Energy Scenarios: The Value and Limits of Scenario Analysis

A need for low-carbon world has added a new challenging dimension for the long-term energy scenarios development. In addition to the traditional factors like technological progress, demographic, economic, political and institutional considerations, there is another aspect of the modern energy forecasts related to the coverage, timing, and stringency of policies to mitigate greenhouse gas emissions and air pollutants. The goal of this paper is to review the value and limits of energy scenarios and, in particular, to assess how the new low-carbon goals are reflected in the latest projections. This relatively new dimension of the scenarios means that in addition to the traditional factors like technology development, demographic, economic, political and institutional considerations, there is another aspect of the modern energy forecasts related to the coverage, timing, and stringency of policies to mitigate greenhouse gas emissions and air pollutants. The results from a long-term global energy-economic model, the MIT Economic Projection and Policy Analysis (EPPA) model, are compared with other major outlooks (like BP, ExxonMobil, IEA) and model-comparison exercises (represented in the IPCC scenario database). Considering the value and limits of the energy scenarios, it is obviously easier to find the limits of the forecasts. It is true not only about the energy projections, but also about other predictions of the future: financial, economic or political. Forecasts of all sorts are usually bad at predicting sudden changes. In terms of energy projections, fast growth of China’s energy appetite and its recent slowdown, fast development of unconventional oil and natural gas, fast deployment of renewables, all these events are missed by most scenarios. A move to a low-carbon energy future requires a drastic change in energy investment and the resulting mix in energy technologies. If history is any guide, energy scenarios overestimate the extent to which the future will look like the recent past. Energy scenarios are useful for decision-makers to assess the scale of the necessary transformation. However, the exact technology mix, paths to the needed mix, price and cost projections should be treated with a great degree of caution. The scenarios do not provide the exact numbers (or even close numbers), but they can be used as a qualitative analysis of decision-making risks associated with different pathways. We should recognize the energy system is complex, interconnected and affected by economic drivers. In turn, economists are notorious for their forecasting ability. Due to a long-lasting nature of energy infrastructure, energy system is not as fluid as economic system, and some trajectories in energy development are more persistent, but the same degree of carefulness should be applied to the long-term energy forecasts as to economic forecasts. Energy scenarios models are complex, but they do not reflect all the complexity, so they often provide imprecise projections. At the same time, without models nothing at all constrains the projections. While indeed energy scenarios are not suited for providing the exact number (or specific forecast), but practically decisions have to be made. The value of energy scenarios (and models that produce them) is not in their decision-making capabilities, but in their decision-support capabilities. Any single energy scenario is not going to provide a prediction of the future, and it cannot be used as a basis for policy-making. However, the results from numerous scenarios obtained from different modelling planforms provide useful information about potential risks and benefits of a particular potential policy or investment. When one has a model to make a scenario – an argument can be made about improvement, simplification, or bringing additional details. When one has just tea leaves to guess the future, there is no tool to advance the knowledge. Most of the energy scenarios offer plausible rather than most likely future. Perhaps the most important uncertainty about the future of energy is its interaction with the environment. The need for low-emitting technologies will shift the current technology mix, but the exact contribution of particular technology and the timing of this shift depend on many economic and political variables. Such uncertainty about the future costs and technologies supports a conclusion that governments should not try to pick the “winners”, rather the policy and investment focus should be on targeting emissions reductions from any energy source. Energy scenarios may not provide the exact projections, but they are the best available tool to assess the magnitude of challenges that lie ahead.