The feasibility of net-zero electrical heat | McKinsey

Electrifying heat production is not just good for the planet; it is also technically feasible and increasingly cost competitive. However, enduring perceptions of industrial heat as “difficult to electrify” have hindered progress toward the decarbonization of heat.

Electrification can be an accessible and viable option to decarbonize most low- and medium-temperature heat needs across multiple sectors, including food and beverages, manufacturing, and chemicals. High-temperature heat electrification is also ongoing, as paradigm-shifting new designs and concepts are applied across industries.

As the economic feasibility of electrification improves, industrial companies have an opportunity to decarbonize and capture value—potentially with payback possible within a year—and increase resilience if they combine electrification with renewables. An integrated approach could be key to unlocking this opportunity.

In this article, we address the perceived barriers to electrification and highlight how companies can capture the growing potential for cost-effective, sustainable, and resilient heat systems.

Heat (comprising industrial and building heat) is responsible for around half of global energy demand. Industrial heat is responsible for a fifth of global energy demand, accounting for a significant proportion of energy-related carbon emissions (Exhibit 1).

While electrification offers a clear pathway to decarbonization and is feasible in almost all heat categories, companies have been slow to make the transition due to long-standing concerns about technical and economic feasibility.1“Global energy perspective 2023: Industrial electrification outlook,” McKinsey, January 16, 2024. A lack of knowledge on commercially available technologies for low-carbon industrial heating, such as thermal storage and heat pumps, has caused hesitation, which is amplified by the complexity and heterogeneity of industrial processes. A better grasp of commercially available technologies could help industrial companies make progress on electrification.

Companies may also lack an understanding of the changing economics of electrification. Historically, fossil fuels have been the cheapest energy source for heat production. That heat was in turn used to produce electricity (for example, in coal power plants), and part of it was lost due to the conversion efficiency. This meant that electricity generated from heat was always more expensive than the heat itself.

Additionally, in some markets, such as Europe, the cost of heat is climbing as industry must pay for CO2 emissions.2“Global energy perspective 2023: Power outlook,” McKinsey, January 16, 2024. Following the proliferation of renewable energy sources (RES), industrials have the chance to decouple the electricity price from fossil fuel prices, enabling greater cost efficiency.

However, to capture the opportunity of clean, intermittent power, industrial companies need to understand price forecasting: what are the forecasted trends and how can industrials adapt to benefit? As it stands, not all companies may have the capabilities to develop credible, hourly cost-forecast models for longer-term simulation. Even with up-to-date knowledge of pricing, they may be unfamiliar with multiple price bidding or have limited access to such contracts. Improving industrials’ forecasting capabilities could be a key lever to enable electrification.

Further, the current approach to grid costs—where supply exactly meets demand when required and energy delivery is costly—is not congruent with the variable supply from RES.3Matthijs de Kempenaer, Rob Jagt, Ken Somers, and Godart van Gendt, “Demand-based pricing stabilizes the electricity market of the future,” McKinsey, February 28, 2024. When electricity from RES is in excess, users still pay for costly energy delivery. A new grid mechanism that can adapt to an electricity surplus is needed to set the transmission price. Such a mechanism can be more granular and, for example, introduce dynamic bidding split by congestion zone.

Electrification can also be limited by a paucity of operational incentives. The principle of “if it isn't broken, don't fix it” is deeply ingrained in engineers and, without strong incentives, companies may hesitate to change well-established processes that have proven to be reliable over many years.

Contrary to what many companies believe, however, our analysis suggests that electrification technologies are commercially available for most low- and medium-temperature heat needs.4Low- and medium-temperature heat is up to 600°C and high temperature above 400°C. The redesign of heat processes that were intended for fossil fuels can often bring additional benefits, such as a reduction of operational expenses in the long term for certain industries.

We have evaluated 60 industrial processes across eight sectors (metals and mining, cement, chemicals, fertilizers, pulp and paper, construction materials, food, and machinery and equipment) as well as 13 types of general industrial equipment (such as boilers, kilns, and dryers).

Each assessment comprised an extensive process overview with a focus on heat demand. Each heat demand source was evaluated for potential electrification using solutions that are either available on the market today or are in advanced development stage. For temperatures below 600oC, electrification is possible today with mature equipment. For higher temperatures, the electrification potential is close to 100 percent, but the technology needs more maturation.

Our analysis shows that electrification is an accessible and viable option within certain conditions, with some small exceptions (see sidebar, “Our analysis”). Electrification can be undertaken today for many low- and medium-temperature heat processes (up to 600°C), but technologies for high- and very-high-temperature heat needs (above 600°C) still need to mature. This specifically refers to the transfer of heat from the electrical heating element to the product, as high temperature heating means are mature and available today.

However, electrification is not a “one size fits all” lever for decarbonization. Bespoke solutions involving various technologies (like biofuels, geothermal, and nuclear) may be more suitable for processes and sectors across different contexts. For industries such as ethylene production, electrical crackers are being conceived and tested, with some—including new rotating equipment—showing improved yield, reduced size, and strong economic incentives.7Joonas Rauramo, “Vendor viewpoint: How RotoDynamic technology enables clean olefin production,” Chemical Engineer, October 21, 2023. In high temperature processes where high energy density is needed, electrification can be combined with fuel (for example, hydrogen). Further, electricity can be used to preheat air and effectively reduce fuel demand.

