The world is faced with a dual imperative in the energy transition: the energy system has to be decarbonized, but much more energy is going to be needed in the future. In this episode, Janet Bush, executive editor at McKinsey Global Institute (MGI), talks to McKinsey experts Chris Bradley and Vishal Agarwal about the hurdles that need to be cleared, particularly in Asia, to achieve decarbonization.

An edited transcript of the conversation follows.

Janet Bush: Welcome to this episode of McKinsey’s Future of Asia Podcast. Today, we’re going to chat about one of the great challenges of our time: the energy transition. The global energy system is huge, complex, and fundamental to modern life. It has been optimized to our needs over centuries, but it’s also the source of more than 85 percent of carbon dioxide emissions. My colleagues at MGI decided to roll up their sleeves and look in detail at what makes today’s energy system tick and how it needs to change. I’m Janet Bush, an executive editor at MGI, and Chris Bradley and Vishal Agarwal are with me. Chris is a senior partner in Sydney, a director of MGI, and one of the authors of MGI’s recent report, The hard stuff: Navigating the physical realities of the energy transition. Vishal Agarwal is a senior partner in Singapore and leads McKinsey’s sustainability work in Asia.

Chris, one of the points made in the MGI report was having to meet a dual imperative to deliver a successful energy transition. Can you explain that imperative?

Chris Bradley: The double imperative is that we not only have to decarbonize the energy system, but the world needs a lot more energy. To put it into context, the energy system is already massive. There are 60,000 power plants, and if all the oil pipelines were lined up, they would stretch to the moon and back twice over. It’s a huge system, but it needs to do even more.

Why do I say that? Let’s use a unit of energy—a gigajoule; 50 gigajoules is a good starting point. I like using that as an example because it’s about what a Toyota Corolla uses every year for an average amount of driving. More than half of the world lives on less than that amount of energy a day—for example, it’s about the level of consumption in countries such as Brazil and Vietnam. The United States uses almost six times more than that. The big imperative, therefore, is not only solving the carbon challenge but also reducing energy poverty. That brings me back to the main framing of the Hard stuff report: the world loves energy. It’s what warms us; it’s what feeds us; it’s what drives our economies. But, while we have to buy a product called carbon, we also have to get rid of it. That dual imperative is the context of our report.

Janet Bush: Vishal, how does that dual imperative appear in Asia?

Vishal Agarwal: The per capita energy consumption for the median world level is about 170 gigajoules in OECD countries. Asia’s consumption is about 70 gigajoules per capita. So, energy access is very important. As Chris said, we all love energy, and energy consumption is increasing in Asia. At the same time, the dual imperative is important because 60 percent of emissions globally comes from Asia. There is, in fact, a third imperative here: the question of energy security, which turns the dual imperative into the energy trilemma. Energy security is increasingly important in today’s geopolitical context.

Chris Bradley: An important addition is that Asia net imports $1 trillion worth of energy into the region every year. It’s by far the most energy-insecure region in the world.

Janet Bush: Chris, the Hard stuff report described the 25 physical challenges that would need to be tackled to deliver on the energy system. Could you tell us about them and where we are on addressing them?

Chris Bradley: It has been almost nine years since the landmark Paris Agreement [was signed], so at MGI, we thought it was a good time to take stock of where we are and what it is going to take to get the job done. If we’re serious about it, we don’t just want to talk about it; we want to measure and physicalize it. When we looked across the seven domains of the energy system, all the jobs that have to get done—moving things, making things, keeping people warm, powering things, et cetera—we found that the energy transition is only, on average, about 10 percent of the way there [in the deployment of low-emissions technologies]. That’s a pretty generous average because, in some places, for example, in making materials, we’re probably more like only 1 to 5 percent of the way there. There’s an obvious corollary of what I’m saying here: if we’re only 10 percent of the way there, we’ve got another 90 percent to go.

If 90 percent of the energy transition is not done, what stands in the way? For the report, we took stock of all of the physical challenges. We found 25. Twelve of them—the “demanding dozen”—represent about half of the emissions challenge. And for that demanding dozen, for example, forging green steel, we don’t yet have a clear, aligned path on how we’re going to address emissions.

Janet Bush: Vishal, where is Asia on those 25 physical challenges? In industry, for example.

Vishal Agarwal: Industry is a huge contributor to global emissions. Two-thirds of industrial emissions come from four key sectors: steel, cement, plastics, and ammonia. New industries are also emerging, with more and more downstream metals processing taking place, driven by data centers powered by generative AI. There’s more demand for power and more demand on the grid, and these also contribute to industry emissions.

