Powering a new era of US energy demand

The United States is on the precipice of a new energy era, with multiple factors in play that will challenge the system and create opportunities for commercial, scientific, and technological innovation and growth. Over the past four years, new energy demand has reshaped the industry, mostly through reindustrialization, AI, data centers, and electrification. This has led to sustained load growth for the first time in nearly two decades, with power demand expected to increase by more than 3 percent a year through 2040 (Exhibit 1).

For the United States to achieve energy abundance and maintain global leadership in commercial, scientific, and technological energy innovation, the nation’s power system will need to meet this rising demand steadily and efficiently. While an “all of the above” approach to energy will be required, a core part of the solution will come down to a rapid and sustained build-out of new baseload, dispatchable generation, and grid capacity.¹Ethan Howland, “DOE to focus on expanding baseload generation: Secretary Wright,” Utility Dive, February 6, 2025.

We explore challenges related to six key issues that the American energy sector must tackle to deliver critical assets: resource adequacy, extreme weather, energy-supply-chain issues, project permit bottlenecks, labor availability, and energy affordability. We also suggest potential solutions that encompass the use of deployment-ready technologies as well as future innovations.

Six imminent challenges for the energy sector

As energy operators try to meet demand, power generation is a major bottleneck. The following are critical issues to address:

• Resource adequacy: Some markets could face a shortage of supply by 2030. For example, according to McKinsey’s GEP Power Model, many US grid operators, including PJM and Midcontinent Independent System Operator (MISO), could experience shortages of dispatchable power during peak summer demand hours by 2030.²For more, see “Two major grid operators embark on joint planning endeavor to enhance reliability,” Midcontinent Independent System Operator press release, May 9, 2024. This is because of scheduled coal and gas retirements, a lack of market incentives to bring on new baseload and dispatchable generation, and supply chain challenges that result in multiyear lead times for equipment.
• Extreme weather: Major events will further challenge resource adequacy.³For more, see Climate change 2021: The physical science basis, contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change, Intergovernmental Panel on Climate Change, August 9, 2021. The leading cause of US power outages today is severe weather, which affects physical infrastructure and often increases power demand. This leads to reduced reserve margin at best and a resource adequacy crisis at worst. For example, we used power modeling to see how extreme heat waves could affect the 2030 California grid. Reserve capacity margin during an extreme heat wave would go down to 3 percent, from about 44 percent. The decrease would be driven by a higher peak electricity demand relative to typical days, as well as by a lower availability of renewable and thermal generation resulting from the weather event (Exhibit 2).
• Energy-supply-chain issues: Critical equipment faces lead times of two to five years (or longer). New-project timelines face delays due to limited upstream capacity for equipment such as transformers and turbines. For example, combined-cycle gas turbines currently face lead times of three to five years for delivery, and distribution transformer lead times have increased by 400 percent since 2019.⁴“DOE and industry team up to keep the lights on for America,” blog post, US Office of Electricity, February 22, 2024.
• Project permit bottlenecks: Energy projects typically face a multiyear process. For federal permits, project developers report National Environmental Policy Act (NEPA) review—usually the key permitting milestone for energy projects—as the primary bottleneck. The sometime-uncertain permitting timelines can affect project economics, resulting in higher project cost, delayed revenue, and lost competitive edge. The median review timeline is about three years; however, some projects face much longer timelines. For example, the SunZia Transmission Project had its permitting timeline extend to 17 years.⁵Jennifer Hiller and Andrew Restuccia, “The U.S. ‘fast-tracked’ a power project. After 17 years, it just got approved,” Wall Street Journal, May 18, 2023. Project developers may often take longer to execute state and local processes.
• Labor availability: Shortages in critical trades are imminent. The projected annual hiring for critical trades (such as welders, construction laborers, and electricians) through 2032 is expected to be more than 20 times the projected nationwide annual increase in net new jobs.⁶Ezra Greenberg, Erik Schaefer, and Brooke Weddle, “Tradespeople wanted: The need for critical trade skills in the US,” McKinsey, April 9, 2024. These labor constraints are especially challenging for the energy sector. For example, project developers report that engineering, procurement, and construction labor availability, pricing, and capacity are among their top challenges when building new assets, and upstream equipment manufacturers report similar constraints when scaling new capacity.
• Energy affordability: Growing costs are challenging investment ability. Since 2020, retail electricity bills have increased around 6 percent year over year, which is a rapid increase compared with that seen over the previous 15 years.⁷Using data from the U.S. Energy Information Administration and proprietary data from McKinsey. This dynamic has led to increased scrutiny from regulators on rate case and to growing concerns from investors over the tension between affordability and returns. We expect this dynamic to continue to challenge the sector over the coming years as more projects and capital spending become essential to keeping up with the growing electricity demand.

