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Undressingtheemperor:AcriticalreviewofIEA’sWEO

KlausMohn

UniversityofStavangerBusinessSchoolNorwegianSchoolofEconomics1

Abstract

SincetheturnofthecenturyTheInternationalEnergyAgency(IEA)hasassumedagraduallymoreimportantroleindefiningtheagendaandoutlookforenergyandclimatepolicies.ThisessayreviewsthemethodologyandmethodsbehindIEA’sWorldEnergyOutlook,andthenoffersacriticalreviewofassumptionsandprojections,focusingin

particularontheoutlookforeconomicgrowth,technologicalchange,andinvestmentinnewrenewableenergy.TheanalysissuggeststhatimportantaspectsofIEA’sscenariosaredrivenbycriticalexogenousassumptions.Moreover,vastresourcesandacompetent

researchorganizationofferlimitedmitigationforoutlookuncertainty,andIEA’soutlookshouldthereforebeapproachedwiththesamecautionasotherglobalenergyprojections.

Keywords:Energyeconomics,macroeconomics,modellingJELclassification:Q41,Q43,Q47

                                                            1ValuablecommentsfromOlufLanghelle,OttarSkagenogEirikWærnessarehighlyappreciated.

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Introduction

InNovembereveryyearTheInternationalEnergyAgency(IEA)releaseanewissueoftheir700‐pageflagshippublicationWorldEnergyOutlook(WEO;IEA,2105a)atapackedpressconferenceinLondon.Thiscomprehensivelong‐termenergyoutlookenjoyssignificantattentionacrosstheentireoilandenergyindustry,andhasestablisheditselfasareferencedocumentforenergyandclimatepoliciesacrosslargepartsoftheworld(VandeGraaf,2012;HeubaumogBierman,2015).

Atthesametime,IEA’sWorldEnergyOutlookhasattractedincreasingcriticismfromseveralcamps.Forexample,theIEAhasbeencriticizedforunder‐estimatingthedynamicdevelopmentofrenewableenergy(e.g.,Metayeretal,2015).IEA’sprojectionshavefallenparticularlyshortoftherealiseddevelopmentofsolarenergyandwindpower.

IEA’sWorldEnergyOutlookisbasedonacomprehensiveandverydetailedsystemofmodels,drawingoninsightsfromgeology,technology,economics,andpoliticalscience.AcommonargumentagainstthemethodologyandmodelsoftheIEAisthattheflexibilityofeconomicbehaviouriseffectivelycontained,andthattherelationsofthemodellingsystemarenotsufficientlyresponsivetoshiftsandshocksintechnology,preferences,policies,andprices.CriticsalsoarguethatIEA’sWorldEnergyOutlooklargelyisaproductofhistoricaltrendsanddevelopments,combinedwitharichsetofexogenousassumptionsandcoefficientsfortheevolutionoftechnology,prices,andpolicies.Aspecificexamplerelatestotheoutlookforeconomicgrowth,whichisassumedidenticalacrossthreescenarioswhichspansubstantialvariationinarangeofareasoftheworldeconomy,includingoilandgasprices.

ThepurposeofthisessayistoshedlightonthequestionifIEA’sWEOhasdeservedtheroleaskeyreferencedocumentforglobalenergy‐relateddevelopmentsandcorrespondingpolicydesign.AreviewofthemethodologyandmodelsbehindIEA’senergyprojectionsisfollowedbyacriticaldiscussionofthreeareasoftheoutlook.ThefirstrelatestoIEA’streatmentoftheinteractionbetweenenergydevelopmentsandgeneralmacroeconomicdevelopments.WethentakeacloserlookatIEA’sapproachtogeneralandenergy‐specifictechnologydevelopments,beforewediscussimplicationsrelatedtonewrenewableenergysources,ormorespecificallyinvestmentsinsolarenergyandwindpowercapacity.

Methodologyandmodel

Overmorethan20yearstheIEAhaspresentedlong‐termmodel‐basedprojectionsofenergydemand,supplyandpriceformationatthegloballevelandineachofIEA’smembercountries.AcomprehensivesimulationmodelcalledtheWorldEnergyModelhasgraduallybeenforthepurpose.Whatfollowsisageneralintroductiontothisverydetailedsimulationtool,toillustratetheprinciples,methodsandmodellingstrategies

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thatformthebasisforIEA’slong‐termenergyprojections.Notethatarangeofdetailsandnuanceswillescapesuchabriefintroduction.ForacloserlookattheWorldEnergyModel,seeIEA’sownintroductiontothemodel(IEA,2015b).

Figure1.OverviewofIEA’sWorldEnergyModel

Source:IEA(2015b).

Figure1givesanoverallstylisedoverviewofIEA’sWorldEnergyModel(WEM).Themodelisbasedonannualdata,2andhavethreemainmodelblocksfor1)energysupply,2)conversion,and3)energydemand,respectively.ThemostimportantexogenousassumptionsrelatetocostsofCO2‐emissions,plansandmeasuresforenergyandclimatepolicies,technologicalprogressbyindustryandregion,andassumptionsformacroeconomicdevelopments(i.e.,economicgrowth).Reflectingthisbroadsetofexogenousassumptions,Figure1illustratesthatfinaldemandfromdifferentsectorsineachcountryisaresultofeconomicactivityinthesesectors.Finaldemandisdirectedatarangeofconversionprocesses,andprimarydemandisdeterminedbytheenergyrequiredfortheseprocesses.Production,trade,andpriceformationforenergycommoditieslikecoal,oil,andnaturalgas,naturalgasandbiomassisthendeterminedbytheinteractionwithprimaryenergydemandindifferentindustriesandregions.

WEMdividestheworldin25regions,12ofwhicharecountries,andtheremaining13aregroupsofcountries.Thehorizonofprojectionsistypically25‐30years,andexogenousassumptionsincludeforecastsforeconomicgrowth,populationgrowth,technologicalprogress,andpolicydevelopments.Technicallyspeaking,crudeoilandnaturalgaspricesarealsoexogenous,whereasend‐userpricesforarangeofenergy

                                                            2EnergydataformodelinputisretrievedfromIEA’sowndatabases(http://www.iea.org/statistics),

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productsisdeterminedbythemodel.3Outputfromthemodeltypicallyincludessupplyanddemandfordifferentenergycarriers,costsandinvestments,end‐userpricesandenergy‐relatedgreenhousegasemissions.

Figure2.StylisedillustrationofthemodellingofenergydemandinWEM

Kjelde:IEA(2015b).

