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October 4, 2023
Exploring the exponential nature of climate tech adoption
The exponential nature of (climate) tech adoption was the single most inspiring and motivating thing I learned at McKinsey. Often, we underestimate the rate at which technologies, including climate technologies, can scale and be adopted. However, the world is increasingly realizing that the transition to clean energy will not be linear but exponential. By identifying the tech with tipping points for exponential growth and focusing action on achieving them, the shift towards a net zero economy can be accelerated.
This article dives into the concept of exponential tech adoption, explores the conditions required for climate technologies to reach tipping points, and highlights the role of startups and scaleups in driving innovation and accelerating deployment.
The power of exponential growth thinking
At times, our minds struggle to grasp exponential growth, just like the Indian king who granted a man one grain of rice on the first field of a chessboard, two on the second, four on the third, and so on. This seemingly innocent request quickly spiraled into an astonishing 18 quintillion grains of rice — or approximately 2000 years of India’s total rice production.
The same principle applies to technological adoption. As a technology scales, more investments and government support are made to optimize it, creating additional learning, which leads to further cost reductions, and further adoption.
As you can see below, we are still not good at understanding this exponential nature.
Every year, the International Energy Agency (IEA) puts forth a World Energy Outlook, where they forecast the speed of the energy transition. In the chart above, you see the predictions they put out between 2002 and 2017. You see that every year, they made a linear extrapolation of last year's adoption rate of solar panels, but every year the adoption rate increases.
Exponential thinking would have meant that the IEA had to predict in 2010 that the adoption of solar was going to be 4x bigger by 2015, and 8x bigger by 2017. That said, if we start to better understand and forecast the exponential nature of climate tech adoption, it presents a remarkable opportunity for driving a rapid transition toward net zero.
The first proof points of exponential adoption within climate tech
Certain technologies have already reached tipping points, where their adoption has become exponential and difficult to reverse. Solar, wind and batteries like lithium-ion are the first climate tech examples.
In 2021, solar and wind became the cheapest sources of new power. This clear cost competitiveness has spurred significant deployment, with solar and wind accounting for over 75% of total new capacity additions globally that same year. Electric vehicle sales are scaling up rapidly, even though cost parity with internal combustion vehicles is still a few years away - thanks to public policy, subsidies and some very sexy cars.
But how did they get there?
S-Curves: the path to exponential adoption
To understand the trajectory of exponential adoption, we must examine adoption curves - which are often called S-curves. S-curves illustrate the cumulative adoption of technologies as they move from niche markets to widespread deployment. The shape of an S-curve resembles the letter "S" and is characterized by slow initial growth, a rapid acceleration phase, and a leveling off at the saturation point.
Here's a basic breakdown of how S-curves work:
Slow start: In the early stages, the total adoption of an innovation are typically slow, however growth in adoption (aka acceleration) can already be quite big.
Rapid acceleration: As awareness and familiarity with the innovation increase, adoption starts to accelerate. The growth becomes more pronounced as more people adopt the innovation.
Saturation point: Eventually, the growth rate slows down as the majority of the population has already adopted the innovation. At this point, the market reaches saturation, and further growth becomes limited.
Acceleration is caused by learning curves. What are those?
Better technology. Over time, companies use cheaper and lighter materials; for example, the polysilicon per kilowatt (kW) of solar keeps falling, and the energy density of batteries keeps rising.
Learning-by-doing. This is what lies at the heart of all manufacturing technologies. The more you do, the better you get.
Copy the leaders. Some countries are leading the energy transition while others are still learning. For example, the UK sends heat pump engineers to Sweden to train.
Evolution is more clever than we are — Orgel’s second rule. We are likely to find solutions that we cannot forecast in detail today.
Pandora’s box has been opened. In every area of the energy system, people are hunting for solutions to improve efficiency, reduce carbon emissions, and lower costs. Many solutions blend to spawn new ones.
Affordability, attractiveness, and accessibility play crucial roles in determining the speed and extent of adoption.
Affordability: if a technology becomes affordable, it gains wider acceptance and adoption. For example, the rapid adoption of solar panels occurred when they reached price parity with other energy sources - first thanks to subsidies and feed-in tariffs, now increasingly purely due to cost of the technologies.
Attractiveness: when a technology offers superior performance or additional benefits, it becomes more desirable to consumers. Despite being more expensive initially, Tesla created a desirable product that people were willing to pay a premium for, supporting the driving down of costs as scale increased.
Accessibility: the availability of supportive infrastructure and easy access to technologies can significantly influence their adoption. For instance, the build-out of public charging stations in Norway facilitated the widespread adoption of electric vehicles in the country.
Ready for takeoff
These conditions of affordability, attractiveness, and accessibility create the necessary environment for technologies to reach their socio-economic tipping points.
Tipping points occur when a set of conditions is met, allowing new technologies to outperform incumbents and gain significant market share. Once a tipping point is crossed, reinforcing feedback loops drive self-accelerating progress, further enhancing the adoption and growth of the technology.
The power play between balancing and reinforcing feedback loops defines how steep the subsequent growth curve is.
Balancing feedback loops happen when an increased deployment of a particular technology leads to a push to restore the status quo. This backlash can occur when parties behind existing technologies lobby against policies encouraging new alternatives, aiming to slow deployment. An example is the US and European car industry's attempt to block and delay emission reductions and the transition to electric cars.
Reinforcing feedback loops, on the other hand, have a self-accelerating effect on technology diffusion: Learning by doing improves performance, economies of scale reduce costs, and the spread of new social norms increases acceptability.
