somewhat unproven and requires acceleration.

Stephen Lacey: This is The Carbon Copy. I'm Stephen Lacey. We need to invest trillions of dollars every year to build the climate positive economy. We know generally what those technologies are, but they're all at very different levels of readiness. This week a conversation with Anna Orthofer and Mark Patel about the adoption pathways for everything from renewables to hydrogen to lab grown meat.

So you track 12 different sectors with varying degrees of commercial readiness. Break down those sectors for me.

Anna Orthofer: Yes, so we look at 12 different sets of technologies which roughly fall into four buckets. So that's everything around clean electrons, which is basically renewables, nuclear, grid and storage infrastructure, and then things like EV batteries, heat pumps, and other direct electrification routes. Everything that falls into green molecules or clean molecules, which are things like hydrogen and sustainable fuels. And then we have carbon management topics, so everything that comes off the combustion of fuels, so CCUS carbon removals and nature-based solutions. And then lastly, topics around circularity and resources such as alternative proteins, for example.

So these 12 buckets together capture around 90% of the abatement need until 2050. We look at them in terms of a maturity assessment first, and we basically see three different categories. So there's technologies that are in global deployment, which we categorize as technologies that are roughly in the... the IEA would put it at a TRL scale 11. So these are technologies that are commercially available and they're commercially competitive. So they are technologies that on a standalone business case basically work.

There are other technologies, the next set, which is the biggest set, which is technologies in commercialization. So these are technologies that are technologically available and mature that are commercially available but that are not deployed on sort of a standalone basis, that requires some sort of support on system integration or to bridge a cost gap relative to incumbent technologies. And then there are early innovators. So technologies where we kind of have the technology basics figured out. We have them proven at a concept scale or at a large prototype or even in a big demonstration project, but which are really still about proving technologically that they work at scale, getting first of a kind plants going.

I don't think it's surprising that we have a lot of the technologies available to get to net zero. This is something that is often repeated. I found it quite surprising how few technologies are really in this full global deployment and maturity. So when I set out I thought solar, wind and batteries are basically everywhere. So they are commercially, they're basically mature, they're in global deployment, and it's all about just removing the floodgates of any barriers that are in the way, material shortages or permitting or other things. And they basically are self-starters. Now we looked at it in a lot more granular detail, so we said we don't look at all solar or all wind, but we look at specific use cases and linked abatement potential to that use case. So for example, we differentiate between utility scale solar installations in the Middle East versus residential solar installations on rooftops in environments with existing grid headroom versus others in which there is no headroom in the grid, which require additional investments into transition and distribution infrastructure of storage.

So basically we take quite a granular look at different use cases for technologies, similar obviously for all the other technologies as well. And when we do that, we actually find that only about 10% of the abatement potential that we need to get to net zero is in global deployment or sort of fully mature category, which is a lot less, I think, than we would've hoped. And I think the other thing that I found surprising is despite the fact that we see a huge cost down potential across all these categories, which we can go in more detail is driven by different things by R&D or industrialization or other things, that despite huge cost down historically and projected, we will not get to more than 20 or 30% of all abatement needs being fully in the money or fully commercially mature by the end of the 2030s, which I guess is, for me at least, a rather disappointing insight from this research.

Stephen Lacey: Yeah, that reminds me of a recent interview I did with a former solar executive who said, "The revolution is here, it's just not evenly distributed." And even these mature technologies that are in global deployment, it's very geographic and market dependent. Mark, what's your read on this? I mean I think it is commonly said that we have upwards of 80% of the technologies available today to hit net zero emissions, but Anna just sort of explained the nuances of what you found and that is not necessarily the case when we think about technologies that are working their way up from innovation to commercialization to deployment. So what's your read on this in terms of the preparedness of many of these technologies to compete and get an edge in the market?

Mark Patel: The preparedness I think is a great question. What we find is that in the early stages of development, there is inevitably and rightly a focus on individual technologies and the maturing of those technologies at a bench level if you like, or a demonstration of pilot level. However, the capabilities and the requirements to move to the next levels of scaling and to do it as quickly as possible, they move very quickly from technical insight and technical capability, particularly scientific insight and scientific capability, into things like broad-based process engineering and process development, capital, productivity and construction of infrastructure. These are the things that we need to do, right? Whether it's building DAC facilities or whether it's scaling new agricultural models, pretty much all of them require some interaction with the physical world. And the preparedness for what it takes to scale beyond the proof and scaling of a process or a individual chemical, physical or biological activity, that's a gray area of, I think, uncertainty, unpreparedness. We don't talk about what those disciplines are and we don't talk enough about and plan enough for what it takes to move faster with them.

