In an evolving energy landscape, our Global Energy Perspective 2023 provides insights into long-term trends that will shape the energy transition.

In the past two years, the war in Ukraine and the subsequent energy crisis have changed the energy conversation. Energy security, affordability, and industrial competitiveness are now critical focus points alongside sustainability.

The outlook for the energy transition depends on multiple variables and interdependencies. Uncertainties in cost evolutions, speed of technological progress, and policy developments translate into a wide range of possible scenarios, particularly regarding the outlook for fossil fuels.

What is clear, however, is that the pathway to keep warming below 1.5°C looks increasingly challenging. The world is nonetheless making progress toward a net-zero future, with record growth in areas such as electric vehicle (EV) sales and renewable energy. By 2040, we expect solar and wind together to contribute the largest share of the world’s energy mix.

Substantial investments will be needed to support the build-out of renewable energy—and to provide sufficient fossil fuels to complement these sources. We expect total energy investments to increase from 1.5 trillion USD in 2021 to between 2 and 3.2 trillion in 2040. While this represents a big increase, investment levels are likely to remain stable as a proportion of GDP.

The question now is whether supply chains can keep up with the pace of the energy transition. Materials shortages and production bottlenecks—and even land availability—all threaten to slow momentum. These risks play out to varying degrees in every scenario we model in the latest edition of our Global Energy Perspective.

As the world treads a fine line between energy security today and ensuring a livable planet for tomorrow, our Global Energy Perspective 2023 examines the changing energy picture and provides insights into the longer-term trends that will shape the world’s future energy systems.

Wide-ranging scenarios point to an unclear path ahead

The energy transition has gathered pace, but the path ahead is full of uncertainty in everything from technology trends to geopolitical risk and consumer behavior—making it difficult to shape resilient investment strategies that work in multiple scenarios. It is therefore increasingly challenging for decision-makers to address multiple objectives at once, such as meeting long-term goals for decarbonization as well as short-term expectations for economic returns.

The Global Energy Perspective 2023 explores the outlook for demand and supply of energy commodities across a 1.5° pathway (modeled as part of McKinsey’s Climate Math effort) and four bottom-up energy transition scenarios. These scenarios sketch a range of outcomes based on varying underlying assumptions—for example, about the pace of technological processes and the level of policy enforcement. Despite significant reductions in carbon emissions, all energy transition scenarios remain above the 1.5° pathway and result in warming of between 1.6° and 2.9°C.

These estimates include non-CO₂ emissions, and building assumptions on non-energy emissions from sectors like agriculture, forestry, and waste.

To stay within the carbon budget necessary for the 1.5° pathway, a much steeper reduction in emissions would be required, particularly in the next ten years.

Fossil fuel demand is projected to peak soon, but the outlook remains uncertain

Total demand for fossil fuels is projected to peak by 2030 in all scenarios. Although a sharp decline in coal demand is expected under all scenarios, natural gas and oil are expected to grow further in the next few years and then remain a core part of the world’s energy mix for decades to come.

Total natural gas demand to 2040 is projected to increase under most scenarios, driven in large part by the balancing role that gas is expected to play for renewables-based power generation until batteries are deployed at scale. In the decade to 2050, the outlook for gas demand differs widely by scenario, from a steady increase under slower transition scenarios to a steep decline under scenarios in which renewables and electrification advance faster.

For oil, total demand is projected to continue growing for much of this decade and then to fall after 2030—but the extent of the decline differs significantly across scenarios. In the Achieved Commitments scenario, oil demand almost halves by 2050, mainly driven by the slowdown in car-parc growth, enhanced engine efficiency in road transport, and the continued electrification of transport. In the Fading Momentum scenario, oil demand would decline by just 3 percent over the same period; this reflects much slower electrification of the global car parc and lower penetration of alternative fuels in the aviation, maritime, and chemicals sectors as bottlenecks on materials and infrastructure limit their growth.

Fossil fuel demand is projected to peak before 2030, but the future outlook varies widely.