The dynamic between the two feedback loops determines the shape of our S-curve. When reinforcing feedback loops become dominant, the deployment of low carbon solutions increases dramatically while replacing existing, less green technologies.
However, it's important to note that not all sectors and technologies reach their tipping points simultaneously.
Different sectors have varying requirements and constraints, and technologies are at different maturity levels. For example, the decarbonization of long-haul shipping, steel production, and aviation depends on the use of green hydrogen, which is still in the early stages of development.
Plus, not every technology may have the potential to hit the affordability, attractiveness and accessibility points that are needed to reach a true tipping point. Heat pumps for homes, while increasingly reaching attractiveness and accessibility parity, are likely to continue to require a higher initial investment than gas boilers (even though lifetime costs may be lower), making the adoption harder for some.
Overcoming barriers to exponential growth
Even though this seems like a relatively straightforward road to success — it’s not. What if one or more of the conditions required to catalyze a tipping point is missing? Most climate technologies have the potential to follow S-curves, but many constraints still hold them back.
To help climate tech reach tipping points, several factors are required:
Well-designed policies can drive down costs and make low carbon solutions cost-competitive with incumbents at an earlier date. Carbon taxes, subsidies, production targets, public procurement, and market-shaping regulations can shift investment towards climate tech, stimulating large-scale deployment. Policy support may be temporary or continuous, depending on the sector and the specific challenges it faces.
Example: Hydrogen Production Tax Credit (PTC) Experts believe that for green hydrogen to really take off, product costs have to get to $3 per kg. Today, they are $6-10 per kg. With the 45V Hydrogen PTC from the Inflation Reduction Act (IRA), green hydrogen can get a credit of up to $3 per kilogram of hydrogen produced. This is quickly scaling supply. Between 2022 and 2023, investment announcements for green hydrogen in the US increased by 50%.* Some experts think that the price of green hydrogen will continue to fall after that due to learning curves, with some experts forecasting prices of as low as $0.50-1/kg.*
Early-stage innovation plays a significant role in pushing technologies past the tipping point. They can drive attractiveness with technological innovations that improve the performance and appeal of climate tech. They can also contribute to accessibility by mitigating infrastructure challenges and can help improve affordability by working in conjunction with governments to achieve cost parity
Example: Antec Biogas Antec has created a unique and patented production process for biogas from waste biomass that can extract up to 98% of biogas potential from biomass. This is significantly higher than the typically observed maximum efficiency of 65%.* Due to this innovation, more biogas can be valorized from the same biomass, creating higher revenues and a more positive business case.
While capital is not the only driver, it plays a crucial role in accelerating technology adoption. Startups and scaleups often require funding to push their technologies past the tipping point into self-enforcing feedback dynamics. Investments can help get companies with innovative technologies, business models or go to market approaches off the ground, and finance the scaling of technology and production processes, leading to cost reductions and increased adoption. Investors can support startups and scaleups, providing the necessary funding for innovation and growth.
Example: H2 Green Steel In the largest private placement in Europe this year, H2 Green Steel has raised about €1.5 billion in equity from an investor group led by Altor, GIC, Hy24 and Just Climate. The round will finance the world’s first large-scale green steel plant and Europe’s first giga-scale electrolyzer. The proceeds will finance the construction and development of H2 Green Steel’s flagship large-scale green steel plant in Boden, Sweden. Groundworks have been ongoing on site in Boden since summer 2022, and through this transaction H2 Green Steel takes another big leap toward starting operations at the end of 2025.
Corporates and Consumers
Corporates and consumers also have important roles to play in creating the enabling conditions for tipping points. Corporates can invest in climate technology production plants and commit to forward purchase agreements of green products. Consumers can drive demand for climate-friendly solutions, even when there’s still a green premium to be paid.
Example: Normative Normative is a carbon account tool that help businesses calculate its generated emissions, identify emissions reduction opportunities, minimize climate risk and find opportunities for growth in a net zero economy. Zurich Insurance Group aimed to reach net-zero operational emissions by 2030 and teamed up with Normative to better understand and reduce its supply chain emissions.
By addressing these factors and fostering collaboration among stakeholders, we can create an environment that accelerates the adoption of climate technologies, leading to faster reductions in costs and greater global impact.
The forecast for climate tech growth
Despite the fact that we’re learning a lot about how exponential growth curves work, we still fail to use them in our transition forecasts. Dominant agencies like IPCC and IEA have historically underestimated the speed of adoption, and likely still are. This also means that the transition to net zero might be going faster than we think.
RMI, an independent organization of experts across disciplines working to accelerate the clean energy transition and improve lives, works to give us a new perspective and approach by taking the S-curve effect into account
RMI forecast: Solar and wind power will grow by 3–4 times by 2030. Fast growth will mean a quadrupling in generation, to produce more than 14,000 terawatt hours (TWh).
IEA forecast: In 2021, IEA forecasted annual solar PV generation level of approximately 8,300 TWh in 2030*
Recognizing the conditions required for technologies to reach tipping points, the power of reinforcing feedback loops, and the role of startups and scaleups in driving innovation can lead to more accurate predictions. It can also allow for better informed decision-making while we aim to accelerate the deployment of clean technologies.
By understanding and accounting for exponential adoption, we can unlock the full potential of climate tech and pave a quicker way to a sustainable future.
Did you find this deep dive helpful? Let us know in the chatbot or connect with Liza, our Co-Founder and Head of Impact, on LinkedIn!
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