Currently, there are very few economical pathways for many of these industries to move from high-carbon intensity to low-carbon intensity. For example, green steel has only a few pathways: either green hydrogen is used or more electric arc furnaces. Similar physical challenges remain in many other sectors. Cement has very few options for decarbonization. And the only way for ammonia to decarbonize is to use green hydrogen, which means having renewable power at scale—and that is already bursting at the seams.

The point here is that physical constraints remain for most of these industries, meaning it will take a long time for these industries to transition. If you look at how industries and ecosystems have been built through the industrialization phase over the past 50 to 100 years, you can see how hard it is to go from one phase to another immediately. It’s difficult to make the shift, and steps need to be layered on top of each other. That’s why we think of this as an energy transition, not an energy switch.

Two factors could disproportionately play a very important role in addressing these physical challenges. One, for example, could be carbon capture and sequestration, which have potential in Asia. For carbon capture and sequestration to be economical, it would help a great deal if the challenge of growing capture technologies at scale could be solved. The second factor is continuing to increase renewable energy at scale. If the power sector can move to more renewable energy, a lot of these industries will benefit and be able to decarbonize further.

Janet Bush: Vishal, you talked about the energy transition rather than the switch. Asia is still heavily industrialized, and the region’s economies rely on industry to an extent that may not be the case in some other economies. Is the challenge higher for Asia in industry?

Vishal Agarwal: Yes, I think so. Asia is not only already heavily industrialized, but industrialization is increasing. If you look at countries such as India, Indonesia, Vietnam, and even China for that matter, they are all continuing to industrialize. However, the region is starting from an already high base. As I said, about 60 percent of global absolute emissions comes from Asia, where the demand for energy will only increase, not only from the people’s consumption but also from all of the new industries that are emerging.

Chris Bradley: There are various reasons why Asia is in a tough spot. The first one is industrial production. The energy share dedicated to industry in Asia is double that in Europe and North America. Those regions have “exported” industry to Asia, so the problem has become Asia’s to solve. Over 60 percent of global energy industrial use is in Asia; it is the emissions hotspot. And these industries are in hard-to-carbonize sectors, where very high heat is necessary. In many of the sectors, such as plastics and ammonia, fossil fuel is part of the production process—not just as the source of energy but also as a source of the molecule.

Second, Asia is the most energy-insecure place on the planet. It has coal, but it imports much, much more energy than it exports every year. However, energy consumption will still have to increase in Asia. As mentioned, Indonesia and Vietnam have just one-third of the level of consumption relative to the OECD. And finally, these systems are having to grow so much faster. In Germany, as an example, the electricity system is not growing so it can use all its existing assets as giant batteries. But in some Asian countries, growth has historically been 6, 8, 10 percent a year. That means that every single asset in the system has to be used. The existing thermal capacity can’t be utilized as a big giant battery. That’s a luxury only in the West, where energy systems don’t have to grow. I’ll be strident on this point: it’s easy to sit in a postindustrial European landscape and wag a finger at Asia. But Asia’s doing all the work.

Janet Bush: Chris, you mentioned electricity earlier. Can you say something about the physical challenges in transitioning the power system?

Chris Bradley: Electrification is at the heart of the energy transition because it’s only by electrifying our energy that we can clean it up. But many people don’t realize that, presently, electrification makes up only 20 percent of primary energy use. We have a massively growing electricity system. Using Germany as an example, the country has had a big transition toward renewables; the bulk of its energy production is from variable renewable energy. But we have to look at the footnotes. Footnote one: Germany is next to major countries from which it can borrow power—for example, France, which has a lot of nuclear power. Germany has a hedge. Asia, however, is made up of disconnected islands, so, in general, these areas do not borrow power. The second big footnote is that 80 percent of Germany’s energy system consists of the old energy system and is being used as a giant battery. The third footnote, as I said, is that the electricity system is not growing in Germany.

By looking at this, we are trying to understand the physical challenge of electrifying an Asian economy that has a lot of high-heat industrial production that’s hard to electrify. The electricity system has to grow a lot so that every single megawatt of capacity is used to produce electricity all the time; it can’t be used as flexible capacity. That is what you can see in places such as Malaysia that have low, single-digit penetration of renewables.

Vishal Agarwal: I think that electrification—the decarbonization of the grid—is a huge challenge. As mentioned, Asia is the largest insecure region from an energy perspective, and the fuel used for electrification in Asia is heavily coal-reliant. This is because it has the coal. The average age of coal-fired power plants in Asia is about 13 to 14 years, compared to Europe or the United States, where coal plants are over 40 years old.