DemandFigure2illustratesthegeneralmodellingapproachtoenergydemandinWEM.Themodelsplitsdemandbyfivedifferentmainsectors(industry,transport,households,services,andagriculture).4Inadditioncomesdemandforenergyproductsasfeedstockforthepetrochemicalindustryandotherindustries.Foreachofthesesectorsandsub‐sectors,WEMspecifiescalibratedrelationshipsbetweenenergydemand(Et)andasuitableproxyforeconomicactivity(Yt)

. (1)

Thechoiceanddefinitionofactivityvariablewillvaryacrosssectors.Value‐addedisatypicalcandidatefortheindustrialsectors,whereeconometricequationsarefittedtoexplainenergydemandasaresultofhistoricalproduction,GDP,populationsize,andenergyprices.Correspondingrelationshipsforhouseholdenergydemandarebasedondwellingsize,numberofhouseholds,andaccesstoelectricalappliances,andservices,5

Foreachsector,thenextstepinvolveseconometricdiscretechoicemodelstoallocatetotaldemandforenergyservicesbetweendifferenttechnologiesandenergycarriers.In

                                                            3 Themodelcomputesanindexforend‐userpricesineachsectorwhichisbasedonenergycommodityprices,costsandmarginsofconversionand/orrefining,transportationcosts,taxesandduties.Energyproductsincludethreetypesofcoal(cokingcoal,steamcoal,andlignite),naturalgas,morethan10productsfromoilrefining(LPG,naphta,gasoline,kerosene,diesel,bunkeroil,petroleumcoke,refinerygas,asphalt,solvents,wax,etc;IEA(2015b),p.30).Inaddition,WEMprovidesend‐userpricesforelectricity,varioustypeofbioenergy,andheatproduction.4Eachofthesemainsectorsaresplitin5‐7subsectors.Asanexample,the«industry»sectorwillincludesubsectorslike‘aluminium’,‘ironandsteel’,‘chemicalandpetrochemical’,‘cement’,‘pulpandpaper’og‘othermanufacturingindustries’.The«transportation»sectorincludes‘roadtransport’,‘aviation’,‘railwaytransport’,‘shipping’and‘othertransport’,whereasenegydemandfromthehouseholdsectorismadeupby‘heating’,‘cooling’,‘waterheating’,‘cooking’,and‘lighting’.5‘Passengerkilometer’and‘tonnekilometer’formthebasisforenergydemandfrompersonandgoodstransportation,respectively.

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thisstepofdemanddecision‐making,thechoicebetweenvariouscategoriesisguidedbycost‐minimisation,implyingthatdemandovertimewilldrifttowardsthemostcost‐efficientalternatives.Morespecifically,thepointofdepartureforeachenergycarrier(i)isthespecificationandestimationoflinearindirectutilityfunctions(Vit)foreachareaofapplication:

, (2)

wherepiisthepriceofenergycarriericomparedtoaverageenergyprices,tisatrendterm,iogiareparameters,andiisanexogenousadjustmentparametertoaccountforinfluencefromvariablesbeyondpricesandthetimetrend(e.g.,specificpolicymeasures).Inaccordancewithstandardmultinomiallogitmodelling,thelikelihoodofaspecificchoiceofenergycarrierineachapplication(it)isnowdeterminedbytheoddsfactor:6

∑

. (3)

Totranslatethischoicetofinalenergydemand,theaboveequationiscombinedwithanexogenoustrajectoryfortechnicalenergyefficiency.ThesecoefficientsforenergyefficiencyaredeterminedbyIEA’sprofessionaljudgentforeachofthesectorsinallthreregions,andwillideallyreflectplausibleassumptionsforenergyprices,technologydevelopmentandenergypolicies.Atthisstageofmodelling,adjustmentparametersarealsocalibratedtomimicsluggishnessandgradualadjustmentofenergydemandovertime,whichagainmaystemfromvintagemechanismsinhouseholdandbusinesscapitalformation.

With25countries/regions,18applicationareasforenergy,andpotentiallysevendifferentenergytypesforeachapplication,theresultisindeedadetailedmodellingscheme.

PowergenerationProductionofelectricityisdeterminedbydemandfromvarioussectorsandregion.AspecificblockoftheWEMcomputesestimatesforcapacityrequirements,allocationofproductionoverdifferenttechnologies,demandforenergyfromthepowergenerationsector,infrastructureinvestment,andproduceandend‐userpricesforelectricitybysectorandregion.

Installedproductioncapacityineachregionisrequiredtomeetpeakdemandwithasafetymargion.Ifcapacityfallsshortofthisrequirement,themodelwilladdnew

                                                            6Atthispointthemodellingstrategyimpliesthatimprovedpropertiesforaspecificenergycarrierwillreducethechoiceprobabilityforallotheralternativesbythesamepercentage.Thispatternofproportionalsubstitutionimposesastrait‐jacketonpreferencesandproductiontechnologythatlimitstheflexibilityofenergydemand(e.g.Train,2009).

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productioncapacityfortheregion.Thechoiceoftechnologyinthesecapacityinvestmentsisguidedbylong‐termmarginalcost.7

Themodellingofelectricitymarketsfollowthetextbookstandard(e.g.,Bhattacharyya,2011).Demandfromhourtohourissortedinavarietyofcategoriesfrombaseloadtopeakload.Generatorsarethensortedaccordingtoflexibilityandshort‐termmarginalcost(meritorder).Inconsequence,baseloadismetbygeneratorscharacterisedbylowmarginalcostandlimitedflexibility,whereasgeneratorswithhighermarginalcostsandmoreflexibilityarehookedupasdemandapproaches‘peakload’intheafternooneveryday.

Powerproductionfromsolarenergywillnormallycorreatewithdailydemandfluctuations,withpotentiallysignificantcontributionsduringthemiddleoftheday.Thesituationisslightlydiffentforwindpower,asthevariationsinwindarelesssystematicthroughtheday.However,windturbinesmaybemoreexposedtoseasonalvariationinwindstrength.Whatsoever,theelectricitysystemwillabsorbtheproductionfrombothsolarenergyandwindpoweraslongastheirmarketsharesaremoderate.

Moresubstantialcontributionsfromsolarpowerandwindenergywillraisearequirementforreservecapacitytomeettheinherentintermittencyofnewrenewablesinpowergeneration.Achallengeforthesetechnologiesisthattheirmarginalvalueandcompetitivenessisgraduallyweakenedthehighertheirmarketshare.8

Figure3.TradeincrudeoilandoilprocutsintheWorldEnergyModel

Source:IEA(2015b).

                                                            7Newrenewablesintroduceasignificantstochasticelementinelectricitysupply.Solarenergyandwindpowerarethereforeattributedwithacapacitydiscounttoreflecttheshareofinstalledcapacitythatcanbeexpectedtodeliveratdaily‘peakdemand’.8Transportofelectricityinspaceandtimewouldalleviatethischallenge,Flyttingavelektriskkraftiromogtidvilavhjelpedenneproblemstillinga,oghersereinkorforframvekstenavnyfornybarenergiharstimulertinteressafornyeløysingarformagasineringoglagringavelektriskkraft.

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OilrefiningandtradeAspecificmodelblockofIEAs’WEMisassignedfortheconnectionofoildemandandsupplythroughoilrefiningandtradingactivities.Overtheshorttomediumterm,refineryactivityisdeterminedbydemandforoilproducts,anddevelopmentofnewcapacityisgivenbyidentifiedprojectsandplans.Inthelongerterm,theevolutionofrefinerycapacityisinfluencedbytheregionalmarketbalanceforoilproductsontheonehand,andbytheaccesstocrudeoilontheother.

Notethatsomeoilproductsaresuppliedbyothersectorsthanoilrefining,andthatthedemandforoilproductsiscorrectedforbiofuels,liquefiedpetroleumgas(LPG),ethaneandnaphta(NGL),andalsobysyntheticfuelsfromalternativeupgradingprocesseslikecoal‐to‐liquids(CTL),andgas‐to‐liquids(GTL).Atthecrudeendofthevaluechain,refineriesmakeuseofalltypesofcrudeoilwithrefinerypotentialinlinewithconventionaloil.

Consequently,oilproductdemand,refinerycapacity,andcrudeoilproductionismodelledseparatelyforeachofthe25regionsofIEA’sWEM.Theresultisregionalmarketbalancesandunbalancesforbothcrudeandoilproducts,whichinturnareequilibratedthroughinventorychangeandtradebetweentheregions.Morespecificinformationonhowthesetradeflowsaredeterminedinthemodelisnotofferedbythemodeldocumentation(IEA,2015b).

