Machinery Makers’ Golden Opportunity in the Green Economy

Power Generation. This industry is key to the fight against global warming, given that it emits 34% of total emissions. Decarbonizing power generation will require outsized investments in renewables not only to replace existing fossil fuel-based power generation but also to meet increased power demand due to higher rates of home, auto, and industrial electrification. Meanwhile, major investments in the grid will be needed to connect new renewable resources, manage distributed and intermittent generation, and harden transmission and distribution networks against more extreme weather. These investments will drive the bulk of the value opportunity for machinery makers.

Industrial Processes. This sector includes mining; the production of chemicals, metals, and cement; and the downstream manufacturing of a wide variety of machinery and end products. Here, the need to decarbonize both production processes and supply chains will require advancing a wide variety of new technologies, some of them still in their infancy. Switching to sustainable fuels or high-load electrification will be needed for processes with high heat requirements, and technologies for optimizing heat and power will be needed to manage costs and emissions. Still, the release of some emissions will be unavoidable, likely requiring carbon capture, utilization, and storage technologies.

Agriculture. Agriculture and related changes in land use account for more than 20% of global GHG emissions. These potent emissions are driven by methane and nitrous oxide in addition to CO₂. Methane emissions come primarily from livestock, while the application of fertilizer produces nitrous oxide. Conventional farming practices, such as tilling and overgrazing, have resulted in the loss of up to a quarter of the original carbon stock in the world’s soil. Changes in land use is another significant contributor, as growing demand for agricultural output continues to fuel deforestation and the loss of biodiversity, resulting in the further destruction of natural carbon stores.

Transportation. The automotive industry is currently undergoing a fundamental change, as vehicles shift from using the internal combustion engine to using battery electric powertrains. Navigating this change will require massive investments not only in machinery to manufacture electric vehicles but also in the charging infrastructure required to support them. Over the long term, heavy-duty trucks may shift to hydrogen as a fuel source for hauling freight over longer distances.

Decarbonizing the aviation and maritime industries presents a unique set of challenges given that batteries lack the power density required for long-distance travel. Instead, these industries will turn to sustainable biofuels or synthetic power-to-X fuels that can replace existing fossil fuels with a fraction of the emissions. Biofuels will lead to new supply chains and production facilities that use specialized membranes and compressors. Power-to-X fuels will rely heavily on green hydrogen that is produced using electrolyzers and sustainably sourced CO₂.

Buildings. The most significant source of direct emissions from buildings is heating and cooling systems. Converting legacy heating, ventilation, and air conditioning (HVAC) equipment to heat pumps can dramatically reduce fossil fuel use and the resulting emissions. While this switch will increase the use of electricity, more-efficient HVAC units and heat pumps can help reduce the incremental power needed from utilities. New digital technologies that manage power consumption, directing it to only where it is truly needed, will also play a key role.

To construct net-zero buildings, improved insulation and decarbonized materials will be needed. Machinery makers will likely find opportunities to help industrial materials makers reduce emissions during the manufacturing process.

The Challenges of Rising Demand for New Machinery

As demand for new machinery, equipment, and automation systems ramps up, machinery makers will need to juggle three challenges simultaneously. They must decide which new product and technology areas to compete in, balancing their existing competencies with the needs of their customers. They must continue making their legacy offerings more efficient to remain competitive throughout the transition. And they must develop new data and analytics tools that can help support their customers’ efforts to decarbonize.

Meeting these challenges will be no easy task. And predictions consistently underestimate the speed at which the transition to new technologies and systems take place. (See “Rising Expectations.”) As the pressure on industries to decarbonize increases, and as governments take a more active role in the transition, the demand for new products will likely accelerate, reach an inflection point sooner than expected, and become an avalanche. There are early signs that the US Inflation Reduction Act, for example, may be triggering a sudden increase in demand.

Rising Expectations

In preparing for the ramp-up to new green technologies, it behooves all machinery makers to remember that predictions consistently underestimate the pace of technological progress. For example, the actual solar photovoltaic capacity in 2020 was far higher than the predicted capacity either in 2002 or in 2010. (See the exhibit.) Current projections for 2030 show that solar photovoltaic capacity will likely exceed the earliest prediction by a factor of 36. The rapid increase in capacity has been driven in part by equally rapid decreases in cost, which by 2030 will likely have fallen three times faster than was predicted in 2008. The same trend holds true for wind power and batteries.

 

In short, technology deployment continues to outpace expectations, driven in part by the achievement of greater cost efficiencies than expected. And rapid deployment drives greater cost efficiencies, promoting yet more deployment, creating a virtuous circle. There is no reason to believe that the next generation of green tech will be any different.

Opportunity Strikes

As substantial as the challenges may seem, the green tech opportunity for machinery makers is equally vast—about $27 trillion through 2040 across six critical technology categories. (See Exhibit 2.) And while the opportunity is significant in each category, it is important to note that the growth trajectories for each type of technology will vary considerably given their current maturity and future innovations.

• Renewable Energy. Driven by an average cost that is increasingly favorable to customers and the pressing need to decrease reliance on fossil fuel-based power generation, renewable power will be central to decarbonization. Solar and wind power, both onshore and offshore, will drive the bulk of this $9 trillion opportunity through 2040.
• Grid Infrastructure. Because of the increased load from electrification, the added complexity of intermittent and distributed power generation, and the deployment of new renewable capacity, power grids worldwide will require $7 trillion in investments through 2040. Existing suppliers of equipment with established relationships with utilities will be especially well positioned to benefit.
• Energy Storage. Batteries will become pervasive in a variety of industrial applications. For example, stationary batteries will be used by utilities and buildings to manage intermittent power generation and the resulting cost fluctuations, and off-highway vehicles will increasingly feature electric powertrains. Battery manufacturing equipment will be needed to keep up with the demand. The result will be a $4 trillion opportunity through 2040, even before considering investments to produce batteries for on-highway vehicles.
• Alternative Fuels. While batteries and electrification can help address many challenges, liquid fuels will remain critical for heavy transportation and industrial processes with high heat requirements. These alternative fuels include biofuels, hydrogen, and power-to-X fuels, which are synthetic hydrocarbons assembled from green hydrogen and CO₂ captured from the atmosphere. Producing these fuels will require new membranes, pumps and compressors, electrolyzers, and equipment to support carbon capture, resulting in investments of up to $3 trillion through 2040.
• Green Buildings and Heating. Decarbonizing buildings will require converting fossil fuel-based heating systems to electric ones, as well as adopting more-efficient appliances and power-management solutions. Demand will be driven by the steady conversion of a large installed base, thanks to a favorable total cost of ownership for these solutions relative to legacy systems, as well as rebates and financial incentives. This demand will drive investments of $3 trillion through 2040.
• Carbon Capture and Removal. While all sectors should strive to reduce their carbon intensity, some hard-to-abate industries (such as concrete) will be unable to fully decarbonize without capturing the carbon they emit. And given the current trajectory of global emissions, CO₂ will also need to be removed from the atmosphere to avoid the worst impacts of climate change. Technologies to capture CO₂ from industrial and power applications, as well as a budding direct-air-capture industry, will drive approximately $1 trillion in machinery investments through 2040.