The transition from energy systems dominated by fossil fuels to ones based on renewable electricity and carbon-free molecules will significantly impact existing value chains and transform production to consumption lifecycles, dramatically altering interactions among stakeholders.
The Road to Net-Zero
There is no doubt that fossil fuels have paved the way for rapid industrialization and economic growth for many decades. Still, business-as-usual would only exacerbate existing socio-economic imbalances. Due to these disparities, we tend to divide the world into developed and developing nations, which seems to imply that the former have already achieved the achievable and the latter only need to catch up. Herein lies society's existential challenge. If the world were to attain the same per capita energy consumption and associated emissions as industrialized nations, the results would be environmentally catastrophic.
The Kyoto Protocol, signed in 1997, was the first attempt by global leaders to address the threat of climate change systemically. Still, despite decades of climate summits, global emissions continue to soar and have increased by about 60% between 1998 and 2019. While initial reduction efforts were mainly limited to industrialized nations (the world’s largest emitters) today, the focus on the transition to a low-carbon economy has gained a truly global dimension. As of 2021, more than 70 countries accounting for more than 80 percent of global emissions and about 90 percent of global GDP had announced net-zero commitments by 2050, together with thousands of companies in the private sector.
Looking at key emitters, in 2019, the European Union (EU) presented its Green Deal, intending to become the first climate-neutral continent by 2050. The strategy leverages up to one trillion euros in new investments to achieve a more sustainable economic model, resulting in a cleaner environment, more affordable energy, smarter transport, new jobs, and a better quality of life. Furthermore, in 2021 the European Commission (EC) unveiled the Global Gateway strategy to boost the international dimension of its energy policies. Finally, with REPowerEU, the EC intends to accelerate the adoption of renewable hydrogen (produced by splitting water molecules with renewable electricity). The plan envisions creating a 20 million tons (Mt) market by 2030 – equally divided between domestic production and imports focusing on three areas: the Mediterranean – thanks to the vast renewable energy potentials of North African countries – the North Sea region, and Eastern Europe. In the U.S., President Biden’s two trillion dollar Infrastructure Investment and Jobs Act strongly focuses on clean and carbon-free energy sources. Countries like China and India have announced longer timelines to 2060 and 2070, respectively, and their emissions continue to rise. In 2019, President Xi said that the country’s emissions would only peak by 2030. According to a recently released roadmap, Beijing plans to double its renewable capacity by 2025 while allowing for increased coal capacity to bolster energy security. In March of this year, Beijing also released its first long-term plan for hydrogen, focusing on renewable hydrogen. According to the China Hydrogen Alliance, renewable hydrogen demand could reach 5 percent (35 Mt) of China’s energy systems by 2030 and 10 percent (60 Mt) by 2050.
But while it is evident that the imperative of reaching net-zero is increasingly recognized, how to get there is unclear. What is clear is that this transformational process will impact all sectors of the global economy and is a titanic endeavor – and so are the resources needed to finance it. McKinsey estimates that achieving net-zero by 2050 would require additional annual investments of 3.5 trillion dollars in physical assets. The growing number of policies and initiatives supporting the transition to a low-carbon economy brings hope that the tide has finally changed and that the time has come for global leaders to address the sheer scale, cost, and inertia of carbon-dependent energy systems and lead in this new geopolitical and economic race.
A critical question remains – how to navigate the delicate balance between sustaining growth and achieving prosperity for all. Recent events have highlighted how wars, pandemics, and even supply chain issues, can quickly blunt existing efforts and policies to address climate change. The solution cannot lie in globalization but instead in a long-term systemic focus on clean technology innovation. The path head will require a collective understanding of how developing and deploying the needed clean technology innovation will affect value chains, markets, and geopolitics.
Today, technological innovation is driving dynamics not seen in the energy sector since the Industrial Revolution. But as new technologies develop to meet growing energy needs, understanding how these technologies will impact existing energy value chains is crucial for navigating the energy transition successfully. To elucidate these dynamics, we must first identify the key technologies driving disruptive change and then understand how their deployment at scale might impact existing value chains or cause new ones to emerge.
Value Chain Integration or Segmentation
An analysis of existing energy value chains highlights many reasons for how stakeholders position their offerings—including adopting sustainable business models, specializing in key technologies to gain a competitive advantage, or responding to regulatory constraints. However, these decisions generally result in two outcomes: integration or segmentation.
Integration is a process by which multiple stakeholders at different points along the value chain form sustained collaborations. Integrated scenarios generally occur when there is a need for intense coordination between stakeholders to develop and adopt a market or technology at scale. On the other hand, segmentation refers to activities that create unique markets or differentiation in services, where individual stakeholders realize a competitive advantage through specialization. In segmented areas of the value chain, competitors maximize profits by offering unique products or services to multiple clients.