EnergysupplyThesupplysideofIEA’sWEMsplitsenergycommoditiesintofourgroups.Thosearecoal(32percentoftheglobalprimaryenergymixin2013),oil(34percent),naturalgas(23percent),andbiomass(11percent).Oilisblessedwiththemostambitiousmodellingstrategy,withasomewhatmoresimplifiedprocedurefornaturalgas,andinparticularforcoal.Finally,thereisaspecificmodelblockforbioenergy,separatingenergyproductsfromprocesseswheretheyareamainproductontheonehand,frombioenergyasaby‐productofforestryandagricultureontheother.

Figure4.OilsupplyinIEA’sWorldEnergyModel

Source:IEA(2015b).

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ThemindsetofsupplymodellinginIEA’sWEMwillbeillustratedthroughtheirapproachtooilproduction,whichisalsothemostambitiousmoduleofproducerbehaviourinthemodel.Foramorespecificanddetailedintroduction,includingotherenergyproducts,seeIEA(2015b).

Thepointofdepartureforoilsupplyisacomprehensivesetofhistoricalfield‐specificresourcedata,whichisobtainedfromabroadrangeofsources,includingtheUnitedStatesGeologicaSurvey(USGS,2012)andGermanBundesanstaltfürGeowissenschaftenundRohstoffe(BGR,2014).Moreover,dataonreservesandproductiondrawonBP’sAnnualStatisticalReviewofEnergy(BP,2015),supplementedwithIEA’sownstudiesofglobaldeclineratesofproducingfields.ThisdataformsthebasisfortheestimationoffutureproductionprofilesforeachofthecountriesinIEA’sWEM.

Abroadsetofinformationonfieldsunderdevelopmentisexploitedtoenrichtheshort‐tomedium‐termoutlookforoilsupply,bothforOPECcountriesandfornon‐OPECcountries.Moreover,rankingsofnetpresentvalues(NPV)ofallknownprojectsandprospectsisfinallyappliedforthecalibrationofalong‐termoilsupplycurve,whichaganformsthebasisfortheallocationofoilfutureproductionbetweencountriesandregionsinthelongerterm.

Followingstandardpracticeofresourceaccounting,futureproductionprofilesforconventionalcrudeoilaresplitinfourdifferentcategories:Producingfields,fieldsunderdevelopment,fieldswherefinalinvestmentdecision(FID)isstillpending,andresourcesthatareyettobediscovered.Ontopofconventionalcrudeoil,theIEAthenaddsnaturalgasliquids(NGL)andproductionfromunconventionalresourceslikeoilsandsandshale/tightoil.

Oilsupplyintheshort‐tomedium‐termislargelybasedonidentifiedprojectsandplans,wheresurveydatafromalargenumberofoilcompaniesisappliedtoscaleinvestmentandcapacityupordownoverthefirst3‐4yearsoftheprojectionperiod.TheseplansalsoincludeOPECcountries,andthemodellingapproachdoesnotreflectanyenactmentofmarketpoweronOPEC’sbehalf.9Intheirmodellingoflong‐termcapacityadditionsintheupstreamoilindustry,IEA(2015b)lendssupportfromsomemethodthatlinksinvestmenttocapacityrequirementsandcashflows.However,thespecificsonhowthistranslatestomodellingremaininthedark.10

                                                            9 Atthispoint,IEA’smodeldocumentationislongonambiguity,andshortonaccountability.AccordingtoIEA(2015,p33),«…OPECisnottreatedastheswingproducer,thoughconstraintsthoughttorepresentOPECpoliciesareincorporateintheWEMoilsupplymodule.»Withoutfurtherdetail,theIEAleavesuswithnopossibilitytoevaluatetheirmodellingstrategyonaveryimportantaspectofoilpriceformation.10NotethatHotelling‐stylebehaviorplaysnoroleinIEA’sWEM,andthatoilproducersintheirmodelseemoblivioustoanyformofdynamicoptimization,bothinsideandoutsideOPEC.Still,exogenousassumptionsareapplied,wherebyincreasingresourcescarcity(i.e.,oil)contributestoagradualescalationinbothcostsandpricesovertime.However,thedocumentationofthesemechanismsmakesmakesnoreferencetocapitalmarketreturnsorinterestrates.

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Emphasizingvariationintechnologyandextractioncostsbetweencountriesandregions,IEA’smodellingstrategydoesimplyacompetitiveadvantageforcountrieswithlargereservesandlowcostsofextraction.AreflectionofthismechanismisevidentintheNewPoliciesscenarioofIEA(2015a),whereOPEC’sglobalmarketshareissettoincreasefrom41percentin2014to49percentin2040.

Themodellingofgasproductionfollowsasimilarpatternasforoilproduction.However,thegassupplymoduleislessrichindataandgranularity,andwithmorerestrictionsontradebetweenthecountriesandregionsofthemodel.Evensimpleristhemodellingofthecoalmarket,wheretheoutlookcombinesprojectionsofdemandandpriceswithcurrentresourceendowmentstodistributefutureproductionofcoalbetweenproductcategoriesandregions.

PriceformationTechnicallyspeaking,pricesofcoal,crudeoil,andnaturalgasareexogenoustoIEA’sWEM.Inpractice,however,crudeoilpricesaredeterminedthroughaniterativeadhocprocedure,tosecurethatinvestmentsandproductionwillmeettherequirementsimpliedbythedemandoutlook.Whenrunningthemodel,theIEAstartsoutwithaninitialsetofpriceassumptions,whichformsthebasisforafirst‐roundprojectionofinvestmentandproduction.Demandisthencomputedbasedonthesamesetofpriceassumptions.Ifsupplyanddemanddoesnotbalance,demandandsupplyarerecalculatedatahigher/loweroilpriceuntilmarketbalanceisestablished.Correspondingmechanismsarearguablyimposedforcoalandnaturalgasprices,butlessdetailleavestheimpressionthattheapproachissomewhatsimplifiedcomparedtotheiterativeprocesforthecrudeoilprice.

CO2pricesarereflectedinIEA’sWEMthroughadetailedsetofexogenousassumptionstocapturecostsofemissionsinhouseholdsandindustriesimposedthroughenergyandclimatepoliciesineachcountryandregionofthemodel.Thisapproachtakesaccountofcurrentpoliciesandcommunicatedplanstomakepolluterspay.However,anyspecificquotaregime,withourwithouttrade,isnotapartofthemodel.

End‐userpricesarecomputedfossilfuelsineachsectorandregion,reflectingregionalvariationinenergymixantaxpolicies.Correspondingly,end‐userpricesofelectricityarecomputedonthebasisofregionalmarginalcostsofproduction,systemoperation,distribution,localsupply,taxesandsubsidies.

Energyandthemacroeconomy

Theannuallong‐termprojectionsforIEA’sWorldEnergyOutlookarebasedonascenarioapproach.OverthelastyearsthreespecificscenarioshaveformedthecoreofIEA’sanalysisoffutureenergyprospects,withdifferencesdrivenbyassumptionsregardingenergyandclimatepolicies,technologicalchange,energiefficiencyimprovements,andenergyprices.

