Roadmap 2050: McKinsey and company lay down the low-carbon gauntlet to the EU




A report issued by the European Climate Foundation, ‘Roadmap 2050: A practical guide to a prosperous low-carbon Europe’, appears to have dispelled concerns that the decarbonization of the European Union’s power sector is a profligate fantasy. Deputy Editor Tim Probert went to Brussels for the launch of the report, which has the backing of the European Commission.


Tim Probert, Deputy Editor

Environmentalists may now able to sleep a little easier at night. Their dreams of a zero-carbon Europe are wholly realistic, but it is up to the politicians and policymakers of the European Union (EU) to make it happen. Says who? Greenpeace? The World Wildlife Fund? In fact, it is McKinsey & Co., the world’s leading management consulting firm.

The European Climate Foundation’s (ECF) landmark report, Roadmap 2050: A practical guide to a prosperous low-carbon Europe, authored by, among others, McKinsey & Co., Dutch energy consultancy KEMA and Imperial College London, with input from dozens of OEMs, utilities, trade associations, NGOs and banks has managed, fairly convincingly, to show that a decarbonized European power sector is not only technically feasible but, crucially, economically compelling.

Figure 1. Inter-regional transmission requirements assuming 80 per cent renewables and 20 per cent demand response

The authors of ‘Roadmap 2050’ had two primary objectives: a), to investigate the technical and economic feasibility of achieving at least an 80 per cent reduction in greenhouse gas (GHG) emissions below 1990 levels by 2050, while maintaining or improving today’s levels of electricity supply reliability, energy security, economic growth and prosperity; and b), to derive the implications for the European energy system over the next five to ten years. ‘Roadmap 2050’ addresses GHG emissions across all sectors of the economy, but in particular it analyses the power sector in depth. The approach taken stipulates the minimum desired 2050 outcome as expressed by the European Commission, and then derives plausible pathways from today to achieve them.

The report uses a methodology known as ‘backcasting’ to differentiate it fundamentally from forecasting: the end-state is stipulated, that is, rather than derived. A ‘backcasting’ approach can help, says the ECF, to highlight where momentum must be broken and re-directed in order to achieve future objectives, while forecasting tends to extend current trends out into the future to see where they might arrive. The end-state stipulated for ‘Roadmap 2050’ is the 80 per cent reduction in GHG below 1990 levels by 2050 across the European economy, without relying on international carbon offsets, and an energy system that delivers at least the same level of service reliability as Europeans enjoy today. The initial analysis confirmed that is virtually impossible to achieve an 80 per cent GHG reduction across the economy without a 95 to 100 per cent decarbonized power sector.

Three different decarbonized power sector pathways were studied that differ in the shares of a range of low/zero carbon supply technologies: fossil fuel with carbon capture and storage (CCS), nuclear energy, and a mix of renewable technologies, at 40 per cent, 60 per cent and 80 per cent respectively. In addition, the roadmap assessed a scenario with 100 per cent electricity from renewables.

The overall conclusion of the report is that by 2050, Europe could achieve an economy-wide, affordable reduction of GHG emissions of at least 80 per cent compared to 1990 levels. Realizing this radical transformation, however, requires fundamental changes to the European energy system. This would only be possible with a nearly zero-carbon power supply that emits five per cent or less of baseline GHG emissions. Such a supply could be realized by further developing and deploying low carbon technologies that are already commercially available or in late-stage development, like CCS, and by expanding the trans-European transmission grid.


DECARBONIZATION at no extra cost


Assuming (i) industry consensus learning rates for those technologies; (ii) increased emission reduction efforts in the rest of the world; (iii) market demand for low-carbon investments; (iv) International Energy Agency (IEA) projections for fossil fuel prices; (v) a significant expansion of grid interconnection between and across regions in Europe; and (vi) an average carbon price of at least €20″30 ($27″$40) per tonne of CO2 over 40 years, ‘Roadmap 2050’ found that the cost of electricity and overall economic growth in the decarbonized pathways would be comparable to the baseline over the period 2010-2050.

