We rely heavily on forecasts, projections and scenarios in many aspects of our lives, from weather to economic growth.
They underpin many decisions and investments, while also shaping perceptions of our likely future and policy debates. These perceptions shape attitudes and beliefs about what is possible or desirable.
One truth underlies all analysis of the future:
“It is difficult to make predictions, especially about the future” (attributed to many authors, see https://quoteinvestigator.com/2013/10/20/no-predict/ ).
The ways that forecasts are presented can influence interpretation. For example, a single scenario implies certainty, while several scenarios can improve understanding of the sensitivity of the future to a range of factors. Clear statements about the assumptions underlying a forecast are also fundamental to informed debate, yet they are rarely publicised and debated.
This article uses three examples to explore the challenges of estimating future outcomes, and how they shape policy debate. It considers our National Electricity Market, Australian climate emissions and global coal demand. We need a new approach.
Electricity forecast scenarios
The Australian Energy Market Operator regularly publishes projections of electricity demand and supply in its annual Electricity Statement of Opportunities. This provides guidance for investors, the energy sector and governments.
Most focus in the ESOO and public discussion is on the ‘central’ scenario, which is the only one presented in Figure 1, in the executive summary of the 2019 issue. However, in the fine print of the report, Figure 17 on page 48, a graph shows five scenarios, as shown here.
The five scenarios show a wide range of possible future demand trends, with the highest scenario estimating 2039 electricity demand more than 50% higher than the lowest.
In a context where there is wide criticism of governments for lack of certainty for energy investors, the scale of investor risk due to uncertainty of future demand is, surprisingly, usually overlooked in debate.
AEMO includes a comprehensive disclaimer regarding information in the ESOO. Its main focus, and responsibility, is to encourage action to ‘keep the lights on’ in the short-medium term. But maybe inclusion of Figure 17 in the Executive Summary would intensify investor focus on long term risks.
We already have recent experience of unexpected changes in electricity demand that seriously impacted on the economics of investment in energy supply infrastructure. The graph below shows how projections of future demand have declined in most years since 2009.
Over-investment in electricity distribution networks relative to demand has been a major factor in retail electricity price increases over the past decade.
Each year, just before Christmas, the federal Department of Environment and Energy (or its equivalent) publishes a comprehensive report on trends in greenhouse gas emissions, updates on emission inventory calculation, and performance relative to international commitments [see here ].
It is a comprehensive and valuable document. The main focus of the 2019 report is progress relative to our international commitments.
As with the electricity example above, this report also focuses on a single ‘baseline’ scenario, shown in Figure 5 on page 8, although ‘Sensitivity analyses to illustrate how emissions may differ under changes in economic growth and technology uptake’ are mentioned in a dot point on page 4 where the report outline is described.
We must turn to page 45 to see a graph (Figure 26) showing the range of scenarios considered.
Since his return from COP 25, Minister Taylor has suggested that Australia may achieve its present Paris commitment without relying on the controversial use of Kyoto Carryover Credits [see here], and government language has shifted towards ‘meet and beat’ its Paris commitment.
The ‘low growth’ scenario could indeed come close to such an outcome – but not a globally responsible or lowest cost reduction in Australia’s emissions. And alternative and even lower emission trends could occur if effective policies were implemented.
Yet most critics have focused on the baseline scenario, seemingly without noticing the other scenarios, or looking in detail at the unrealistic assumptions underlying the baseline scenario.
These assumptions include use of 2019 budget projections for economic growth, which now look unrealistically high, and low expectations of growth in energy efficiency, renewable energy and electric vehicle adoption.
The International Energy Agency’s energy forecasts are often used by the fossil fuel industry to support their claims of future importance (see here for example).
Again, we need to look closely at the assumptions underlying IEA scenarios. ‘Stated Policies’ and ‘Sustainable Development’ are two key scenarios. Before 2019, IEA used the title ‘New Policies’ for the first of these. This title was vulnerable to misuse, as it could be inferred that it represented policies beyond present commitments.
Indeed, this scenario has been widely used by the fossil fuel industry to lobby for ongoing expansion. But this would lead to around 3.5C global heating, so it is clearly unrealistic. The new title more clearly reflects the assumptions underlying the scenario.
The ‘Sustainable Development’ scenario reflects IEA’s assessment of the lowest cost path for the energy sector to deliver its share of Paris climate targets. While this may seem ambitious to some, to many it is necessary for the long-term viability of human society. It also reflects the outcome of an international negotiation.
The graph below, using the data from IEA’s 2019 World Energy Outlook (from IEA, “Coal demand by region and scenario, 2018-2040”, IEA, Paris https://www.iea.org/data-and-statistics/charts/coal-demand-by-region-and-scenario-2018-2040 ) compares global and regional coal demand under the two scenarios.
Clearly future global coal demand, according to IEA, is very sensitive to the effectiveness of climate policy. It will also be very sensitive to difficult-to-predict actions of Asian nations.
We need to carefully evaluate the assumptions underlying forecasts and scenarios before we accept and argue about them. And we need to fund more independent modelling, analysis, forecasting, critiques and debate about those assumptions.
Our energy and emission future is very likely to be quite different from the forecasts that dominate debate.
The actions of many agents, not just governments, will influence the outcomes.