The economics of decarbonizing heat via electrification are increasingly viable. First, electrification can bring additional benefits such as efficiency gains in the case of heat pumps or even better product yields (for example, in electrified ethylene production).8“Key advantage of RotoDynamic Reactor compared to furnace technology,” Coolbrook, 2024.

Second, electricity is already often cheaper than gas. On one hand, the on-site costs of RES are going down and, on the other hand, grid electricity prices are becoming lower in moments of oversupply.9The price of electricity on short-term wholesale markets, such as the day-ahead market, is determined by the variable cost of the marginal producer, which is the most expensive plant needed to meet demand. When it comes to renewable energy sources (RES), the marginal cost of an additional unit of electricity is zero, resulting in a decrease in electricity prices in the event of an oversupply of RES. Often, these two sources of electricity (on-site RES and grid) can be combined, leading to even lower energy costs. Third, CO2 prices are effectively making fossil fuels more expensive.

All these elements together make a good case for considering heat electrification in the industrial context. But, regardless of these overall trends, companies may still need to identify the best way to capture value from decarbonizing heat. Electricity combined with thermal energy storage is expected to have a high potential for several reasons.10“Demand-based pricing,” February 28, 2024. For one, electric heating can be installed quickly and in parallel to existing heating; for example, using steam, resistive liquid heating, and hot air for drying. In addition, thermal storage can be combined with both grid storage and low-cost, behind-the-meter generation.

The economic potential of electricity combined with thermal storage is supported by the decreasing costs of renewable energy generation. As more renewable electricity capacity becomes available on the grid, prices typically become more volatile. This can create arbitrage opportunities to alleviate grid bottlenecks and stabilize prices.

The electrification of heat, particularly with thermal energy storage, can give additional degrees of freedom when designing overall plant energy procurement. For example, many companies install solar photovoltaic (PV) systems to provide part of their electricity demand. Typically, the size of the solar panels is capped by the demand in the peak production time, which is the middle of the day. In the morning and evening hours, solar panels provide only a small amount of the energy supply. When the plant decides to electrify heat, the constraint on maximum capacity is released and it can oversize its RES generation.

Additional production of energy in peak time can be used to generate heat or be stored in thermal storage for later use. Oversized solar panels can provide a larger share of electricity in the morning and evening hours, allowing for larger energy bill savings.

Another economical advantage of electrification is that the cost of electricity is becoming lower than the cost of gas and CO2 (Exhibit 3). Drops in prices generally coincide with an oversupply of RES—this means that “cheap hours” of electricity availability are also “low-emission hours” (see sidebar, “The advantages of oversizing electricity generation”).

While the large price swings of 2022 are no longer present, when we look, for example, at Germany and Spain, and consider the price spread between gas and electricity, it becomes apparent that price volatility remains (Exhibit 4). In both examples, the share of hours when electricity was cheaper than gas was around 15 to 25 percent in 2023. Price volatility may increase in the future as additional RES are added to the system.

Electrification presents a swift payback time. Our analysis modeled the hourly system operations for Germany and Spain in 2021, 2022, and 2023 to illustrate examples with contexts of historical, (2021) extreme (2022), and current (2023) volatility (Exhibit 5). The model applies a hybrid system with a parallel electric boiler—a solution that can be applied most easily across industries. This system demonstrated a payback turnaround time of around eight months to five-and-a-half years, based on low capital expenditure (€125,000 per megawatt thermal [MWth]).

Our analysis also considered the increasing role of thermal systems for storing excess energy during periods of volatility. In the modeled cases, we observed payback times of just over one-and-a-half years to over four-and-a-half years. More important, over half of the energy was delivered electrically—effectively through excess “clean” electrons. However, the analysis considered that the end user would only pay an additional variable cost for electricity, without having to pay grid fees, given the small size of the boiler (assuming that the capacity was already booked and paid for).

The current grid fee structure with fixed fees of about €20,000 per megavolt-amperes (MVA) requires at least 3,000 hours of low-cost electricity to enable electrification at scale. However, in many cases, the transmission grid still has capacity, and market building, dynamic pricing, and local grid price-setting based on congestion can create a win–win–win (as the grid gets money for capacity not used, industrial players receive cheap heat, and the electricity market has a higher floor).

Companies can be proactive in overcoming perceived challenges to electrification by considering four actions.

Electrifying industrial heat is less challenging than previously believed. Although industrial heat requirements vary widely, commercially available technologies and bespoke design solutions are rapidly filling the gaps. As economic feasibility increases, companies that commit to decarbonization could benefit from both cost-efficiency and emissions reductions on the path to net zero.

Joris van Niel is a partner in McKinsey’s Amsterdam office; Ken Somers is a partner in the Brussels office, where Chiara Magni is a consultant; and Marcin Hajłasz is a knowledge expert in the Wroclaw office.

The authors wish to thank Bartosz Browarczyk, Godart van Gendt, Joe Alam, Mohammed Ghonima, Sergio Nistal Prieto, and Tiago Meintjes for their contributions to this article.