Renewables will make up the bulk of the power mix by 2050

Renewables are expected to continue their rapid growth, driven in part by their cost competitiveness—in many regions, they are already the lowest-cost option for incremental new-build power generation. Renewable energy sources are expected to provide between 45 and 50 percent of global generation by 2030, and between 65 and 85 percent by 2050. In all scenarios, solar is the biggest contributor of renewable energy, followed by wind.

The ramp-up of renewables could see emissions from power generation reduced by between 17 and 71 percent by 2050 compared to present levels, despite a doubling or even tripling of demand. However, the renewables build-out faces challenges, from supply-chain issues to slow permitting and grid build-out implications.

The uptake of nuclear and carbon capture, utilization, and storage (CCUS) technologies could lower the burden on the renewables build-out, but depends on the political landscape and future cost development.

Coal (without CCUS) is expected to be phased out gradually. Power generation from hydrogen-ready gas plants—which support grid stability—is likely to increase.

Major investments in the energy sector will be needed, but remain stable as a share of GDP

Total annual investments in the energy sector are projected to grow by between 2 and 4 percent per annum—roughly in line with global GDP growth—to reach between $2 trillion and $3.2 trillion in 2040.

Despite the increasing regulatory push for decarbonization and declining demand for fossil fuels, between 25 and 40 percent of energy investments in 2040 will still be deployed in fossil fuels and conventional power generation to meet demand, offset declines in existing production fields, and balance the energy system.

There will be a gradual but continued shift of investment focus from fossil fuels to green technologies and electric transmission and distribution. In 2015, power renewables and decarbonization technologies accounted for only 20 percent of total investments, while that figure is projected to reach 40 to 50 percent by 2040.

Decarbonization technologies show the highest growth at between 6 and 11 percent per annum, mainly driven by the strong uptake of EV charging infrastructure and CCUS, which together are projected to account for the bulk of decarbonization investments by 2040.

In the more progressive scenarios, higher energy investments are mostly offset by lower total operating expenditure for fuels like coal and gas due to the shift towards more capital expenditure-intensive technologies like renewables.

Despite the absolute increase, energy investments as a share of GDP remain stable at between 1.2 and 2.2 percent across all years and scenarios.

Achieving a successful energy transition would require a major course correction to overcome bottlenecks and reach the goals aligned with the Paris Agreement

To deliver on the steep climate commitments made globally, substantial pivots are needed across industries and geographies. Even the more modest transition scenarios require that multiple bottlenecks are overcome.

Potential bottlenecks include land availability, energy infrastructure, manufacturing capacity, consumer affordability, investment willingness, and material availability.

The adoption of green hydrogen faces steep challenges mainly due to infrastructure needs and the high investments required to achieve large-scale deployment.

Rare materials are required for most energy transition technologies, with EVs and wind generation both highly impacted by materials bottlenecks.

Costs continue to be a barrier, but EVs and heat pumps are expected to become economically viable. Despite the big upfront investments needed, renewables become cost-competitive in the Further Acceleration and Achieved Commitments scenarios.

While these bottlenecks could limit the growth of some of the technologies known today, shortages are also likely to lead to price spikes that create additional investment opportunities and innovation.

The energy transition is well underway, but how it will unfold in the decades ahead is difficult to predict. Decision makers in government and business face a challenging time planning for a future energy mix that remains unclear.

Leaders might be tempted to “wait and see”, but this approach would be a big risk. Even if the exact trajectory of the energy transition is unknown, the changes ahead will be immense—and faster than many expect. A look at the past two years underscores this: despite massive and unprecedented uncertainties, the growth in several low-carbon technologies has continued and even accelerated.

Organizations can work now to shape transition strategies that account for uncertainty and are robust under a range of future scenarios. Those strategies, aggregated across countries and sectors, will determine how the global energy landscape takes shape in the years ahead. They will also be crucial in driving progress on sustainability while safeguarding energy security, affordability, and industrial competitiveness.

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