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TheCurrentPoliciesscenariocanbasicallybereadasaprojectionof‘business‐as‐usual’,whereenergypoliciesoftodayarecontinuedwithoutanyfurthertighteningtoimproveenergyefficiencyand/orinresponsetoglobalwarming.Inthisscenarioprojectedtrendsoftechnologyarelargelyanexptrapolationofhistoricaldevelopments.Consequently,futureenergydemandgrowthturnsoutonthehighside,withlimitedchangesintheenergymix,limitedgrowthinthedevelopmentofrenewableenergy,andcontinuedhighgrowthinglobalemissionsofgreenhousegases.

NewPoliciesispresentedasIEA’scentralscenario,andisbasedonasetofassumptionswherebyenergyandclimatepoliciesevolveaccordingtoannouncefuturemeasures,plansandintentionsindifferentcountriesandregionsacrosstheworld.Thisscenarioaccountfornationalandregionalambitionsforrenewableenergygrowth,substitionoffossilfuelsinthetransportsector,fossilsubsidyreforms,andpricingofCO2emissions,Theresultisamoremoderatregrowthinenergydemandandgreenhousegasemissions,butnotbyfarsufficienttolimitglobalwarmingto2°C.

The450‐scenarioisthereforedesignedtoilustratewhatitwouldtaketocontaintheconcentrationofCO2intheathmosphereto450ppm(partspermillion),whichisthemaximumlevelthatcanbeallowedifglobalwarmingistobelimitedto2°C.Thisscenarioisbasedonasetofaggressiveplansandpoliciestoreduceemissionsofgreenhousegases,withambitionsfortechnologicaldevelopmentandenergyefficiencyimprovemtnetwhichreallyisachallengetothecredibilityandrealismoftheentireexercise.

Figur5.IEA’soutlookforglobalGDPandprimaryenergydemand

Source:IEA(2015a).

Arelevantandreasonableassertionwouldbethatthesubstantialvariationinenergypolicies,technologicaldevelopment,energyefficiencyimprovement,andenergypricesacrossthescenarioswouldhaveimplicationsformacroeconomicdevelopments.

0%

1%

2%

CurrentPolicies

New Policies 450 Scenario

Primary energy demandCAGR (per cent)

2013-2020

2021-2040

2013-2040

0%

2%

4%

6%

CurrentPolicies

New Policies 450 Scenario

World GDPCAGR (per cent)

2013-2020

2021-2040

2013-2040

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Moreover,therearegoodreasonstoarguethatthesignificantvariationbetweenthescenariosinenergyandclimatepoliciesforeachregionandcountryshouldreflectuponthemacroeconomicdevelopmentsinthesameregionsandcountries.

However,thisisnotthecaseinIEA’sWorldEnergyOutlook.AssumptionsforGDPgrowthareexogenoustothemodel,andaretypicallyretrievedfromthemostrecentforecastsfromtheOECD(shorttomediumterm)andtheIMF(longerterm).AweaknessIEA’smethodologyandmodelisthereforethatmacroeconomicdevelopmentsarebynoaccountaresultofthemodelprojections.Whatmakesthisevenworseisthefactthatnovariationisallowedforeconomicgrowthbetweenthethreescenariosoftheoutlook.AnypotentiallybilateralinteractionbetweenenergyandmacroeconomicdevelopmentthereforeremainsablindspotinIEA’sworkonenergyprojections.

Atthesametime,theIEAdoappreciatetheroleofeconomicactivityasanimportantdriverofenergydemand,statingthat«TheprojectionsinthisOutlookare,therefore,highlysensitivetotheunderlyingassumptionsabouttherateandpatternofgrowthingrossdomesticproduct(GDP)».Howeveranysortoffeedbackeffectsfromenergypolicies,technologicalchangeandenergybackoneconomicactivity(growth)istotallyneglected.

Aroleforenergypricesasadeterminantforeconomicactivityandeconomicgrowthisfirmlysupportedbycontemporaryacademicresearchactivity,wheretheroleoftheoilpricehasbeensubjecttoparticularlyclosescrutiny.Forcountriesthatarelargelyimportersandconsumersofoil,Jimenez‐RodriguezandSanchez(2005)andHamilton(2008,2012)arguethatoilpriceshocksisanimportantfactorbehindmacroeconomicrecessions.Recentresearchdoessuggestthattheconnectionbetweenoilpriceshocksandbusinesscycleshasfadedovertime.AliteraturesurveybyKillian(2008)alsoarguesthatthebusinesscycleimpactofanoilpriceshockwilldependonthesourceoftheshock,withdemand‐drivenshocksbeingmoreinfluentialthanshocksdrivenbysupply.Nonetheless,Schwark(2014)studiesthemacroeconomicimpactofoilpriceshocksinaDSGEmodelforoil‐consumingcountries,andfindssignificanteffectsoninvestment,productivityandeconomicgrowthoverahorizonof8‐50years.Theconclusionthereforeisthatthesimultaneityofenergypriceformationandmacroeconomicdevelopmentintherealworldshouldbereflectedinmodellingstrategiesandprojections.

Thelinkbetweenenergypricesandmacroeconomicdevelopmentisevenmoreobviousforcountrieswhoarelargeproducersofenergycommodities.Economicgrowthinresource‐richcountriescannotpossiblybeseenasisolatedfromenergy‐relatedshocksinpolicies,technologyorenergyprices.Foranexampleoftheimpactofoilpriceshocksonasmall,openpetroleumecnomy,seeBjørnlandandThorsrud’s(2016)studyoftheoil‐fireboomintheNorwegianeconomyoverthelast15years.NotealsothatthestudybytheInternationalMonetaryFund(IMF,2015)oftheoutlookforcommodity‐exportingcountriesintheaftermathofthelateplungeinoilprices,withclearindicationsthata

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setbackincommoditypriceswilldampenbothactualandpotentialGDPinthesecountries.Theimplicationisthatpermanentenergy‐relatedshockswillhavelong‐termconsequencesforeconomicactivityincountriesthatarerichinenergy‐relatedcommodities.

Turningnowtolonger‐termgrowthinpotentialGDP,awell‐establihedperceptionisthatglobaleconomicgrowthfromtheindustrialrevolutionandonwardshasbeensupportedbyaccesstocheapenergy.(e.g.,Stern,2011;SternogKander,2012).Still,theempirialresearchliteratureisstillshortonstudiesofthelong‐termimplicationsofshocksandfluctuationsinenergy‐relatedvariables,includingenergyprices.OneexceptionisBerkandYetkiner(2014),whoapplycointegrationtechniquesforgrowthregressionsonapaneldatasetfor15OECDcountriesovertheperiod1997‐2011,concludingthatanincreaseinenergypriceswilldampenthegrowthratesofproductionandconsumptionalsointhelongerterm.Inarelatedstudy,SternandEnflo(2013)establishGrangercausalitybetweenenergyconsumptionandeconomicactivitybasedon150yearsoftimeseriesdatafortheSwedisheconomy.11

ThedifferencesbetweenscenariosofIEA’sWorldEnergyOutlookarelargelydrivenbyvariationinenergyprices,energyandclimatepolicies.Thisshouldattracttheinterestofanypossibleinfluencefromthisgroupofvariablesonoverallmacroeconomicdevelopment.However,theIEAmethodologyimpliesthateconomicgrowthisinsensitivetoanyvariationinenergy‐relatedvariables.Moreseriously,thisalsomeansthattheIEAoffersanopportunityforindustryleadersandpoliticianstoarguethatenergyandclimatepolicieswillhavenoconsequenceforeconomicactivityoremployment.Conclusionslikethisaregenerallyembracedbypoliticianswhowouldhatetodissapointtheirelectorate(sjåtd.Stern,2007;Tol,2009;NewClimateEconomy,2015).However,thisisnoguaranteeforthevalidityoftheseresults.

