Sunday, September 24, 2023

Use of scenarios in our energy future is a double-edged sword

Back at the beginning of the Industrial Revolution, life was relatively simple. Most people lived a short and frugal life, fully occupied with the tasks of securing food and shelter to support a family. If you survived childhood, you became a farmer or a blacksmith, or a home-maker based largely on your gender and the circumstances under which you were raised. No need for a lot of thinking or planning about future alternatives for most people.

Since then, 200+ years of increasing energy abundance has made human lives remarkably better in most ways, but also more complex, at least in middle- to high-income countries. We live longer and healthier lives, and there are many life choices to be made, so planning for the future can present formidable challenges.

And that’s just for individuals and families. Managers, bureaucrats, and politicians responsible for planning and building businesses, public services, and infrastructure are faced with an incredible number of variables and considerations in making and executing their plans. There are so many choices for how to do things that nobody can possibly determine the best path forward by balancing each critical variable to come to the “right” answer.

A great way to deal with analyzing and planning around complex issues is to consider a variety of scenarios.

What exactly is a scenario? Google Oxford Languages dictionary is not very helpful, defining a scenario as a postulated sequence or development of events. Brummel (2023), in his book about using scenarios as management tools, is much more helpful. He describes scenarios as “stories describing a range of different futures. Typically, each describes a logical path, over time, leading to a distinct future.”

Brummel summarized five key characteristics of scenario analysis:

  1. Scenarios are multiple – they involve more than one description of the future. Each should expose a different logic of how the future could unfold.
  2. Scenarios are qualitative, at least to some extent. They reflect the fact that the world is complex and uncertain, and that there are irreducible uncertainties – ones that cannot be described with mathematical certainty given present knowledge.For example, launching a satellite into orbit requires complicated calculations, but all the math and variables are known, so it can be done precisely, and is not complex. Complex problems cannot be solved by calculation alone – they involve variables such as social, economic, and political factors that cannot be fully quantified, and that interact in poorly understood ways.
  3. Scenarios should be objective, describing what could happen and not what we would like to happen. Scenarios should be plausible, internally consistent descriptions – presenting believable stories of how the future could unfold. They should push the limits of believability to broaden thinking so that we can gain new insights, but not go beyond the limits of believability.
  4. Scenarios should be focused on a specific question around which strategies must be devised. The question can be very large – for example, what range of possible weather conditions can we expect for a certain region over the next 25 years, so that we can plan robust infrastructure? That is pretty reasonable, but if we expand the scope of our scenario-building to address all effects of possible weather conditions on societal factors within that area over the 25-year period, we end up with a jumbled mass of possibilities that do not inform us well on the infrastructure question.
  5. Scenarios are open ended – they are outlines of possible futures. They are therefore not precise, and new ideas can be added, and the logic expanded. Scenario development is a powerful learning tool both for those involved in the building process and those not directly involved.

Scenarios are NOT predictions or forecasts of what is going to happen in the future. They instead allow us to understand what different things might happen in the future under different sets of assumptions and inputs.

How should we use scenarios?

Scenarios can guide us in understanding the future by fleshing out “what if” questions, allowing us to identify and explore the uncertainties that lead to a range of futures. We can improve our strategic decisions by analyzing each plausible scenario to see where it might take us.

A couple of examples:

  • BP produces the BP Energy Outlook each year, employing scenarios to “explore the possible implications of different judgments and assumptions concerning the nature of the energy transition.” The 2022 Outlook presented three plausible futures for global energy production using the Accelerated, Net Zero, and New Momentum scenarios. Each was built using different assumptions about energy policies, societal behaviours, and technological progress. One output from the 2022 report was a visualization for the share for each primary energy source of global energy production in 2050 compared to known shares in 2019 (Figure 1).Use of scenarios in our energy future is a double-edged sword

Figure 1 – The share of various energy sources in global primary energy supply in 2019 versus shares under three scenarios in 2050 (from BP Energy Outlook 2022).

  • Assessments of the size and potential value of a new resource discovery, such as an oil field or a lithium mine, commonly rely on incomplete information. The owners may use scenarios to visualize the range of potential resources and economic value, and thus guide decisions on whether to invest to develop the discovery. Different scenarios may consider ranges of ore grades or oil saturations, total volume of the ore body or the reservoir, likelihood of favourable regulatory rulings to undertake development, potential ranges of development costs, and ranges of prices that the product might attract in the future.

