Why your energy demand forecasts are wrong

Why your energy demand forecasts are wrong

 Are energy demand forecasts overlooking the rise in renewables? 

As any student of business is aware, relying on historical projections to predict future demand is a risky proposition. 

Yet, according to the non-profit Carbon Tracker Initiative, this might be exactly what's happening in energy markets as fossil fuel companies and energy forecasters are continuing to rely on past assumptions to project future demand. 

Carbon Tracker’s most recent report (PDF), "Lost in Transition: How the energy sector is missing potential demand destruction," seeks to challenge the sector’s business-as-usual assumptions. Additionally, the report discusses ways in which current assumptions are discounting the rise in renewable energy and improvements in energy efficiency technology.

Carbon Tracker, which is based in London and analyzes the financial risks of climate change, first gained notoriety for detailing the widespread financial risks of fossil fuels’ stranded assets. Its work focused on how trillions of dollars in carbon reserves could become unburnable in part due to increasing regulation on carbon emissions along with an increase in demand for renewables. 

Luke Sussams, a senior researcher at Carbon Tracker and an author of the report, said the organization’s latest work is important to businesses if they need to forecast future energy demand.

"It brings an awareness that the future energy mix and fossil fuels' role in that mix is anything but certain," he said.

The rise of renewables

The report highlights numerous ways in which initial projections by the oil and gas industry as well as by energy forecasters such as the International Energy Agency (IEA) and the U.S. Energy Industry Agency (EIA) failed to foresee the increasing demand of renewable energy.

One example of this is the IEA’s solar capacity forecasts, where actual installed solar capacity in 2012 differed by 87.2 percent from the IEA’s projections in 2000 (PDF) and by 41.5 percent from its 2007 projections.

"The IEA has been so far out in their old forecasts in what will happen to renewable energy that it kind of sparks your interest in what else their assumptions are," Sussams said.

Beyond the rising demand for renewable energy, the report also challenges widely held assumptions on population growth, Gross Domestic Production, China’s energy demand, improvements in energy efficiency and electric vehicle usage.

Forecasting the unknown

While BP, ExxonMobil, the EIA and the IEA all project that population growth will rise to 9.7 billion by 2050, Carbon Tracker says this growth is not entirely certain. Fossil fuel companies are asserting that population growth is directly correlated with increasing demand; however, if population does not increase at their expected rates, demand for fossil fuels likely will decrease.

The authors of "Lost in Transition" explore what would happen if the global population followed the United Nations' lower growth trajectory and only increased to 8.3 billion by 2050. They found that fossil fuel demand would be 17 percent less than what the U.N. projects.

Coal would take the biggest hit in Carbon Tracker’s lower population projection, as demand for coal would decrease by 25.5 percent.

Looking more broadly, Sussams said that current energy demand projections are only linear rather than considering the possibility that a transformational changes could occur and decrease demand significantly. 

"That’s not how technology behaves; it doesn’t change at an incremental pace," said Sussams. "Things happen very, very quickly or not at all."

Specifically, Carbon Tracker’s report mentions how this disruption could happen with improvements in energy storage, where a new technology immediately could diminish the need for traditional fossil fuels.

This new disruption already may be occurring today with Tesla’s Powerwall, released early this year. It operates as a home battery charged through electricity generated by solar panels, and can be used as a power source for homes in the evening.

Telsa’s Powerwall can enable homeowners to live off the grid, and it currently costs $350/kMh, according to the Rocky Mountain Institute. The report added that although energy storage needs to cost $150/kMh in order to be economically competitive, the Powerwall’s costs are seven years ahead of the industry forecasts and 25 years ahead of the EIA’s forecasts.

While new technological innovations could disrupt fossil fuel demand, diminishing demand from China also could be nearly as impactful.

China's waning demand

Because China is the world’s largest consumer of energy as well as the largest consumer and producer of coal, a nationwide transition toward renewables or waning economic growth could have a significant impact on energy demand, according to the report. 

The oil and gas company BP, for example, assumes that China and India’s GDP will grow annually by 5.5 percent; however, if their combined GDP only increases by 4.5 percent annually, global energy demand will decrease by 8.5 percent by 2035. 

China also recently reported its slowest GDP growth since 2009 with its rate falling by 0.1 percent to 6.9 percent for the third quarter, raising concerns that China’s economic growth finally may be waning. A sluggish Chinese economy could influence the nation's energy consumption in a number of ways, as a weaker economy means that consumers may purchase fewer vehicles and industries such as manufacturing will require less energy. 

Overall, Sussams said the report shows there are many variations on what can happen to energy demand, and people should question current projections. 

"When the company actually says in one forecast that this will happen," said Sussams, "it’s actually neglecting a lot of different possibilities that might transpire."