Stephen Lacey: I was surprised that a lot of renewables still fall into this in commercialization category. I just wonder what separates in commercialization from the global deployment category when we think of some of these more mature energy technologies?

Anna Orthofer: The line that we drew is that we said for the global deployment cases, these are the ones that on a pure market basis would happen. Basically if you had no government that provided any type of support, that build the grid for you or that build charge points for you, the business case would still work for the private sector to do it. So these are basically technologies that don't require a further push. They just require not to be limited by any sort of limiting factors such as permitting. This requires per definition that the abatement cost is essentially zero or actually below zero, because you tend to have existing industries with long-lived assets, in many cases over capacities. So you need to have a business case to actually replace whatever your incumbent technology is with that new technology, unless it's sort of for an incremental power use in which it's additional.

But in many other cases, you would have to have this full standalone business case. I think maybe the reason why it sounds surprising that we have 10% of abatement potential in a mature category and 40% in this in commercialization category is that a lot of people think of it from the subsidized end-user case. And even a lot of our clients, startups, scale-ups basically say, "Well, I can bring my technology into a 10 to 15% cost range against the incumbent after drawing subsidies," for example, which is great. It basically means that some customers with a high willingness to pay who are early adopters will be willing to pay that premium. Plus you have a supportive government who is willing to pick up the rest of the bill.

But this is not something that we see in the whole world, and we are looking at global abatement potential, and I'm personally passionate about that given that my husband is South African and I spent a lot of time in Africa, the environment in which a switching decision is made to go to a EV is very different than in a fully subsidized environment in Europe, yet we have most of the cars on the road outside of Europe where we have $100 per ton carbon tax.

So in that sense, this is where we drew the line, we said which are the cases that even without any additional support would work? And I think we tend to overestimate a little bit the share of technologies that are really fully viable because we do tend to be based in geographies where we have a lot of support systems and because we tend to work with companies who are early adopters with willingness to pay. So I guess the implication of that is for the in commercialization technologies, there's some sort of environment that is needed to make them happen. They need an extra sort of push or enabler. In many cases that is infrastructure and great integration. And again, there may be a lot of use cases that will enable that faster than maybe we predict.

Stephen Lacey: If we take a step from commercialization and get into the early innovation category. Can you describe what technologies live in that category and are there any that jump out as having the clearest path to commercial deployment?

Mark Patel: Yeah, in early innovation, I mean we have quite a range of technologies actually in early innovation, and they also populate categories of technologies that in some cases we'd say are more mature, but where we've still got innovation coming. So solar is a good example, right? I mean solar PV is more mature, it's well into our commercialization phases. But perovskite based solar applied to PV, which has the potential to raise efficiency significantly, that's still there in that much earlier category.

The other technologies you'll find there are those that are still working their way down the cost curve significantly and are making the transition typically from demonstration and pilot scale into first of a kind scaling. We see a number of the fuels technologies around, for example, alcohol to jet power, power to liquids, rather, for sustainable aviation fuel in there. And then we have some of the technologies with respect to nuclear technologies or derivative nuclear technologies. Obviously everyone wants to talk about fusion as such a breakthrough, but although these have been in development for many, many decades, they're still arguably in that phase.

I think the characteristic you'll find in most of those technologies is that there's an incredible focus on how do you get to a repeatable and viable process technology and a clear roadmap for a unit cost reduction. That doesn't mean that everything is clear in the roadmap, but that you're able to at least describe the material waypoints that you have to get to either in scaling and/or in development that are going to help you get to the next phase.

Stephen Lacey: Yeah, you just hit on a critical point there that it really depends on the type of technology, whether we're talking about something that is mass manufacturable or is part of a process industry, that changes the cost trajectory considerably. Anna, anything you want to say on what you're seeing in terms of the steepest cost trajectories and where we are seeing costs reductions held back?

Anna Orthofer: 100%, Stephen, I think you nailed it on this differentiation, what is mass manufacturable versus where do you have a lot of bespoke process industries and EPC scope around? I think this is in essence if we look at the cost down curves, the ones where we see the steepest curves historically is obviously solar and wind are the obvious ones. On sort of the ones that are more up and coming. It's things like direct air capture, things like the lab-grown beef, other things that really can... What is material innovation potential at first on a chemical side and then a very clear mass manufacturing pathway.