Creating a range of scenarios can allow us to test potential outcomes resulting from a variety of plausible inputs. They may help us test different results arising from structural changes, such as a reversal of regulatory policy around resource development. Just thinking about all the potential important factors encourages sharing insights and building common understandings amongst decision makers.

However, scenarios built on implausible inputs are not useful, and can be very misleading, particularly when people mistake them for actual forecasts. As an example, Roger Pielke Jr. has written extensively on the misuse of highly-implausible IPCC climate scenario RCP 8.5 in climate research (Big News: Climate Scenarios are Getting Back on Track). Because RCP 8.5 was originally chosen as an extreme scenario which has since been dismissed because it is not plausible, models and forecasts built on it are on very shaky foundations.

When are scenarios less useful?

There are a number of normative or visionary scenarios around, which start by dictating the outcome they want to happen, basically the reverse of constructing scenarios from plausible inputs to understand what might happen. Examples of this are the International Energy Agency’s Net Zero by 2050  and the Canada Energy Regulator Canada’s Energy Future 2023: Energy Supply and Demand Projections to 2050, which both set pre-determined outcomes (net-zero greenhouse gas emissions by 2050) and then attempt to explore what changes to energy production need to happen to achieve those outcomes.

One can argue that such exercises are not really scenario-making, because they produce implausible inputs in order to reach the pre-determined end point. As an example, the IEA’s Net Zero report sets out a number of milestones to their target of net zero GHG emissions by 2050 (Figure 2). Few if any of these milestones are plausible – the two for 2021 have failed, while supply chains and technologies generally are not in place to support the future milestones.

Use of scenarios in our energy future is a double-edged sword

Figure 2 – Key milestones required to reach IEA Net Zero’s target of Net-Zero GHG emissions by 2050 (from IEA Net Zero by 2050).

The CER report describes “transformations that will occur in each industry sector” that are similarly implausible, such as direct air capture (DAC) of 46 to 55 megatonnes of carbon dioxide annually in Canada – even though DAC is a highly controversial technology that has not yet been demonstrated to be economically feasible. Massive declines of oil and gas production are also forecast to occur, even though the IEA has recently projected continued demand growth through at least 2028 (Oil 2023: Analysis and forecast to 2028). But when you set a goal that must be reached without knowing that it is even possible, there is no way to ensure that actions will be plausible.

Conclusions

Many problems facing humanity today are complex – they depend upon variables and relationships that we cannot quantify or forecast with confidence.

Properly constructed scenarios are wonderful tools for looking to the future, visualizing different things that might happen built on plausible ranges of input variables. But we have to remember these are merely “what-ifs”, not predictions or forecasts. So if the BP Energy Outlook New Momentum scenario tells us that modern renewables will produce 30% of global primary energy in 2050, we can look at that as a possible outcome but by no means a certainty.

How well our scenario outcomes match what we want to happen – such as reduced GHG emissions by a certain date – can guide us toward what actions we should take to increase our chances to hit our targets. We can re-run our scenarios using these new parameters to see whether we are getting closer to our targets.

However, some players are creating visionary scenarios, where outcomes are pre-determined and variables/actions are manipulated to create those outcomes. A great example is the IEA Net Zero by 2050 report, in which a series of highly implausible milestones has been produced in order to generate a target of energy systems with net-zero GHG emissions. This process can be highly misleading to the uncritical reader, who might believe that the target can be achieved because the report says that there is a pathway defined by the milestones in their visionary scenario. On the other hand, the critical reader quickly realizes that the visionary scenario process suggests the net-zero target will not be reached, because it cannot define a realistic or plausible pathway.

Like many other tools, scenarios can be incredibly valuable, but also very dangerous in the wrong hands.

References

BP Energy Outlook 2022

Brummell, A., 2023. Take Charge of the Future – Using the Power of Scenarios to Drive Strategy and Performance. FriesenPress, Altona, MB

Brad Hayes
Brad Hayes has a PhD in geology from the University of Alberta and is president of Petrel Robertson Consulting Ltd., a geoscience consulting firm addressing technical and strategic issues around oil and gas development, water resource management, helium exploration, geothermal energy, and carbon sequestration. He is an adjunct professor in the University of Alberta Department of Earth and Atmospheric Sciences.

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