In the short term, the cost of electricity in the roadmap’s decarbonized pathways is higher than the baseline, more so in the pathways with higher shares of renewable supply. Over the medium and long term, these differences disappear. Because the average costs of the various decarbonized pathways over 40 years differ from the baseline cost by less than 15 per cent, other factors, like risk tolerance, technology development, legacy infrastructure, resource availability and security of supply become important in planning for and implementing a decarbonized power system.

The report addresses concerns about whether the road to a low-carbon Europe is paved with obstructions to economic growth.

Jeremy Oppenheim, director of McKinsey’s Climate Change Special Initiative, says that the overall impact on European GDP is muted. “From a macroeconomic perspective, although there are pockets of wins, there isn’t a huge win for the economy,” he said. “But nor is there a catastrophe. Nothing suggests that decarbonization will mean power prices will fly out of control.”

McKinsey says the short-term investments required could see a 0.02 per cent reduction in the growth rate of the European economy, but the GDP growth rate could rise by 0.07 per cent above business-as-usual by 2050. Furthermore, McKinsey expects that the proportion of EU GDP spent on energy costs will fall from the current 6.5 per cent to just 4 per cent, mainly due a reduction of imported gas from Russia and elsewhere.

‘Roadmap 2050’ was intentionally conservative and cautious in its methodology, the authors say, but even in its ‘worst case scenario’, decarbonization should not hit consumers’ pockets unreasonably hard. In this scenario (see Figure 2), where the roadmap estimates a carbon price of zero, fossil fuel prices 25 per cent below the IEA’s estimates, the ‘cost of change’ at €500 billion and the ‘learning rate’ ” which has been defined as capital expenditure improvement per doubling of cumulative installed capacity ” is 50 per cent lower than baseline projections, then household electricity bills for a decarbonized power sector by 2050 would still cost only €250 per year more than in the baseline.

Figure 2. Decarbonized household bill costs. A decarbonized power sector need not hit consumers’ pockets too hard Source: OMA/EDF




‘Roadmap 2050’, however, does not pretend that the process of decarbonization in the European power sector would be easy. Achieving the 80 per cent reduction in total EU emissions by 2050 means nothing less than a transition to a new energy system in both the way energy is used and produced. It needs a transformation across all energy-related emitting sectors, and major investment in low-carbon power, smart grids, electric vehicles and heat pumps.

However, each of the four pathways assume 99 per cent reliability, relies on existing and late-stage technology such as CCS, and uses only European energy resources ” except the 100 per cent pathway, which sees Europe import power from North Africa. The roadmap assumes the use of coal, oil and gas in Europe has already peaked. Solar and wind energy will dominate Europe’s energy supply in 2050, with sunny yet windy Spain set to become the ‘powerhouse’ of Europe.

Imperial College London mapped weather and electricity demand for the first time, breaking the EU into nine regions, and found that combining regional demand curves reduced volatility, because people use power in different ways depending on where they are. As Reinier de Graaf, director the Netherlands’ Office for Metropolitan Architecture, puts it, “The sunny south of Europe will power up in summer while the windy north powers up in winter.”




Despite the complexities, the transformation of the European power sector would yield economic benefits, while dramatically securing and stabilizing Europe’s energy supply, says the ECF. Realistically, however, the 2050 goals will be hard to attain if the transition is not started in earnest within the next five years.

Waiting until 2015 to begin to build the large amount of the required infrastructure, say the authors, would place a higher burden on the economy and the construction industry. Delay would also increase the challenges that exist in transforming policies, regulation, planning and permitting.

At the same time, the project to transform Europe’s power sector will need to take into account feasible ramp-up rates across all sectors, particularly in the current financial climate. In the roadmap’s decarbonized pathways, the capital spent in the power sector goes up from about €30 billion a year in 2010 to about €65 billion a year in 2025. When delayed by ten years, however, the required annual capital spent goes up to over €90 billion per year in 2035.