To dive into one of the challenges with energy, we modeled the power balance at 7:00 p.m. during a heat wave in California in August 2030.

McKinsey modeling finds that at 7:00 p.m. during a typical summer day in California, the electrical grid can handily meet forecasted demand for power (about 49 gigawatts). With expected available capacity at 71 gigawatts, the grid maintains a healthy margin of reserve capacity: 44 percent.

Once an extreme heat wave hits, however, the grid is expected to lose 1.6 gigawatts of capacity as thermal power plants operate less efficiently or even go offline.

Heat waves can also affect power from renewable-energy sources that rely on environmental conditions. On the same date, time, and location, a heat wave could further strain the grid by reducing renewable-energy capacity, resulting in an additional loss of 5.1 gigawatts.

During a heat wave, reduced capacity from regional power imports could also chip away at how much power the grid can deliver, lowering expected capacity by another 2.6 gigawatts.

In addition to making the grid less reliable, extreme weather events such as heat waves can cause spikes in demand (for instance, as consumers boost their use of air conditioning). McKinsey modeling shows that a heat wave could increase demand for power by more than 10 gigawatts.

In the model, with the heat wave reducing grid capacity by about nine gigawatts and energy demand increasing, power demand nearly exceeds supply. Reserve capacity falls to 3 percent, from 44 percent, with only two gigawatts of reserve capacity left. This falls far short of the California Public Utilities Commission’s 17 percent planning reserve margin for utility companies.

Exhibit 2

Solutions range from those ready to go to those requiring planning and investment

We see three tiers of solutions:

• Deploying technological solutions today: This involves getting more out of existing assets through commercially available but underpenetrated technologies.
• Adjusting existing conditions, such as markets and processes: This includes permitting-process reform, market reform, and increased domestic capacity of electrical equipment.
• Activating through technical investment: This includes scaling commercial nuclear generation, deploying advanced geothermal technologies, and securing mineral and rare earth element (REE) supply chains.

1. Deploying technological solutions today

Existing technologies such as demand response programs, grid-enhancing technologies, energy efficiency programs, and front-of-the-meter storage can improve the grid today. But they aren’t being deployed at scale, because of limited incentives to integrate new technologies into the system and the lack of a standardized and regulator-approved approach to evaluate systemwide impacts.

These technologies can have real benefits. For example, grid-enhancing technologies (such as dynamic line ratings) could increase grid capacity by 10 to 30 percent. Energy efficiency programs (such as California’s load management standards) could reduce annual peak-hour electricity use by 120 gigawatt-hours. And front-of-the-meter storage could help reduce congestion at key points in the grid. This could add up to about $13 billion annually in inefficiencies.

2. Adjusting existing conditions, such as markets and processes

Improving market structures and regulatory processes could substantially reduce project costs, increase grid capacity, and facilitate the faster buildout of energy infrastructure:

• Address administrative delays in project permitting. There is an important and ongoing conversation on the future of permitting, given the need to quickly build new energy infrastructure. Our analysis shows that solving administrative delays alone could reduce annual project development costs by over $10 billion across energy projects.⁸Based on the cost of reporting delays in dollars per megawatt or per inch-mile multiplied by the number of projects, using data from the U.S. Energy Information Administration and proprietary data from McKinsey. The current US administration is also pursuing federal-permitting reform. The Council on Environmental Quality rescinded its NEPA regulation effective April 11, 2025, and issued guidance directing federal agencies to revise their agency-specific NEPA requirements in the spirit of permitting-process efficiency.
• Increase the domestic capacity of critical equipment. The United States relies on imports for critical energy equipment—for example, imports for electrical transformers, which have faced increasingly long lead times. This dependence challenges America’s ability to fortify its electric grid and deliver reliable and secure delivery of electricity. There are several options to support this objective, including by expanding the 45X advanced-manufacturing tax credit to offer incentives for increasing domestic energy-equipment-manufacturing capacity and by pursuing trade agreements with other countries.
• Reform electricity markets. According to North American Electric Reliability’s 2024 report on long-term reliability, the nation’s power infrastructure isn’t being built fast enough to keep up with rising demand, particularly the increased power demand from data centers.⁹2024 Long-term reliability assessment, North American Electric Reliability, December 19, 2024. This is due to a combination of resource retirements outpacing capacity additions, faster load growth than that of the past three decades, and inadequate reliability frameworks for natural gas infrastructure.

