The Problem With Official Energy Adoption Forecasts

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Energy

When making investment decisions, it’s important to base them on accurate forecast data.

Before I go further, I’ll admit: It’s extremely difficult to make accurate forecasts. I don’t envy those who try.

Nonetheless, when researching energy companies and looking for forecast data, pay no attention to anything the International Energy Association (IEA) or the Energy Information Administration (EIA) publish.

(I say that despite the fact that I follow both organizations closely for up-to-date data on global energy markets.)

In fact, I suggest you ignore most forecasts regarding energy and technology.

It’s been my experience that most forecasts are proven wrong within a year or two. I’ll show you two examples in a moment.

First, let’s review Fessler’s Three Laws of Technology…

  1. Technology marches on.
  2. When it comes to technology, changes happen much faster than anyone expects they will.
  3. New technology is almost always disruptive and transformative.

The above organizations’ inability to provide accurate (or close) forecasts ties directly into my second law, which means nearly every forecast is going to be wrong.

Sometimes new technology just sneaks along… then it hits a tipping point. Adoption becomes widespread, seemingly overnight.

But even in the face of widespread adoption, forecasts are often far too conservative.

Take solar photovoltaic (PV) adoption. When it comes to forecasting solar, both the IEA’s and the EIA’s predictions have been abysmal.

Neither can ever seem to come close to reality. Let’s look at the IEA’s solar PV forecast data first…

Forecast data comes from the IEA’s Annual Energy Outlook. The arrow titled “PV History” is actual solar PV installation data compiled every year.

Note that even as late as last year, the IEA’s prediction for solar PV completely missed the mark. Given the steepness of the increase in the adoption rates of solar, the IEA forecast should be more accurate than this.

It’s been forecasting little or no growth in the adoption rate of solar for the last 14 years. How can it be this far off?

Before I answer, let’s look at EIA’s forecast accuracy…

The EIA chart is interesting. Instead of looking at actual installation growth rates and forecasting from those, the EIA has completely changed its outlook on solar from year to year.

For instance, the projection made in 1979 looks quite accurate today. Meanwhile, the ones from 1994 through 2011 have completely missed the mark.

They give the impression that widespread adoption of solar isn’t remotely in the cards. More recent forecasts (from 2013 and 2015) are more accurate but still conservative compared with actual installations.

So what did these researchers miss?

Perhaps both agencies neglected to take into account the cost of solar – specifically how much and how fast its cost was dropping…

As you can see, PV adoption is almost inversely proportional to the cost of solar… as it should be.

The bottom line is energy and technology forecasting is difficult. All you have to do is look at my second law to immediately understand why.

The IEA and EIA are far from the only groups that struggle with forecasting. But as I said before, they do a great job collecting historical data.

Just don’t make decisions about alternative energy investments based on their versions of “the future.” If you do, you’ll miss opportunities that won’t come around again.

Good investing,

Dave

P.S. There’s no question that the EIA’s and the IEA’s forecasts are laughably inaccurate… If you wait for their forecasts to give you a signal to buy, you’re going to be way too late.

In fact, the tipping point is coming way faster than these organizations and other forecasters realize… and there’s an investment that’s already exploding that savvy resource investors need to get in on.

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