Advancing the energy transition will require a massive portfolio of capital projects in new industries including hydrogen, battery electrification, CCUS, and renewables.
These projects require a unique approach to planning, financing, and delivery, with labor and capacity being persistent concerns.
On June 19, 2023, McKinsey’s Global Infrastructure Initiative convened a roundtable of leaders across energy, metals and mining, power, investing and construction to explore levers for achieving green capital excellence in the energy transition. Five key themes emerged:
- There is a climate and business imperative to deliver the green capex portfolio. Projects are urgently needed to meet Australia’s decarbonization targets; but it is also important to move fast because the ROI on projects will decrease if they are too late “in the ground.” And there is fierce global competition for those returns; as one leader said, “I have never worked in an area where the rest of the world is doing the same thing at the same time. We are a large company… but [in this arena] we have no leverage.”
- Scarcity of resources is the primary issue, and it is likely to get worse. Participants flagged that the current market’s supply of skilled companies and people is insufficient to meet the needs of their project portfolios. “I routinely approach five to six companies for a tender and get one response, maybe two if I am lucky,” said one participant. Others expressed concern that the growth of coastal projects would pull resources away from in-land rural locations, making it harder to deliver projects such as solar or wind farms in those areas. Retaining skilled talent is essential to boosting productivity and accelerating delivery, as it brings teams up the learning curve. As one executive mentioned, the rules of the game have changed and “if we want to get access to the best resources, we now need to talk long term engagement.”
- To tackle the scarcity challenge, the industry must raise productivity and embrace more enduring collaboration. Leaders must shift “from competition to collaboration” – forging longer-term partnerships instead of taking a project-by-project view, which is not attractive for EPCs. This will require a mindset shift at the board level and a new approach to contracting, tenders, and risk. “We need to kill the old tender, it’s too rigid,” said one executive.
- Modularization is promising, but it is not a straightforward solution. The group discussed the “plant as product” approach to green capital projects, taking a modular and repeatable approach to such assets. The group discussed two key challenges with modularization:
- First, a modular approach relies on ecosystems of (often) exclusive partnerships. The market is likely too small to support complete exclusivity, which will require alignment amongst industry participants in terms of industry standards in order to capture the benefits.
- Second, the pace of technological change means that module “blueprints” quickly become outdated. One leader said: “We agreed on 10 project archetypes with our contractor, and the first project that popped up wasn’t on our list.” In designing modules, leaders need to feel certain that their modules’ productivity gains outweigh the benefits of cutting-edge tech.
- The permitting process is a key bottleneck for most renewable projects. Participants raised the need for fast-track options when it comes to delivering repeat projects, such as wind farms. There are some examples of this today, but they must be scaled up. Meanwhile, some owners are ordering long-lead items and engaging contractors while permitting is underway. This increases pace, but also creates obvious risks. The government can play a role in setting clear permitting guidelines, as well as in de-risking the initial wave of green projects so they are commercially viable, alleviating the “chicken and egg” problem.