Theriskisthatdemandamongindustryleadersandpoliticansmaygiverisetoabiasinanalyses,messaging,andpolicydesignintheenergyandclimatedomain.Itthereforebecomesespeciallyimportanttoremindthatrecentresearchleavesafarmorediversifiedimpression(e.g.,Bretschgeretal.,2011;MohammadiandParvaresh,2014;Hartleyetal.,2016;).Anincreasinglycommonperspectiveistoviewclimatepolicyeffortsasalong‐terminvestment,withlong‐termreturnscomparedtosomereferencescenario,butonlyin30‐100yearstime.Duringtheinterimperiod,policieswillhavetoprovideforhighercostofenergyandreducedenergyconsumption.Inotherwords,whatsuchadevelopmentwouldrequireisanupheavalofthecurrentenergysystem,includingacrowd‐outoffossilfuelsatthebenefitofrenewableenergysolutions.Thistransitionislikelytohaveadampeningeffectonproductionandconsumptionthroughouttherelativelylengthyinvestmentperiod(Hartleymfl.,2016),whichonlypartlycanbeoffsetbyhigherinvestmentinnewtechnology,improvedenergyefficiencyandthedevelopmentofnewrenewableenergysolutions.

                                                            11OtherstudieswithsimilarresultsincludeStern(2000),Ayresetal(2013)andThompson(2014).

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ThisdiscussionleadsinevitablytotheconclusionthattheIEAshouldallowforvariationineconomicgrowthbetweenthethreescenariosoftheWorldEnergyOutlook(IEA,2015).EndogenisationofeconomicactivitycouldthenimplythattheCurrentPoliciesscenariowouldbeassociatedwithhighereconomicgrowthoverthefirst10‐30years,whichwouldthenfallsignificantlybeyondthishorizonduetolong‐termcostsofglobalwarming.Correspondingly,onecouldreadilyimaginethatthe450scenariowouldbecharacterisedbysomewhatlowereconomicgrowthoverthefirst10‐30years,withreturnsintermsofapositivegrowthdifferentialtotheothertwoscenarios,asinvestmentsinclimatepoliciesstarttopayoff.UnlessthemethodologyandmodelsoftheIEAopenforthiskindofmindset,itishardtoseethattheirresearchandoutlookcanfullyinformtheinteractionbetweeneconomicactivity,energy,andclimatepolicies.

Developmentofenergytechnology

Energysaving,energyefficiencyimprovement,andnewenergysolutionsarecriticalfactorstosuccedeinbringingdowntheglobalgreenhousegasemissionsanddampentheprocessofglobalwarming.Relevantmeasurestochangecorporateandhouseholdbehaviourincludequantitativepoliticalregulation(e.g.,standardsandrequirements)andmanipulationofpricesandcosts.TheveryhighambitionsofclimatepoliciesagreeduponinParislastyearwillremainfarbeyonreachwithoutdevelopmentofnewcompetenceandwidespreadimplementationofnewenergytechnology.Adoptionofnewtechnologyleavesapotentialforsignificantreductioninenergyconsumptionbyallsectorsintheeconomy.Moreover,applicationofnewtechnologieswillpotentiallysupportthecontinueddevelopmentofnewenergysolutions.Finally,thecost‐savingimpliedbytechnologicalprogressmayreleaseresourcesforadditionalinvestmentinmeasurestoreducegreenhousegasemissions.

ThepotentialofnewtechnologytobringaboutthedesiredchangeintheglobalenergysystemisheavilystressedbyIEA(2015a,c,d),whoalsounderlinesthattheproectionsoftheWorldEnergyOutlookaresensitivetothechoiceoftechnologyassumptions,andhowtheseassumptionswillinfluenceonenergyefficiency.Inlinewithstandardpracticeofeconomicmodelling,technologicalchangeisapproachedthroughagradualandcontinuousprocessinIEA’sanalyses,withexogenousincrementsimposedforeachsectorandregionofthemodel.Anytechnologyshockorsuddenbreak‐throughisthereforeruledoutofIEA’sscenarioapprach.

Still,implicationsofvariationintechnologyassumptionsbetweenIEA’sscenariosarestillvisibleattheaggregatelevel.Asanexample,IEA(2015a)informthattheglobalenergyintensityisforeseentofallby45percentovertheperiod2014‐2040intheCurrentPoliciesscenario,byapproximately50percentintheNewPoliciesscenario,andbysome55percentinthe450scenario.

MorespecificexamplesareofferedinFigure6,withillustrationsofcumulatedchangesinunitcostfordifferenttechnologiesovertheperiod2014‐2040intheNewPolicies

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scenario(IEA,2014a).WeseefromFigure6thatthecentralNewPoliciesscenarioimpliescontinuedconsiderablereductioninthecostsofrenewableenergy,andinparticularforsolarenergy.Windpowerisofferedasomewhatmoremodestpotentialintermsofcostimprovement,becausethesetechnologiesaremoremature,andbecausewindpowerismorelikelytomeetchallengesrelatingtolandaccessanddecliningresourcequality.

Figure6.UnitcostdevelopmentfordifferenttechnologiesPercentagechangeovertheperiod2014‐2040(NewPoliciesScenari 

Source:IEA(2015a).

Abreak‐throughforcarboncaptureandstorage(CCS)iscriticalforIEA’s450‐scenario,andtheembeddedambitionsareindeedhigh.IftheworldfailsindevelopingtechnologiestosinkCO2,anambitiontolimitwarmingto2°CwilllimittheroomleftforoilandnaturalgasinthefutureenergymixsignificantlymorethanimpliedbytheIEA’s450scenario.Thisalsomeanthatthespeedoftherequiredfossilfuelphase‐outwilldependonthethedevelopmentofcarbonsinktechnologies.ThisisanimportantexplanationfortheinterestinCCSfromindustrialised(oil‐consuming)nationsandfromtheoilandgasindustry,bothofwhichareamongthemostimportantstakeholdergroupsfortheIEA.

By2040,IEA’s450scenariowillrequireacapacityforannualcaptureandstorageof5.1billiontonnesofCO2,3billiontonnesofwhichareforeseeninthepowergenerationsector,andtherestinmanufacturingindustries.Projectsthataredevelopedsofartypicallyhaveanannualcapacityof1milliontonnes,andaninvestmentrequirementof1‐3billiondollars.12TomeettheambitionsofIEA’s450scenario,onewouldtherefore

                                                            12 Notethatcostsaresignificantlylowerfornew‐buildsthanforprojectsimplyingretro‐fittingofCCStechnologyonproducingplants.ThereisnochancethattheCCSambitionsofIEA’s450scenariocanbemetbynew‐buildsonly,andtherelevanceofsuchcostestimatesisthereforelimited.

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havetodevelopsome5,000CCSprojects.Withadecentstartby2020,thiswouldimplytheopeningoffivenewCCSprojectseveryweekover20years.AsseenfromFigure6,theIEAassumesthatdynamicscaleeconomiesandlearning‐by‐doingwillreducethecostsofCCSintheNewPoliciesscenariobyapproximately40percentovertheperiod.13Acorrespondingestimateforthe450scenarioisnotavailable,butthelogicofthescenarioapproachwouldsuggestanevenlargerpotentialforcostreductionthanintheNewPoliciesscenario.