Another point to raise is investment in the grid. Globally, not just in Asia, there has been significant investment in the generation of renewables, but we haven’t invested at scale in the grid. Increasingly, countries are realizing that, for renewable energy to be sustainable and for more baseload, we need to invest in the grid.

Janet Bush: Vishal, we’ve talked a lot about Asia’s particular challenges in the energy transition, but the region has constantly surprised us on the upside. Where are the opportunities, and where is the excitement?

Vishal Agarwal: We spend a lot of time looking at what could be interesting opportunities for Asia, and in the next ten years alone, there could be about $3 trillion to $5 trillion worth of new revenue pools created from many different sectors, new revenue pools, and a new talent base that could come out of Asia.

This will manifest in two ways. First, Asia will continue to be an exporter of new energy systems. For example, China accounts for more than half, sometimes as much as 80 to 90 percent, of the production of many low-emission technologies, including critical minerals, solar modules, wind turbines, batteries, et cetera. Other economies, for example Japan and South Korea, are heavily invested in the electric vehicle ecosystem. Countries such as Indonesia and Malaysia are increasingly playing a very important role. Indonesia has the largest nickel reserves in the world, and nickel is a very important metal for electrification and the battery ecosystem. There are many export opportunities for Asia to help decarbonize the world.

The second broad opportunity is not just for export but also deployment. Asia is deploying many of these technologies at scale within world economies. Many countries are moving away from nuclear, but a lot of Asian economies are trying to deploy it. In fact, Asian economies currently account for about 50 percent of nuclear capacity being built. Many of them, such as South Korea, have demonstrated how to overcome the key challenges in a way that is cheaper and achieved through back-to-back models. Part of this opportunity is the electrification of vehicles, especially two-wheelers, in the Asian economy. About 95 percent of the global electric two-wheeler sales is in Asia. The third example is renewables. Look at the pace at which India has deployed renewable energy at scale; it is really amazing.

Janet Bush: Chris, if you were to summarize it, what should CEOs and business leaders take out of the Hard stuff report? How should they calibrate strategy based on the findings?

Chris Bradley: As I said earlier, we’re 10 percent of the way there [in the physical energy transition]; we’ve got 90 percent to go, and 25 grand challenges stand in the way. Those grand challenges fit into three buckets.

The first is level 1. That’s where we’re on the curve already. An example of that is the range of electric vehicles. They don’t work for everyone at this point, but if we follow the curve of improvement, we’re going to get there. Improving the effectiveness of heat pumps will go into level 1, too.

Level 2 has ten challenges. This is where we have the elements of what we need, but a big acceleration is required; we need to bend the curve. An example here is having enough charging infrastructure and supply chains for electric vehicles. Another example is unlocking nuclear in the same way that South Korea was able to in more countries around the world. I think there are 30 countries now that have signed the pledge to triple nuclear capacity. So, we’ve got to stay on good curves and we’ve got to bend a few.

We don’t even have the curve in level 3. That’s because of three things. The first is the epic levels of scale-up needed. For example, in the hydrogen system, we’re not talking about a ten times scale-up; we’re talking about a 1,000 times scale-up that’s needed. The second challenge is the huge, unsolved technical performance challenges. For instance, electric trucks are a great idea, but batteries are heavy, and trucks have payload restrictions. If I want to power my trucks with batteries, I’m going to have to make a trade-off, and there is no technical solution to that yet. The third factor, which is a really important part of our report, is the interlinkages between all these challenges. All level 3 challenges depend on other level 3 challenges being solved. For example, green steel requires a level 3 challenge to be solved, which is having lots of hydrogen, which requires another level 3 challenge to be solved, which is having a lot of variable renewable energy in the grid. The remaining ones are the demanding dozen. As Vishal touched on before, Asia has more than its fair share of these instances because it’s so involved in materials production.

Janet Bush: Vishal, could you share a couple of examples of companies that are doing exciting things in Asia?

Vishal Agarwal: Many companies are doing exciting things. Take ReNew Power, for example, a renewable energy company in India that began as a start-up and has shaped the renewable landscape in India. A second example would be companies such as BYD and CATL and those in the whole electric vehicle ecosystem. People may have read about the tussle between Tesla and BYD at a global scale in terms of being the number one electric vehicle manufacturer and exporter. The third example is interesting as it does not get a lot of coverage, and this is a company based in the Philippines called ACEN. It has an innovative scheme to retire coal-fired power plants early and replace them with renewables at scale using a transition credit mechanism. This was launched about a year or two back.

Janet Bush: Chris, do any trends jump out for you?