But what does this mean in practice? Take renewable hydrogen. Both integration and segmentation scenarios will emerge depending on the use case.
Due to its versatility, hydrogen is often described as the “missing link” in global decarbonization efforts and can be used in both stationary and mobility applications. As a readily dispatchable means of storing energy, hydrogen can help address growing intermittency and curtailment challenges associated with expanded renewable energy capacity. It can serve as a fuel in stationary systems for buildings, backup power, distributed generation, or high-temperature industrial heat. As a sustainable mobility energy carrier, hydrogen can power fuel-cell electric vehicles or be the base for synthetic fuels, thus complementing ongoing efforts to electrify road and rail transportation and provide a scalable option to decarbonize the shipping and aviation sectors. But this versatility also creates significant uncertainties that must not be overlooked. The infrastructure needed in an economy where hydrogen is used as a transport fuel is very different from one where its primary value is as a heating fuel for buildings.
On the one hand, stationary applications drive integration scenarios because the development and adoption of hydrogen at scale necessitate close coordination between all stakeholders from production to consumption. A process like the emergence of liquefied natural gas markets where players along regional natural gas value chains had to work together to deploy the required infrastructure and drive adoption globally. On the other hand, hydrogen technologies will drive segmentation scenarios in the mobility sector. While the light-duty vehicle market will be dominated by lithium-ion battery-powered electric vehicles, the heavy-duty segment will be powered by hydrogen or hydrogen derivatives like ammonia.
Recommendations and Conclusions
As we move toward a more decarbonized and decentralized future spurred by technological innovation, the public and private sectors must work together to rethink their roles within value chains.
This will require a concerted approach to:
- Acknowledge and address the new geopolitical dynamics of a world less reliant on fossil fuels and the political push for self-sufficiency and strategic independence. For example, if renewable hydrogen were to be adopted at scale, future market dynamics will likely resemble today’s regional natural gas markets – with the corresponding potential for geopolitical conflict. Countries will assume specific roles in global renewable hydrogen systems based on their renewable energy resources and water endowment levels, as well as their infrastructure potential. Therefore resource-rich countries will need to implement policies to trigger technology innovation and infrastructure investments. On the other hand, importing countries must prepare and embrace strategic long-term supply diversification to increase national energy security.
- Recognize key technologies driving disruptive change and examine how existing value chains will evolve or new ones emerge. This will require a concerted effort by all stakeholders to identify integration and segmentation scenarios and their impact on market dynamics along with any associated infrastructure need.
- Define clear government policies and regulations based on the detailed analysis of value chain scenarios. Only a more profound understanding of these dynamics will allow policymakers and corporate investors to better navigate the opportunities that decarbonization will bring. In order to build the resilient energy systems of the future and tackle climate change, countries will need to develop industrial policies designed to leverage their comparative advantages while incentivizing internal competition in high-value-added sectors. Policymakers will need to facilitate the creation and growth of new markets, address capital misallocation across sectors, promote innovation to drive robust growth, and strengthen participation and integration in global value chains.
Success is possible, but only a cohesive and collective understanding of how energy value chains will evolve will enable each participant to take the best course of action to prepare for and succeed in the energy transition. Stakeholders able to embrace the new energy landscape will gain significant competitive advantages while the others risk fading into obsolescence.
 Today coal, oil, and natural gas still account for 80% of global energy demand.
 We use the term value chain to define a more conceptual design of business relationships between stakeholders that support the development and adoption of a market or technology at scale. Unlike the term supply chain that is typically used to define a set of operational relationships designed to benefit a single stakeholder and deliver products or services.
 J.G.J. Olivier and J.A.H.W. Peter, Trends In Global Co2 and Total Greenhouse Gas Emissions, Report, PBL Netherland Environmental Assessmant Agency, 2020
 'Net Zero' means achieving a balance between the amount of emissions produced and those removed from the atmosphere in order to address climate change.
 European Commission, Global Gateway: up to €300 billion for the European Union's strategy to boost sustainable links around the world, Press Release, 1 December 2021.
 European Commission, REPowerEU: A plan to rapidly reduce dependence on Russian fossil fuels and fast forward the green transition, Press Release, 18 May 2022.
 “COP26: India PM Narendra Modi pledges net zero by 2070”, BBC News, 2 November 2021.
 “China to double wind, solar energy capacity by 2025”, France 24, 2 June 2022.
 In 2021, Beijing stopped funding and building coal projects but only for nations covered by its Belt and Road Initiative.
 “China maps 2021-2035 plan on hydrogen energy development”, Xinhua, 23 March 2022.
 “The net-zero transition: What it would cost, what it could bring”, McKinsey Sustainability, McKinsey, January 2022.
 Examples of disruptive technologies include renewable hydrogen, carbon capture, utilization and sequestration, blockchain, and nuclear fusion.