This would require supply chains to be scaled up steeply, potentially leading to short-term shortages of building capacity, materials and resources. Furthermore, the cumulative emitted CO2 between 2010 and 2050 would increase substantially.




One of the reasons that ‘Roadmap 2050’ carries more clout than all the other roadmaps published recently is because it has the backing of not only the power industry, but also by the European Commission. Speaking at the launch, the new energy commissioner, Germany’s Guenther Oettinger, said the report “will be of great use in preparing our infrastructure package for later this year”.

With this package in mind, ‘Roadmap 2050’ highlights three main power sector priorities for policymakers to take action upon in the next five years: energy efficiency measures; incentives for action on grids and integrated market operation; and markets and financial incentives.

McKinsey says the most important GHG abatement actions, via energy efficiency measures, come not only largely at a net profit, but will also create jobs and lower consumer bills.

The report therefore calls on the EU to take action to dramatically accelerate energy efficiency measures by converting the non-binding 2020 efficiency goal into a requirement to deliver the target, while allowing member states the flexibility on how this should be achieved. The roadmap also suggests that the European Commission revises the Energy Services Directive to support a tripling of the current levels of efficiency, as set out in the EU’s energy efficiency package.




Interconnecting national transmission grids and the creation of a European ‘supergrid’, is perhaps the most important, and at the same time the most challenging, essential course of action the ECF demands to fully decarbonize the power sector. National grids must be interconnected to allow energy supply and demand to be spread across Europe for maximum efficiency and minimum storage requirements, the ECF says.

In terms of specific inter-regional requirements, the roadmap calls for a 47 GW connection between France and Spain, which would be the largest interconnection between two European nations. This will allow wind and solar power to flow freely from Spain to northern Europe, but it will require not just engineering expertise, but also a great deal of political will.

At present there is only a single power line connecting France and Spain, and the capacity of the interconnection is less than 1 GW. As one of Europe’s largest exporters of electricity, however, a large connection to Spain could cost France considerable market share. Thus the roadmap calls upon countries like France to “consider wider regional benefits than is currently the case”, but this could fall on deaf ears: this call to open up the French grid is, it was suggested, one of the reasons why French firms Alstom and GDF Suez contributed to, but did not endorse, the report.

Historic local opposition to electricity pylons cutting across the Pyrenees and costly alternative solutions such as underwater cables may mean that the plan for Spain to be the powerhouse of Europe comes unstuck.


A larger role for infrastructure planning


The roadmap envisages that a ‘supergrid’ would involve a large amount of co-ordinated network planning across the EU. The authors say that efficient planning of a European power network requires a long-term strategic view of the generation and demand characteristics across member states that extends well beyond the current 2020 timeframe.

The majority of member states, says the ECF, do not currently develop a view of their system that is sufficiently long term or definitive to facilitate regional network planning.

Moreover, the existing institutions do not have the ability to access such plans or turn these system requirements into a strategic European infrastructure plan, or to ensure that the use of power resources is optimized among the member states. It is therefore necessary, says the report, that the EU requires member states to produce a long-term indicative forecast of generation and demand-side resources to meet projected national electricity requirements.

The commission, therefore, should strongly encourage and actively assist member states to integrate these forecasts on a wider regional basis and this should ideally stretch out to 2050 to ensure alignment with the emissions objectives.

The roadmap also deems it necessary that existing EU grid institutions, i.e. ACER and the European Network of Transmission System Operators for Electricity, be given the mandate to integrate these forecasts and create a strategic infrastructure plan. Importantly, this mandate should involve the ability to share proposals with member states for how their forecasts might be altered to reduce overall costs for the European energy system as a result of trading and sharing balancing services between countries and regions.

An improved regulatory regime should also be developed, say the authors, to fund the infrastructure build and enable the costs to be shared equitably across European consumers who will benefit from the reduced energy costs.