I think the technologies where we tended to overestimate the growth that came down a little bit slower are things that are dominated by process industries. So hydrogen and CCS are prime candidates for that. To give you an example from hydrogen, obviously for green hydrogen production, you need the electrolyser stack, the electrolyser balance of plant and sort of the entire installation scope. Where the electrolyser stack can represent currently about half of the costs, that can come down a lot and we see 50, 60, 70% cost down potential over the next decade through better manufacturing, through efficiency improvements and so on. But we have this sort of very stubborn EPC scope, which in essence is innovated out. It's the same stuff that has been deployed for decades or centuries in chemical industries. And this is very stubbornly high, and so your average cost down has actually been a lot slower than maybe we predicted.

So if I look back at our forecast from 2020 for when we would achieve cost parity between green hydrogen and gray hydrogen, we said this would be by the end of this decade. I think by now we've moved that out by five to eight years depending on geography just because we see these increases in the EPC scope, in EPC costs and just the complexity of getting some of these projects built. And unless I think we can find a way to really replicate some of these manufacturability lessons, how do we become better at simplifying things, at modularizing things and at simplifying specifically the balance of system. These won't come down at the same speed as a solar and batteries did.

Mark Patel: I think that we find that the discipline of economic analysis is not always consistently applied. As a result, the thorough understanding of what it actually means to move down the cost curve is often challenging, I think for all of us, not just for individual companies or technologists, just for all of us who try and engage in technologies that are moving relatively quickly and where there are a number of uncertainties. But time spent and the discipline of spending the time to try and get as precise as possible on what are these breakpoints in cost, that's invaluable.

I mean, we've seen it with clients, those that figure out what their roadmap is... I mean, batteries, let's take lithium ion batteries for vehicles. That's a great example. The transparency that's now created in the industry around relatively well accepted understandings of what are the nature of the innovations and the nature of the activities that will help to get to the next layer of cost reduction. I personally think that has been incredibly to accelerate the whole industry. Now, some folks have shared it for commercial purposes, some folks shared it just to scare the competition, but the collective engagement in what are a relatively well-defined set of parameters and being able to then address those, that's incredibly important in terms of moving down the cost curve.

Stephen Lacey: If we think about these 12 technology categories and moving these technologies up from innovation to commercialization to deployment, where does the emphasis need to lie on a sort of early scale R&D or on later stage commercial deployment and industrialization?

Anna Orthofer: We see both. For the technologies that already are in global deployment, let's take again our solar and to some extent batteries examples, these are probably largely about industrialization. So the first wave of cost down for solar and batteries was actually largely driven by R&D. These were advances in cell chemistries, increases in efficiencies and so on. It really drove the cost down. But already in the last decade for both of these technologies, we saw that industrialization is actually the bigger contributor. So a lot of the cost savings have been realized because of larger module sizes, better gigafactories, process innovations, and even the next phase of cost down will be in process innovations, dry coating technologies and so on. So that is something that is probably where we really can rely on industrialization, larger projects and sort of continuous learning similar to the automotive industry in some sense, sort of continuous cost optimization and improvement.

In all the other technologies, we do still see a bigger role for R&D, also for industrialization, but there's still a lot needed on the R&D side. Say for example in hydrogen, yes, we need to have large first of a kind projects. We need to learn how to finance them. We need to learn how to de-risk them. We need to learn how to improve the CapEx overall bill. But we also still need better membranes or cheaper membranes. We need catalysts that don't require so many precious metals and so on. So already here you have both. And then obviously in the earlier stage technologies, it is largely about R&D, and you will also at the same time need to build some large plants, because frankly we don't have that much time. But if you think about the optimal spend from a taxpayer perspective for what to subsidize, probably the mix looks a little bit different by technologies.

Mark Patel: And there's a body of folks who'll say, "We've got 80% of the solutions, let's focus on scaling them." There's others who'll say, "There is the potential for something that doesn't already exist in the technologies we've identified that could have a breakthrough effect, and that if we're not looking for that, then we're also doing a disservice to what's required." The answer still has to be a combination of both. I do not think that we have reached a limit of scientific discovery with respect to technologies that will help us from a climate perspective. However, if you talk about mobilizing talent around the world and what's required in terms of global capability building, clearly we have still an enormous amount to do in order to create the capacity to scale the technologies that we now know have significant potential and can scale. And that's essentially what we're reflecting in our report.