EvenwithveryoptimistictechnologyassumptionsforCCS,annualinvestmentsofmorethanUSD110bnarerequiredeveryyearthroughthe2030stomeettheambitionsofIEA’s450scenario.Fortheseinvestmenttoprovidereasonablereturns,IEA’sassumptionspointtowardsasharpincreaseinunitcostsofCO2emissionstowards2040,to140USD/tonneintheOECDareaand125USD/tonneoutsidetheOECD.Forcomparison,thecurrentETSpriceis9USD/tonne,andCCSinvestmentiscurrentlythereforeoflimitedinterestamongprivateinvestorsandcompanies(EmhjellenandOsmundsen,2015).ForCCStechnologies,assumptionsandambitionsoftheIEAseemtobestretchedbeyondrealism.Their450scenariorequiresatechnologyoptimismthatsofarispoorlysupportedbyboththeoryandempiricalresearch.14

Importantaspectsofcontemporaryenergyandclimatepoliciesaimatareductioninfossilfuelconsumption.Thesepolicieswillhavetoincludethetransportsector,whereoilsofarvirtuallyhasenjoyedafuelmonopoly.Eventhoughshalegasandprogressforfuelcelltechnologyopenapotentialfornaturalgasandhydrogenastransportfuels,electricalvehicles(EV)seemtobeattractingmostoftheinterestfrompoliticiansandtheautomobileindustrythesedays.Electricalvehiclesstillfacechallengesandrestrictionsintermsofpowerstorage,drivinglength,chargingtime,andinfrastructur,continuedprogressforbatterytechnologyiskeytoabreak‐throughofEVsinthetransportsector.

IEA’sNewPoliciesscenarioisbasedonareductioninEVbatterytechnologyof10‐35percentby2040.Beyoundrathergeneralstatementsaroundrelativeprices,politicalmeasuresandacceleratedratesofinnovation,thereislimitedinformationonthe

                                                            13SeeAl‐JuaiedandWhitmore(2009)andLohwasserogMadlener(2012)fordeeperanalysesofthecost,technology,anddevelopmentpotentialforCCS.1413largeCCSprojectsarecurrentlyoperatingaroundtheworld(IEA,2015c),andtheycaptureatotalof27milliontonnesofCO2everyyear.However,only5.6milliontonnesaresubjecttoformalsurveillanceandverification.Projectsthathavebeendevelopedsofararerelativelysimple(‘low‐hangingfruits’),astheyaretypicallyfittedtonewindustrialprojectsintheoilrefineryandgasprocessingbusiness.Notealsothatthedevelopmentcostissignificantlylowerfornew‐buildsthanifCCStechnologyisretro‐fittedonalreadyproducingplants.Asanexample,capitalexpenditureestimatesfortheNorwegianMongstadprojectwereapproachingUSD4bnatthetimethattheprojectwasstopped,foraprojectwithaannualcapacityof1‐1.5milliontonnesCO2.WhatwasleftwasatestpilotfacilityatacostofUSD800M.Similarfull‐scaleCCSfacilitieshavebeenbuiltelsewhereintheworldforUSD1bnpermilliontonneofannualcapturingcapacity(e.g.,theBoundaryDamandQuestprojectsinCanada,seeGlobalCCSInstitute,2015).IftheCCSambitionsofIEA’s450scenarioaretobemet,thereisnoescapefromwide‐spreadandlarge‐scaleretro‐fittingofCCStechnologyinpowerplantsandindustrialfacilitiesduringoperation.

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specificdriversofsuchadevelopment,howtheimpliedcostreductionwillplayout,andhowthistechnologywillspreadacrosssectorsandregions.

Improvedenergyefficiencyisundoubtedlyanimportantareaofanypolicyplantocontainenergydemand,andthisisalsoreflectedinIEA’sWorldEnergyOutlook.Asanexample,Figure6illustratesapotentialforanother50percentreductionintheglobalcostoflighting.ContinuedinnovationinLEDtechnologyisforeseentosupportfurtherpenetrationbothinestablishedandnewmarkets.However,lightingdoesstillnotrepresentmorethan20‐25percentofglobalelectricitydemand.AnIEA(2015c)analysistargeteddirectlyatthedelegatesatlastyear’sclimatesummitinParis(COP21)concludesthathalfthereductioninenergy‐relatedCO2emissionswillhavetocomefromeffortstoimproveenergyefficiencyifa2‐degreetargetistobemet.15Consequently,progressontechnologyandcostisrequiredwaybeyondlighting.Thequestionthenarisesifothersectorsandappliancesexistwithanenergyimprovementpotentialaslargeasforthelightingsector.

IEA’sanalysesanddiscussionsofenergyefficiencyimprovementsalsoseemtodownplaytheroleofbehaviouralresponseinhouseholdsandcompanies.Economistswillknowthatainput‐specifictechnologyshockisequivalenttoareductioninthepriceofthesameinput(e.g.,Allenetal.,2011;Sorrell,2011;Saunders,2014).Theimplicationisthatainput‐specifictechnologyshockwillinvolveasubstitutionofdemandinfavourofthemoreefficientinput,andanincomeeffectthatwillliftboththeoutputlevelanddemandforallinputs.Theimplicationthatimprovementsinenergyefficiencyareoffsetthroughbehaviouradjustment.Thisiswhatisreferredtoasthereboundeffect.

Consequently,empiricalevaluationsshowthatpoliciestoimproveenergyefficiencyregularlyfallshortoforiginalpromises(e.g.,ChitnisogSorrell,2015).HowbehaviouralresponsestoenergyefficiencypoliciesisapproachedbytheIEAremainsunclear.ThediscussionsofpoliciestoimproveenergyandreduceemissionsofgreenhousegasesbyIEA(2014a,b,c)leavefewtracesofpotentialreboundeffects.16ThissupportsageneralsuspicionthatIEA’smethodologyandmodellingstrategyputstoolittleemphasisontheflexibilityineconomicbehaviour.

Finally,Figure6illustratesawidelydisperseddevelopmentinunitcostsofupstreamoilandgasactivities.Theconstantracebetweentechnologyandscarcity/declineisfundamentaltothecostofoilandgasextraction(Lindholt,2013).Casualinspectionofunconventionalresourcesinjuvenileprovincesclearlyindicatethatunitcostintheearlyphaseofdevelopmentwillbenefitfromtheaccumulationofgeneralcompetenceandindustry‐specificlearning‐by‐doinginexplorationandfielddevelopmentactivities.Asanoilandgasprovincematures,thepotentialoflearning‐by‐doingandtechnological

                                                            15ThisreferencegoestoIEA’s(2015)specificrecommendationonhowtomovetheworldfromathepathofdevelopmentimpliedbytheINDCsagreeduponinParislastyear(COP21;INDCscenario)andontoadevelopmentpathwhichisconsistentwithtargettolimitglobalwarmingto2C(Bridgescenario).16Theexogeneityofeconomicandgrowthwillalsolimitthetheappreciationoffeedbackeffectsonenergydemandviaaggregateeconomicactivity.

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progresswillgraduallybeexhausted,whereasmechanismsrelatedtoscarcityanddepletionexertagradualyincreasingupwardpushonunitcost.

Forthevarietyofresourcesandprovincesintheworld,expectedcostsofexplorationandproductionwillthereforespanabroadspectrum,includingtechnologiesofunconventionalresourceslikeshalegas,shaleoil,andoilsands.Nonetheless,itisworthnotingthattheIEAexpectaveragecostofoilandgasextractiontoincreaseofthecoming25years,whereascostsofnewrenewabletechnologiesareexpectedtofall.Thiswillsupportatransitionwherebyrenewableenergywillgainmarketsharesattheexpenseoffossilfuels.

