The Global Energy Perspective 2023 models the outlook for demand and supply of energy commodities across a 1.5°C pathway, aligned with the Paris Agreement, and four bottom-up energy transition scenarios. These energy transition scenarios examine outcomes ranging from warming of 1.6°C to 2.9°C by 2100 (scenario descriptions outlined below in sidebar “About the Global Energy Perspective 2023”). These wide-ranging scenarios sketch a range of outcomes based on varying underlying assumptions—for example, about the pace of technological progress and the level of policy enforcement. The scenarios are shaped by more than 400 drivers across sectors, technologies, policies, costs, and fuels, and serve as a fact base to inform decision makers on the challenges to be overcome to enable the energy transition. In this article, we examine the key role of electrification in the energy transition, as well as the potential bottlenecks that need to be overcome along the electrification supply chain—and the value that doing so could create.
The energy transition is driving significant demand for technologies that enable electrification. Electrification and the continuing shift toward green and carbon-neutral power generation are likely to play a large role in reducing global emissions, but enabling technologies, such as solar PV, wind, heat pumps, and battery energy storage systems (BESS), may require significant scaling over the next decade. Moreover, bottlenecks along the electrification supply chain, including supply chain risks, labor shortages, and uncertainty in capital deployment, would need to be overcome to ensure that future supply can meet growing demand. Nevertheless, these bottlenecks can be turned into value-creation opportunities, particularly for original equipment manufacturers (OEMs).
Electrification is a crucial decarbonization lever
As the energy transition accelerates and the world moves toward net zero, electrification (the switch from fossil fuel-based systems to electricity-based systems) is expected to be a crucial lever to help achieve decarbonization goals. Electrification can decrease emissions since electricity-based systems tend to be less emissive than fossil fuel-based systems (for example, heat pumps compared to gas boilers, and electric vehicles [EVs] compared to internal combustion engine vehicles).
Additionally, further reductions in emissions can be achieved by reducing the carbon intensity of electricity generation by switching from fossil fuel-based power generation to green or carbon-neutral power (power generation that results in net zero carbon emissions).
The increased use of electricity through mass electrification, along with the growth of carbon-neutral power, is likely to play a significant role in global decarbonization. For example, in the EU-27, electrification is projected to account for almost half of total GHG abatement by 2050.
Due to increased electrification (as well as other factors, such as population growth), electricity demand is projected to increase two-to-threefold by 2050, depending on the energy transition scenario, with industry, buildings, and transport, alongside green hydrogen production, projected to be the largest consumers. To meet current demand, electricity generation today accounts for around 40 percent of global greenhouse gas (GHG) emissions. Since projected rising demand could see increased emissions unless electricity generation is decarbonized, switching to carbon-neutral power generation would be a crucial decarbonization lever, alongside mass electrification.
Electrification is projected to drive the uptake of enabling technologies across scenarios
The shift to electricity as the primary energy source is well underway in multiple industries and sectors, with reliance on fossil fuels being reduced through electrification technologies such as heat pumps, EVs, and industrial electric heating in combination with renewables.
Across all energy transition scenarios, the accelerating energy transition is projected to drive significant demand for technologies that enable electrification. The uptake of several of these technologies has already reached an all-time high in 2022 and is projected to grow further still across scenarios, with up to double-digit growth projected in the Achieved Commitments scenario. Hence, these enabling technologies are expected to require significant scaling over the next decade.
By technology, solar photovoltaic (PV) and wind are key technologies for green electrons, and capacity is expected to grow by up to 10 percent and 16 percent per annum, respectively, by 2030 in the Achieved Commitments scenario. Electrolyzers and heat pumps are projected to see double-digit growth given their central role in enabling the electrification and decarbonization of buildings and industries.
The trend toward electrification technologies and the increased availability of renewable energy sources—as well as their projected increasing affordability—is expected to drive demand for enabling systems and require a strong end-to-end supply chain to support the uptake of these applications, from components and subcomponents to the required processed and raw materials.
Bottlenecks along the electrification supply chain may need to be overcome
Several bottlenecks along the electrification supply chain would need to be overcome to enable the uptake of these electrification technologies amid growing demand and to achieve global climate ambitions. Recent electrification and green capacity build-out has revealed several significant challenges related to supply chains, labor, and capital.
In supply chains, shortages of critical materials could cause project delays, as materials supply might fall behind demand without increased mining build-out or demand-side adjustments (such as material and technology substitutions and metal intensity reduction). Additionally, supply chains for key components are geographically concentrated, with local capacity becoming increasingly relevant due to limited trade-flow opportunities for hard-to-transport components as well as supply chain localization efforts in several countries. Price volatility and uncertainty around future project pipelines could discourage OEMs and investors from financing new capabilities. And lastly, shortages are projected to persist due to long lead times for building up capacities across green technologies.
Regarding labor, shortages of engineers and skilled technicians could potentially hamper the build-out of several key electrification technologies.
Finally, high levels of investment would be required to enable the energy transition and related electrification efforts, but uncertainty in capital deployment might slow down the realization of pipelines.
Electrification could provide significant value-creation opportunities for OEMs if bottlenecks are overcome
The identified bottlenecks need consideration to enable the energy transition and move the world toward net zero. Addressing them could also represent significant value-creation opportunities for OEMs. Global OEM revenues in electrification hardware could increase by between 1.4 and 2.2 times by 2030 compared to today, reaching between $0.9 trillion and $1.4 trillion for selected key technologies, depending on the speed of the energy transition and how effectively bottlenecks are addressed.
Emerging technologies (including battery energy storage systems, large-scale heat pumps, and electrolyzers) are projected to see double-digit revenue growth. For example, heat pump revenue could grow by up to 16 percent, despite being a comparatively mature technology, resulting in value creation increasing up to 3.2 times in 2030 compared to today.
Mature applications, including transmission and distribution (T&D),1 wind, and solar PV, are projected to experience more moderate growth of up to 10 percent per annum to 2030. Nevertheless, components for power renewables and T&D are expected to represent 60 to 70 percent of global hardware capex as total investments are projected to grow by around 8 percent between 2021 and 2030.2
For the applications shown, nine key components (out of the hundreds of components required across supply chains) represent around 45 to 50 percent of the total revenue pool.
While capacity additions are projected to drive volume growth, declining unit economics that could hamper total growth for some technologies could still be a concern for OEMs. Solar PV unit capex, for example, is expected to decline by 5 percent per annum between 2022 and 2030, leading to decreasing annual revenues from solar components.3
Margins and growth rates are expected to vary significantly by technology
To capture new value creation opportunities, the market would need to be monitored closely, as margins and growth rates for different technologies and components are projected to vary significantly.
Under the assumptions of the Current Trajectory scenario, the highest margins (up to 25 percent) are likely to be achieved by components characterized by high entry barriers due to intellectual property or technical complexity (such as power units, controllers, or compressors) or custom-made design.
Well-established technologies with a high level of standardization and low possibilities for differentiation are projected to show high revenues but lower margins and growth (for example, towers for wind turbines or modules for solar PV systems). For these components, moving early could be critical for success.
About the Global Energy Perspective 2023
To meet the significant demand for electrification-enabling technologies driven by the energy transition and to avoid slowing the transition down, several supply chain bottlenecks would need to be overcome. By resolving these bottlenecks, OEMs could seize the opportunity for value creation that electrification can offer and take advantage of high margins and growth rates for key components of electrification technologies.
To request access to the data and analytics related to our Industrial electrification outlook, or to speak to our team, please contact us.