Stephen Lacey: If you both had to pick a sleeper technology that is not quite competitive today, but could have a major impact after 2030, is there any particular technology that you'd choose?

Mark Patel: I'm going to let Anna go first so I have time to decide.

Anna Orthofer: So I'm excited about a lot of the technologies that are not yet in the money. Personally, I'm very excited about lab-grown proteins. I think this is a very under-looked area in climate technology, everything that has to do with food and nutrition, and it's really exciting to see how technology such as the human genome sequencing applied to beef can really get these costs down and can get somewhere close-ish to parity, even though probably not fast enough. I'm also excited about a lot of the harder industrial and hard-to-decarbonize applications.

And so I mentioned hydrogen as one of these technologies where the costs haven't come down as fast as we had hoped, but I still have a lot of hope for it. I think partly there's a lot of use cases for hydrogen, as probably everybody will know, and a lot of them are very, very heavily disputed. But even if we just decarbonized the existing hydrogen use, that's a huge pool of hydrogen, it's 100 million tons of hydrogen per year. That's, I think, about 1,000 gigawatts of electrolysis that we'd need just to decarbonize that. By that time we will have brought the costs down.

I think the other thing that I like about this is that I still think we have such a dispersed renewables potential in the world, and especially in Europe where I am and where my industrial clients are, there's such a shortage of energy and we need to find ways to bring the energy from renewables-advantaged regions into our industrial centers or to bring some of the industry to other places. And I think hydrogen and all the derivatives, green steel, green ammonia are effective carriers for that. I think the only alternative would be to really build a large grid interconnect. So I'm very excited about these technologies of trying to build long-distance, high-voltage DC cables between North Africa and Europe, for example. So everything that allows us to really transport energy more easily between regions are things that I'm excited about and that we probably won't see as much in the next few years, but that have huge potential in the next decade.

Mark Patel: I think my themes are similar to Anna's. I'll frame them slightly differently. The entire set of systems around biology, our chemical physical systems are well understood and characterized. We're just trying to piece them together differently and faster. The biological systems and their potential to deliver both alternatives to fossil derived molecules, to provide us with pathways for alternatives to, as Anna said, to alternatives for proteins. And actually the application of biological systems into industrial decarbonization to replace things like abatement systems, filtering systems microbes to be able to help mitigate and adapt. I think that whole set of systems around biology are both an incredibly open space and hopefully something that we'll see accelerate beyond 2030.

Second for me goes to the energy piece that Anna was talking about. In addition to the technologies that support the transmission distribution and current storage of energy, I think there are potentially even more ambitious opportunities around storage technologies that will help with distribution and point storage that could go beyond what we accept as the limits of efficiency in the form of fossil fuels or lithium ion batteries as examples. So I think there's innovation that's there that could really be quite exciting.

And then the third, I'm definitely a believer in the fact that we have to augment reduction with removal. Both the engineered and the nature-based systems for carbon removal will and will need to become an industrialized sector in their own right. So whilst there's a range of technologies there, I think those that have the potential to scale quickly because they're based on mechanisms that are well known and established in nature are the ones that we should be most excited about. So we're very early in some of these, but they are mechanisms that already exist, right? Whether it's enhanced rock weathering or weathering technologies of different types. So I believe that's another one that we will have to see scale.

Stephen Lacey: Mark Patel is a senior partner with McKinsey who co-leads the McKinsey Platform for Climate Technologies, and Anna Orthofer is a partner with McKinsey. To read the report, check out the link in the show notes. We'll also have a link to a story that we wrote at Latitude Media when the report came out, and you can head on over to latitudemedia.com and subscribe to our newsletter where you'll get all of our editorial coverage on these different sectors, and you'll find transcripts of these episodes as well. So go over there, you can find episodes of Catalyst, Carbon Copy, Political Climate, et cetera, and then of course, give us a rating and review on Apple or Spotify. That is hugely helpful as well. The show is produced by me. Sean Marquand is our technical director, and he composed our theme song. Latitude Media is supported by Prelude Ventures. If you want to learn more about Prelude's investment strategy and climate tech portfolio, go to PreludeVentures.com. Thanks for being here. I'm Stephen Lacey. This is The Carbon Copy. We'll catch you next time.

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