TechnologicalchangeinIEA’sscenariosistheresultofadetailedsetofexogenousassumptionsforregionalandindustry‐specificinnovationrates,andisthereforenotaresultofthemodel.Theestablishmentofthesetechnologycoefficientsisbasedonprofessionaljudgment,allowingforinfluencesontechnologicalchangefrombothpoliciesandprices.Thismethodlacksrobustsupportfromeconomictheoryandthemodeldocumentation(IEA,2015b)isalsoratherweakfortheprocessofinnovationandtechnologicalprogress.

Inpractice,technologicaldevelopmentwillbeaproductofasetofexplanatoryvariablesinclucing,prices,policies,economicactivity,(R&D)investment,andresearch.Ideallyspeaking,technologicalprogressshouldthereforebeendogenizedinmodelsenergy,economics,andclimatechange.Gillinghametal(2011)forasurveyofrecentliteratureonendogenoustechnologicalchangeinstudiesofclimatepolicies.AmoreexplicitrepresentationoftheprocessoftechnologicaldevelopmentwouldsupportthecredibilitytheIEA’smethodologyandmodellingapproach.

IEA(2015a,b)alsoraisesuspicionsthatsubstitutionpossibilitiesareunder‐ratedbothforhouseholdsandcompanies.Moreover,theexactvariationintechnologicalprogressbetweenIEA’sthreescenariosisnotspecified,andtheexactdriversofthisvariationalsoremainunexplained.Asanexample,relativeenergypricesplayaroleforenergy‐specificR&Dinvestments(e.g.,Leyetal.,2016).Consequently,moreweightshouldbeputonmotivationandexplanationofhowvariationinenergypricesbetweenthethreescenariosinfluenceonthetechnologyprocess.AlthughIEA’sWorldEconomicOutlookleavestheimpressionofgreatdetailandandcare,theimportanceoftechnologicalprogresswouldsuggestanevenmoreconsideratemodellingstrategy.

Newrenewableenergy

Thefacilitationoffurthercapacityexpansioninrenewableenergyisoneofthemostimportantareasincontemporaryenergyandclimatepolicies.Anenergymixwithlessfossilfuelsandmorerenewableenergywillmakeiteasiertocombineambitionstostemglobalwarmingwithgeneralwelfareaspirations.Consequently,relevantR&Dactivitites,innovation,andcommercialisationofrenewabletechnologiesisanareaofstrong

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interest,amongpolticians,industryleaders,andNGOs.Renewableenergyincludestraditionalbiofuelsandconventionalhydropowerforelectricityproduction.Howeverthemajorityofattentionoverrecentyearshasbeendirectedatsolarenergyandwindpower.Thebackgroundisobviouslyanenormoustechnicalpotential,promisingimprovementsintechnologyandcost,andwidespreadgovernmentsupport(Timilsinamfl,2012,Timilsinamfl,2013).

Figure7.Globalprimaryenergydemandbyenergycarrierandscenario2000‐2040,bntoeoilequivalents

Source:IEA(2015a).

Despitetheexpansionofgeneralinterestandstronggrowthoverthelast10‐15years,newrenewableenergysourcesstillplayamodestroleintheprimaryenergymix.Figure7providesabreakdownofglobalprimaryenergymixin2013,withashareofrenewablesofapproximately14percent.With10percentfortraditionalbiofuels,and2.5percentforthesumofhydropower,thermal,andsolarthermalenergy,modernrenewableenergymakesuplessthan1.5percentoftotalprimaryenergydemand.Modernrenewablesislargelymadeupbyphotovoltaicsolarenergy(PV)andwindpower,butalsoincludesconcentratedheatplants(CHP)andmodernthermalenergy.

Withcompoundannualgrowthof8percentsincetheturnofthecentury,newrenewableshaveincrasedtheirshareoftotalprimaryenergydemandby1percentagepointin13years.Withasharaccelerationofcapacityexpansionoverrecentyears,thequestionishowtoapproachtheoutlookforthesenewandinterestingsourcesofenergysupply.Beforewediscussthisquestion,letushaveacloserlookatthemodellingapproachfornewrenewableenergyinIEA’sWorldEnergyModel.

AccordingtoIEA(2015b),aseparateblockhasbeendevelopedtoaccountforcapacityadditionsandproductionofpowerheatfromrenewableenergysourcesintheWorld

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EnergyModel.ThismodelblockcombineshistoricaldatawithmethodologyfrombothengineeringandeconomicstoadaptprojectionsforsolarenergyandwindpowertothescenariosoftheWorldEnergyOutlook.Investmentinvarioustypesofpowerproductionaredrivenbyestimatedcapacityrequirementsbasdedoncalibratedstaticcostfunctionsfordifferenttechnologies,whichalsoaccountforregionalandsectoralvariationintaxesandduties,subsidies,technicaland/orgeographicconstraints.Thestaticcostfunctionsarethenaugmentedwithanadhocdynamicelementtoaccountfortechnologicalprogressanddynamicscaleeconomies,orlearning‐by‐doingmechanisms.Thesedynamicsareconstrainedtodiminishovertime,inlinewithastandardS‐patternformodelsofthemarketpeneterationfornewproductsandservices.

Thespecificapproachtothiscalibrationisnotdocumentedanyfurther,andtherelevantrelationsandparametersarealsonotavailabletothepublic.Again,itisthereforedifficulttogiveafullevaluationofthemodellingapproach.However,aswewillsee,thepublishedprojectionsdosuggestthattheIEA’smodellingapproachmostprobablycouldimproveonreviewandrevision.Thereasonissimplythatsofar,IEA’sprojectionsfornewrenewableenergyhavebeenoutpacedbyreal‐worlddevelopments.

Figure8.IEA’soutlookforsolarenergyandwindpowerovertimeAccumulatedinstalledcapacity(GW),NewPoliciesscenario

Source:deVosogdeJager(2014).

IEA’s(2015)centralNewPoliciesscenarioimpliesannualaveragecapacityadditionsof7percentforrenewableenergysourcesapartfromhydropowerandbioenergy.Thisisroughlyinlinewithannualgrowthsincetheturnofthecentury,bothslowerthanthegrowthobservedoverrecentyears.Ingeneral,IEA’sprojectionsfornewrenewableenergyhavebeenconsistentlyoutpacedbyactualdevelopmentsoverthelast10‐15

Solarenergy Windpower

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years(cfFigure8).AstabilizationofinvestmentrateshasbeenakeyfeatureofIEA’sprojections,whereasobservedinvestmentrateshavecontinuedtoclimb.Thedynamicsofsolarenergyandwindpowerhaveclearlybeenunder‐estimated,atleastintheshorttomediumterm.Thishasobviouslytriggeredcriticalremarks,fromthepress,fromrenewablemarketanalysts,environmentandclimateNGOs,andfrominterestsoftherenewableindustryitself(e.g.,Cloete,2014;deVosogdeJager,2014;Osmundsen,2014;Roberts,2015).

