This report is designed to challenge the conventional thinking and linear models which dominate the current scenarios for energy futures.

The greatest risks and opportunities will arise from more dramatic shifts rather than business as usual or incremental change. There is increasing investor interest in what analysis is useful to test business strategies and demonstrate resilience in a low carbon future.

Key Findings

Demand destruction = climate security

The majority of the world’s fossil fuel suppliers appear to be betting on demand for their product continuing to grow as per business as usual (BAU). The direction of travel we see from the worlds of policy and technology is for destruction of fossil fuel demand. This paper is designed to explore the downside for fossil fuel producers and understand why the reality of our future may differ from the scenarios published by the energy industry. This in turn provides optimism that the world can deliver a low emissions trajectory. It is clear that the world will need to deviate from BAU if we are to prevent dangerous levels of climate change.

Will the future repeat the past? 

Scenarios are used to help people understand different futures and identify blind spots in their current assumptions about what might transpire. Many financial and industry energy projections suffer from ‘straight-line’ syndrome, where historical trends or energy mixes are extrapolated into the future over long periods. This can lead to a built-in assumption that the future will repeat the past – something that does not match-up with either preventing climate change or adapting to it.

Scenarios struggle to consider non-linear change

The risk of ‘straight-line syndrome’ hints at the biggest remaining energy modelling challenge, which is to understand system transformations, i.e. dramatic changes in policy or technology which cause non-linear change in trends. This is much more challenging to model or predict, but it is these kind of events which will have the biggest impact on a sector.

These scenarios often justify investment in additional fossil fuel supply

Investments in future fossil fuel supply are predicated on an assumption of future demand that is often presented in or informed by corporate energy scenarios. However, while many energy companies have established scenario teams, the full range of outcomes they consider is not necessarily presented publicly or to the investor community. This could change amid increasing focus on fossil fuel company scenarios as investors engage more around carbon asset risk and future capital investment plans (See also our partners Ceres, IIGCC, LAPFF, CIG, ShareAction and Client Earth on Carbon Asset Risk and ‘Aiming for A’). The scenarios produced by the IEA and US EIA need to be placed under similar scrutiny given the amount they are referenced by the fossil fuel industry, which often results in the cherry-picking of scenarios and the views of these organisations echoing and reinforcing each other.

Track record isn’t great

Another reason for reviewing the scenarios and assumptions underpinning energy industry plans is that their track record of getting it right is not that strong. This is not to say that energy sector projections are easy – however with hindsight it is evident that organisations such as the IEA are consistently behind the curve in their projections of renewables costs and deployment, for example. Figure A shows how IEA forecasts since 2000 have been far off the mark in predicting today’s levels of solar generation, let alone looking further into the future.

IEA solar PV capacity forecasts against actual

Figure A-01

Risk assessment

This report only focuses on the downside demand potential for fossil fuels because it is our contention that current base case energy scenarios are at the bullish end of the range of potential fossil fuel demand outcomes. In terms of understanding risks, it is therefore necessary to focus on the extent to which these scenarios are potentially underestimating the pace and scale of the transformation of the energy sector. We would note we are only using the opposite ends of the ranges of projections from industry, analyst or government sources to test the potential for change. There are a range of even more aggressive scenarios from environmental organisations which would push the boundaries even further.