Net zero infrastructure: challenges and possibilities

Focusing on climate tech innovation, industrialization, and infrastructure could help public-sector leaders achieve national and global decarbonization goals.

A key component of switching to climate technologies is having sufficient infrastructure to support them. For example, a commercial vehicle manufacturer is more likely to develop hydrogen trucks if manage­ment is confident that an adequate hydrogen infrastructure is in place to support demand. A trucking company is more likely to switch to green hydrogen trucks if there are hydrogen refueling stations, a hydrogen distribution network, and transmission lines channeling renewable power to electrolyzers.

Early development and deployment of infrastructure could help accelerate the development of climate technologies, which may very well entail a significant investment in renewal and build-out of existing infrastructure. This could be challenging on several fronts. Large infrastructure projects rarely finish on time and within budget, and there could be public opposition to some efforts, such as overground transmission lines. Then there are the long infrastructure lifetimes, and early retirements of existing assets may be required, which can be costly. Since investments in infrastructure usually need to come before the deployment of the tech­nologies that infrastructure will support, investors can be hesitant to mount the capital to build infrastructure if they fear the market could develop in unforeseen ways. And the clock is ticking. In the European Union, it is estimated that 75 percent of the total investment for infrastructure needed to hit 2050 net-zero targets must be mobilized before 2040.

Early development and deployment of infrastructure could help accelerate the development of climate technologies.

Public-sector leaders can consider several categories of interventions to support the timely build-out of the right infrastructure. However, there is no one-size-fits-all. Different types of infrastructure have unique capital expenditure profiles, market and development mechanisms, and complex stakeholder ecosystems.

Carefully planning infrastructure deployment needs could help prevent technology development from being short-circuited. When no clear choice of zero-emissions technology exists, deploying infrastructure can influence what becomes the most attractive option. Consider, for example, industrial players for which carbon capture and storage (CCS) and electrification have similar decarbonization costs. Connecting an industrial cluster to CO₂ pipelines could lead to members of the cluster choosing CCS to reduce emissions. In some circumstances, that could lock in higher-than-optimal costs.

Policy makers could start by gaining an under­standing of future infrastructure needs and transition paths. Then they could create an appropriate regulatory framework for each domain and mobilize finance for infrastructure investments. In addition, they can facilitate all three of these steps by engaging the private sector more effectively and by encouraging collaboration.

To help with development of comprehensive infrastructure build-out plans, policy makers could create a full-system model of the net-zero economy that identifies steady-state needs and works backward. Identifying and capturing synergies and interdependencies also may be key, along with investing in optionality and anticipating when projects are likely to hit a point of no return.

Developing an appropriate regulatory framework could start with ensuring that the right model is in place. For example, should EV-charging infra­structure be deployed under a merchant model for profit (as is often the case today), included in a regulated asset base like a power grid, or publicly owned, as road and rail networks are in most jurisdictions? Efforts that could prove crucial at this stage include ensuring that public infrastructure planning is reliable and working with other jurisdictions to harmonize frameworks across borders.

Engaging the private sector early and often could help with all these efforts. Public funding alone is unlikely to be enough to cover all the infrastructure investments required to achieve net zero, so new tools and strategies may be needed to encourage private investments before market signals make it an enticing proposition. Choosing financial structures that fit the nature of the investment needed and the stage of project development could help in this regard. Bringing in private stakeholders early could help public-sector leaders gain a better understanding of private-sector views on market dynamics and infrastructure needs, as well as address concerns. Private-sector players could be encouraged to form joint ventures to build infrastructure, and they could collaborate with local financial institutions to gain a better understanding of local risks. Finally, public-sector leaders could help organize demand and supply clusters to help achieve the scale required for justifying private infrastructure investments.

Across these efforts, institutions

While the net-zero transition requires the public sector, business, and civil society to do their part, governments arguably will play the most critical role. They can set priorities, balance interests, and pursue fair and equitable outcomes. Governments can also set guardrails within which businesses can innovate and deliver, help them create and shape markets, and provide funding for research and infrastructure.

None of this will be easy. There is no tried-and-tested policy toolbox for removing many of the obstacles on the road to net zero, and these efforts are unlikely to fall under the remit of a single government agency. Rather, they will likely require agencies to collaborate on an unprecedented scale and pace.

Some situations may require enhancement of existing public institutions or creation of new ones to provide new functions with new capabilities while remaining focused on the core mission of the net-zero transition. This could require enhanced planning for decarbonization sector by sector, combined with efforts to ensure pathways are both adaptive and risk resilient. Other measures that could help are strengthening project steering and management that track progress and drawing on experi­ences from other sectors to inform policy design. Communication will be critical. Dialogue and collaboration across borders and sectors, coupled with effective citizen outreach, could aid innovation, industrialization, and infrastructure.

Source: https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-heat-is-on