Chris Bradley: The one trend I’m most excited about is the incredible development in nuclear. MGI has put out a report called The next big arenas of competition, which identifies the next industries that are going to shape the future in the same way that innovations such as cloud and e-commerce shape today’s industrial landscape. The energy transition features largely revolve around electric vehicles and batteries, as well as nuclear power. About eight reactors a year are currently being built in the world. That’s not that many. But there are scenarios in which it’s not inconceivable that this number could move to 100 reactors a year. I’m very excited about that. It is how a lot of clean energy can be generated to power the massive data centers we are going to have to build for AI and to do it in a clean way with baseload power.

Janet Bush: I would like to ask you about the elephant in the room. This was not the focus of the Hard Stuff report, but it’s a big issue. How are we going to pay for it, Vishal?

Vishal Agarwal: There is no quick answer to this, unfortunately. If it were that easy, we would have solved it. We’ve been talking about the cost of the transition for quite some time now. We released a report about a year back that looked at the total investment needed for the energy transition, and the number was about $9 trillion per year. Many forms of renewable energy are currently not economical at the scale at which they need to be deployed. I think the answer here is nuance. A mix of a lot of capital requirements probably needs to come from the private sector into technologies that are already economical and just need to be scaled up. But a good amount of money will need to come from the public sector. Another factor, which is often overlooked and has not been deployed at scale, is the concept of blended capital—different pools of money coming together to focus on technologies that are close to being economical, and, through a creative blending of different pools of capital, can be pushed into an economical zone. I think it’s a combination of different pools of this capital coming together that will fill the gap.

There would also need to be some sort of a pricing mechanism for the cost of carbon across different geographies. The world is far from having a single, uniform carbon pricing. Many economies have started to put some sort of carbon pricing through carbon taxes or ETS [energy trading system] mechanisms. However, if a voluntary carbon market could act as a proxy for carbon pricing across different economies, it would help investment flow to these technologies.

Janet Bush: Chris, what do you think?

Chris Bradley: We’re only 10 percent of the way [in the energy transition], but we are starting to have adult conversations about how to make this work, make it affordable, make it reliable, and make it clean. The number I would throw in is our estimate that for every $14 spent on the energy transition, only $1 is pure—clean capital that is not subsidized nor crowded in (that is, $13 out of every $14 is somehow tied to a subsidy or incentive). My view is that until that $1 grows much bigger, it’s going to be very hard to unleash the level of scale required.

In the past 20 years, China has managed to industrialize and urbanize the whole country. There weren’t newspaper headlines about cement shortages or problems with urbanization because a lot of the technology was already there. The world can move incredibly fast. But until the affordability quotient increases, politics are going to be unstable. This is part of moving from a starry-eyed conversation with one objective of reducing carbon to a much more balanced and centered one: reducing carbon, driving affordability, pushing energy security, and creating competitive industries for the future.

Janet Bush: Vishal, how did the recent COP meeting in Baku go?

Vishal Agarwal: I think COP29 was a wake-up call, a manifestation of many of the challenges that we have talked about on this podcast. For example, almost all the countries have realized that they’re falling short of the proposed climate action plans that they were expected to achieve between now and 2030. Businesses have started to realize that the plans were made under very different sustainability assumptions, which may or may not hold anymore. The scale of financing that is required is huge.

I think there were some notable wins, especially given how low the expectations were for COP29, which was also termed the “in-between COP.” One of the wins was the aspirations. For example, Brazil and the United Kingdom came with very bold aspirations. We’ll have to see how they get to execute them, however. The second notable win was the decision about Article 6 of the Paris Agreement (which lays the groundwork for operating global carbon markets). It was a good breakthrough and will help in creating some sort of carbon pricing. The third win was climate financing, which had already been in the making. This is the issue of the global North not subsidizing the global South despite it being responsible for the vast majority of global emissions. An agreement was reached there. So, there were some notable wins, but a lot of work needs to be done, and all eyes are already on COP30 to see how some of this will be carried forward.

Janet Bush: Chris, just a last reflection on this enormously interesting and complex issue. Are you optimistic or pessimistic?

Chris Bradley: I think optimists always win in the long run, but in the short run, sometimes they get a bit of egg on their faces. My sense is that we as a society are absolutely going to crack net zero. Are we going to do it with the exact set of technologies that are being modeled in all these scenarios? I think that’s hugely unlikely. But what’s not unlikely is that people are great at solving problems.

Gautam Kumra: You have been listening to the Future of Asia Podcast by McKinsey & Company. To learn more about McKinsey, our people, or our latest thinking, visit us at McKinsey.com/FutureOfAsia or find us on LinkedIn, Twitter, and Facebook.

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