When you’re deep inside the energy industry, it’s easy to develop a kind of tunnel vision. Although our focus is firmly on the day-to-day battle of providing the best value and service we can, we still want to keep in mind how valuable it can be to see things from the outside.
That’s why we always welcome the opportunity to read independent research, studies, and perspectives to see if we can look up above the treetops. While, on the one hand, we might think “that doesn’t really align with our experience or perspective”, on the other hand, you never know when something is going to resonate and possibly help us see an opportunity to do our job better or be better prepared for the future.
This topic is a good example. We don’t fully agree or disagree with its findings or even some of its initial premises, but it does have a very broad scope and does raise some interesting questions and ideas. Sometimes, it’s the viewpoints we don’t expect that spark the most useful conversations.
The energy transition is no small thing
The energy transition is well underway, but it is a colossal global undertaking.
Perhaps because we now live in a world where so much is driven by digital innovation, there is an expectation in some quarters that the energy transition will simply roll out over time, as if it’s the next social media platform or streaming service.
The reality, however, is that our energy system is a physical entity, and historical energy transitions have taken many decades. The current system that underpins the production and consumption of energy is massive and complex. It has been developed gradually and incrementally and optimised over centuries.
It’s also deeply embedded in the global economy and performs at a very high level – something we shouldn’t take for granted. Energy can be dispatched relatively easily where and when it is needed because current fuels are energy-dense and easily transportable, while supply can be ramped up and down quickly.
McKinsey’s 25 physical challenges of the energy transition
The energy transition is only in its early stages, with the deployment of low-emission technologies at about 10 per cent of the levels required by 2050 in most areas. However, it’s fair to say that much of the progress has been in areas that are easiest to address.
Leading global management consulting firm McKinsey & Company, which advises organisations on strategic and operational issues, has identified 25 interlinked physical challenges that need to be tackled to advance the transition.
These challenges range from those already at the forefront, including the development and deployment of new low-emission technologies and the supply chains and infrastructure to support them, to those we might expect to come in the future, such as how the building and construction industry will adapt.
McKinsey’s recent report cites examples like managing power systems with a large share of variable renewables, addressing range and payload challenges in electric trucks, finding alternative heat sources and feedstocks for producing industrial materials, and deploying hydrogen and carbon capture.
What makes these challenges so … challenging?
According to McKinsey & Company, the most demanding challenges share three features.
The first and perhaps most obvious feature is that there is a lack of established low-emission technology that can deliver the same performance as the established “high-emission” ones.
At the same time, the most demanding challenges are interlinked, which means that they depend on other difficult ones also being effectively addressed. They can’t be tackled one at a time.
The third feature is the sheer scale of the deployment required. Taking a physical or structural innovation from proof of concept to something that can be applied at scale is an enormous undertaking.
The McKinsey report has tried to identify these physical challenges so that policymakers and industry leaders can identify the most viable opportunities, anticipate and address bottlenecks, and tackle the most demanding challenges.
This will take a lot of planning and coordination, and a blend of innovation and system reconfiguration.
Breaking the big challenge down into sectors
McKinsey & Company has identified seven “domains’ where the challenges sit, while breaking down the degree of difficulty of the challenges into three levels.
The domains are Power, Mobility, Industry, Buildings, Raw Materials, Hydrogen and other energy carriers, and Carbon and energy reduction.
Level 1 challenges require progress in deploying established technologies and face the least physical hurdles.
Level 2 challenges require the deployment of known technologies to accelerate, and associated infrastructure and inputs to be scaled.
Level 3 challenges occur when there are gaps in technological performance, large interdependencies exist, and the transformation is just beginning.
Here is the full list of the 25 challenges McKinsey has identified, broken down into the seven domains.
Power
Managing renewables variability (level 3)
Scaling emerging power systems (level 3)
Flexing power demand (level 2)
Securing land for renewables (level 2)
Connecting through grid expansion (level 2)
Navigating nuclear and other clean firm energy (level 2)
Mobility
Driving BEVs beyond breakeven (level 1)
Going the distance on BEV range (level 1)
Loading up electric trucks (level 3)
Charging up EVs (level 2)
Refuelling aviation and shipping (level 3)
Industry
Furnacing low-emission steel (level 3)
Cementing change for construction (level 3)
Cracking the challenge of plastics (level 3)
Synthesising low-emission ammonia (level 3)
Heating other industries (level 2)
Buildings
Facing the cold with heat pumps (level 1)
Bracing for winter peaks (level 2)
Raw Materials
Unearthing critical minerals (level 2)
Hydrogen and other energy carriers
Harnessing hydrogen (level 3)
Scaling hydrogen’s infrastructure (level 3)
Managing biofuels footprint (level 2)
Carbon and energy reduction
Expanding energy efficiency (level 2)
Capturing point-source carbon (level 3)
Capturing atmospheric carbon (level 3)
Scaling all the changes will take time
According to McKinsey and Company’s report, the deployment of billions of low-emission assets is needed to achieve current targets for 2050, including about one billion EVs, over 1.5 billion heat pumps, and about 35 terawatts of low-emission power generation capacity.
Alongside those things, we need to develop and scale the required supporting infrastructure, such as the grid, EV charging stations, and supply chains.
Even if we can manage all of that, we might not be halfway to where we need to eventually get to. Of the 25 challenges listed above, 12 are graded at the most difficult Level 3.
As McKinsey Global Institute Partner Mekala Krishnan said ahead of the recent Australian Energy Week 2025: “These challenges must be addressed if we want the energy transition to succeed – and tackling this hard stuff will take real work.”
How is Australia shaping up?
Victor Finkel, from McKinsey and Company’s Australian office, identified four specific areas that he believes Australia needs to focus on.
We must do everything possible to boost the productivity of clean energy project delivery.
We need to create as many opportunities as possible to deploy innovative technologies as they mature.
We need to find a way as a country to accelerate permitting and approvals.
We need to ensure the long-term market structures are in place to support investment beyond 2030.
In other words, there’s still plenty of hard work for everyone.
For much greater detail, you can read the McKinsey & Company article The energy transition: Where are we, really? or the report itself The hard stuff: Navigating the physical realities of the energy transition.