To begin to address these risks, America could consider the following:

• Joint coordination of electric and natural gas infrastructure: As the resource mix evolves, gas power generation will play a crucial and multifaceted role in the system. It would support the balance of demand and supply and continued reliable generation of electricity during extreme events. However, electric and gas systems are not planned consistently. We also see many instances of gas power generation lacking the firm gas supply contracts that it would need to ensure reliable performance in emergencies. Addressing these issues would enhance the reliability of both systems.
• Refined frameworks to offer incentives for the buildout of a firm, dispatchable power supply: Despite the pace of retirement of old power generation systems and the increase in price signals (for example, the capacity prices at PJM for the 2025 to 2026 capacity auction), there continue to be concerns about the pace at which new dispatchable generation is built. Consistent medium- and long-term-planning mechanisms across the country and mechanisms for adequate and fair compensation of these resources could provide the reliability that would help inspire investor confidence and enable the development of these resources.
• Advancing long-term transmission planning: Rapid, integrated transmission planning could enable a faster level of buildout than that seen in recent history. In addition, accelerating the permitting process and improving connectivity across regions, operators, and states could enable the sharing of resources and reserves.

3. Activating through technical investment

Emerging technologies can propel American leadership in scientific and technological innovation in energy. These include the following:

• Commercial nuclear-energy generation and supply chain: Nuclear technology represents a viable option for baseload and dispatchable power generation. To accelerate the rapid deployment and export of nuclear technology at scale, America should pick a winning technology, commit to an order book, invest in the supply and labor ecosystem, and reduce regulatory burdens.

  To date, the United States has failed to deploy nuclear technology at scale, partially because it continues to build first-of-a-kind plants. Additionally, the labor market for specialized nuclear roles (such as nuclear-power-grade electricians, metal workers, and welders) is highly constrained. To alleviate the regulatory burden associated with the construction and operation of new nuclear plants, the government could consider relaxing existing regulations, implementing new regulations specific to generation IV reactors, and deploying digital tools to streamline data collection and regulatory processing.

• Enhanced geothermal technology: This has the potential to add an additional five gigawatts of baseload generation to select regional electricity systems at a competitive cost of around $75 per megawatt-hour. The technology is ready to deploy now due to America’s leadership in unconventional oil and gas, as this sector relies on the same supply chain, labor force, and technologies (such as horizontal drilling and hydraulic fracturing). For the technology to achieve its full potential, it must overcome permitting delays, long grid interconnection timelines, and resource uncertainty. Our analysis shows a full deployment capacity of 65 gigawatts by 2040 at an estimated cost of about $45 per megawatt-hour.¹⁰The future of geothermal energy, International Energy Agency, December 2024.
• Critical mineral and REE supply chains: Critical minerals and REEs are essential for energy equipment such as transformers and batteries, as well as for semiconductors. Currently, the United States imports the majority of these critical metals and relies on one or two countries for its supply of each. Exacerbating this challenge is the lengthy permitting process for new mines, which takes an average of ten years. Over the past two decades, the United States has permitted only two new copper mines. To achieve a reliable and secure energy system, it’s crucial for the country to increase its supply of critical minerals and REEs through strategic investments and policy measures.

America’s energy sector enables the nation’s entire economy, from AI and technology to education, healthcare, and manufacturing. Contending with the myriad changes for the sector expected in the coming years will require substantial innovation, investment, and political will. If the energy sector addresses those needs, it could offer an increased load, strengthen infrastructure to be more reliable and resilient, and support affordability for consumers across the country.

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