Finally, the roadmap says these institutions need to ensure that resources across Europe are utilized efficiently on an operational basis. The system developed in the Nordic regional market for a fully integrated common balancing market and the sharing of reserves could be used as a useful example for how this might be achieved.

The authors also suggest looking at the several independent system operators (ISO) and regional transmission operators (RTO) in parts of North America to see how to operate regionally integrated wholesale electricity markets. Each of them has been structured somewhat differently by regional actors to reflect regional preferences, but they are all chartered and regulated federally against certain minimum but critical criteria.




As the roadmap points out, the recent financial turmoil has limited the availability of capital and increased the awareness of risk among potential investors. Investors may defer investment and/or prefer the lowest capital cost investment options such as closed cycle gas turbines and life extensions of existing facilities. At a time when massive investment in new infrastructure is needed, including in generation capacity, this has the potential to severely undermine the necessary transition to low carbon generation, increase the associated costs and potentially threaten security of supply.

Figure 3. Energy resources in 2050 with an 80 per cent renewables mix Source: OMA/ECF

So the authors deem it essential that member states undertake a review of market frameworks and consider the need to re-balance risk ” shifting more risk away from individual investors to electricity customers. In particular, the review will need to consider how to accommodate increasing volumes of energy produced by technologies still in receipt of ‘commercialization support’, such as feed-in tariffs, which involve a transfer of risk to other market participants.


EU ETS: Time for a rethink?


The report calls for a thorough debate over the future role of the EU’s Emissions Trading Scheme (ETS) in driving forward investment in low carbon generation. While it acknowledges that the scheme has proved successful in setting a price for carbon, the report suggests complementary measures, such as an emissions standards performance, to be imposed on power plants. This should ensure that the overall market framework is able to deliver the results that it was originally intended would be delivered by the ETS alone. The complementary measures would have to rule out investment in long-lived high-carbon generation ” both in new plants and in the life-extension of existing plants ” since these would monopolize critical market space for decades to come, crowding out investment in the similarly long-lived assets capable of producing the low-carbon energy upon which the success of the ETS will depend. The consequence of these measures would be to create a long-term, visible, low-risk market opportunity for new capacity that will encourage investment in mature, capital-intensive, long-lived low/zero carbon generation.

The level of ambition and success of these complementary measures will inevitably affect the carbon price arising from the ETS, says the ECF. It is therefore important that careful consideration is given to ensuring that these effects do not destabilize and undermine the carbon price. Mechanisms such as full banking and borrowing of permits across time, adjusting the cap within bands and adjustment of Clean Development Mechanism (CDM) volumes deserve urgent consideration, though each presents difficulties and carries risks.

To some, however, the only problem with the ETS is that the current price of carbon is too low. Without a carbon price, there may be too few sticks to discourage the construction of fossil fuel fired plants and thus lock-in Europe to a high-carbon pathway. Mike Hogan, programme director of the ECF, said it was asking too much of the ETS to create sufficient incentives and warned against imposing a carbon price floor or other political measures. “The quickest way to undermine the ETS is expect too much of it,” he said. “No investment case can be made [based on the ETS] far ahead enough of time for the required capacity. Instead we need a forward capacity market to compensate investors in low carbon power.

“With a forward capacity market, either nation states or regional governments can impose demand-side efficiency and low carbon requirements, as well as include emissions performance standards. This market would be separate from an energy-only market for other technologies.” The authors also want the commission to ensure that funding is available from the EU budget to demonstrate critical low-carbon technologies across all relevant regions along with appropriate instruments to allocate these funds and request member states to come forward with long-term targets for deploying key renewable technologies and adopt parallel measures for CCS.

The extent of the decarbonization challenge and the measures set out by Roadmap 2050 requires that policymakers treat these issues with urgency. The ECF believes that its policy recommendations are practical and achievable. Only time will tell if the European Commission turns words into action.


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