AmoredetailedevaluationIEAsprojectionsforrenewableenergyinelectricitygenerationisprovidedbyMetayeretal(2015),whohavetracedrelevantdevelopmentsinannualvolumesofIEA’sWorldEnergyOutlookovertheperiod1994‐2014.Theirconclusionisalsothatprojectionsforsolarenergyandwindpowerhavebeensignificantlyunder‐estimated.ThisprovidessufficientevidencetoconcludethattheIEAindeedhasbeentooconservativeonbehalfofnewrenewableenergyexpansion.However,theshortfallremainstobeexplained.Metayeretal(2015)arguethatthechoiceoffunctionalforminIEA’sWorldEnergyModelputsalinearisedstraitjacketonthedevelopmentofrenewablesforelectricityproduction,whichissimplyimpossibletoalignwithreal‐worlddevelopmentsofsolarenergyandwindpoweroverthelastyears.Thefunctionalformitselfishardlythemainprobleminthisrespect,andtheissueismorelikelytobeaboutbiasesrelatingtoparameterisation,restrictions,and(cost)assumptions.

Otherexplanationsareflavouredbypolitics,andsomestudiesarguethattheIEAsimplyreflecttheinterestsoftheir29industrialisedmembercountries,andalsothetheinterestsoftheoilandgasindustryofthesecountries(e.g.,Roberts,2015).Thearguementimpliesthatastatus‐quobiasinthepreferencesofkeyIEAstakeholderscouldimplyacorrespondingbiasinanalysesandprojections.Ifthiswasthecase,oneshouldprobablyexpectashortfallinattentionandeffortfromtheIEAonissuesrelatingtorenewableenergy,inanalyses,communication,andadvisoryactivity.However,theoppositeisprobablymoretrue,asIEAcontinuouslydemonstratesheavyemphasisonrenewablesintheistakeholderoutreach.Activitiesincludetechnologystudies,specialreportsandpermanentworkinggroups.TheimpressionisthattheIEAtakeseveryopportunitytostresstheimportanceofrenewablesgrowthinfacilitatingamoresustainableenergymix.

Amoreplausibleexplanationarisefromthecombinationofinstitutionalconservatism,vintageeffectsincapitalformation,andsubstantialadjustmentcosts.Theresultisasluggishadaptationoftheglobalenergymix,whichalsoagreeswellwithhistoricaldevelopments.Atthesametime,animportantrolefortheIEAistoilluminateandexplainpotentialchangesintheglobalenergysituation–overthelongterm.Thisprioritymightbedifficulttounitewiththeconcernfordetailedinformationoneverysectorandcountry,andinparticularformoreperipheralaspectsofthegeneralenergypicture.Evenafterseveralyearsofdouble‐digitgrowthforsolarenergyandwindpower

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capacity,thecontributionfromthesesourcestoglobalpowergenerationremainswellbelow5percent.

Oneshouldalsobearinmindthattheevaluationofmodellingandanalysesatthislevelofcomplexitymostoftenwillgiveamixedresult.Thedegreeofsucesswillvarybyindustry,energysector,andbyregion.InsomeareasIEA’soutlookperformsprettywell,whereasotherareasarelesssuccessful.Attheendoftheday,IEA’sWorldEconomicOutlookisnotaforecast,butascenarioexercise.Inthiscontext,itisinterestingtonotethatIEA’sCurrentPoliciesscenariohasprovidedthemostaccurateprojectionofaggregatedevelopmentsinenergydemandandGHGemissions,whereasexpostdevelopmentsfornewrenewableshavebeenmoreinlinewiththe450scenario.ThegeneraltendencyforthecentralNewPoliciesscenarioisanover‐estimationoftheroleforoilandgas,andanunder‐estimationofthegrowthofnewrenewables–andcoal(Cloete,2015).

Finally,itisnotstraightforwardtoraiseobjectionstothetheoreticalbasisforIEA’smodellingofnewrenewables.AnS‐shapedpenerationofnewrenewableenergyisareasonableapproximationofaprocesswhichhasbeenobservedforarangeofproductandservicemarkets.Increasingmarginalcostsofnewrenewablesineachsectorandregionwillalsoimplythatthemarginalvalueofcapacityadditionswilldecreaseinthemarketshare.Consequently,theissueofdecelerationfornewrenewablesinpowergenerationthereforeboilsdowntoaquestionoftiming.Withwell‐suppliedelectricitymarketsinWesternEurope,lowoilandgasprices,andemptygovernmentcoffins,theIEAmightberightrenewablesstagnationbeforeweknow.

Concludingremarks

Overthelast15years,competentleadership,highambitions,andfruitfulpromotionhasgraduallyliftedthestatusofIEA’sannualflagshippublicationWorldEnergyOutlooktoaleadingreferenceforgovernments,politicians,non‐governmentorganisations,businessandindustry.TodaynoglobaldebateonenergyandclimatpoliciescanescapethepremisesimpliedbytheIEA’sanalyses.ThisdevelopmentmakesitmoreimportantthanevertolooktheIEAinthecards,shedlightonboththestrengthandweaknessesoftheiranalyticalapproach,andmakesurethatenergyandclimatesbuildontransparentanalysesandthelatestinsightsfromacademicresearch.

QuestionscanberaisedonseveralareasoftheIEAs’methodologyandmodellingstrategy.Energypricesandeconomicactivityareexogenoustothemodel,andsoisalongseriesofvariablesforenergytechnologyandpolicydevelopment.Themodellingapproachisthereforenotparticularlywellsuitedforcharacterisationofmarketequilibria,andalsoleavestheimpressionthattechnologicalflexibilityhasnothadtheattetionitdeservesintheunderstandingoflong‐termdemandandsupply.

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ItisalsohardtoarguethattheIEA’sWorldEnergyModelmeetstherequirementsofamacroeconometricmodel.Tomanyvariablesareexogenousandtomanycoefficientsarecalibratedbasedonprofessionaljudgment.Econometricequationsarealsoshortondocumentation,andtheIEA(2015b)includesinformationoncoefficientestimatesormodeldiagnostics.Consequently,evaluationisvirtuallyimpossibleforthisimportantaspectofthemodel.Atthesametime,thewiderangeofmodelrestrictions,exogenousassumptions,fixedcoefficients,andconstanttrendsraiseasuspicionthatanyfuturedevelopmentcanbesupportedbyasuitablechoiceofinputvariables.

Empiricalmodelsofenergyeconomicsandclimatechangeshouldopenfortheendogenisationofeconomicactivity.FortheIEA’sWorldEnergyOutlook,thiscouldallowvariationinenergypricesandpoliciestoimplycorrespondingvariationineconomicgrowthbetweenthedifferentscenarios.Moreover,uncertaintycouldbespannedbyavarietyofsector‐specifictechnologyshocks,oreventhroughstochasticmodellingoftechnologicalprogressbothfortraditionalandunconventionalenergycarriers.Thecostofsuchadevelopmentwouldpossiblybealossofdetailandgranularity,whichiskeytothecurrentversionofthemodel.However,thenetbenefitwouldmostprobablystillbepositive.

ThisreviewhasillustratedthatthetaskfacedbytheIEAinmodellinglong‐termenergymarketdevelopmentsisbothimportantandverycomplex.Analysesandprojectionsofenergyandclimatedevelopmentswillhavetodrawoninsightsfromgeology,technology,andeconomics–andarealsoapoliticalminefield.Anyconclusionsandoutlookwillthereforeraisediscussion,amongacademic,industryleaders,politicians,andinthepublic.TheIEA’sWorldEnergyOutlookshouldthereforeberegardedasavoiceinthisdebate,ratherthanbibleinitsownrespect.Consequently,allpartiesrelatingtothistypeofinformationareadvisedtotakeboththeIEA’sanalysesandcompetingviewsontheenergyworldwithasuitablegrainofsalt.

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