Faulty energy forecasts are costing investors 'hundreds of billions'

By Lucy Dean

September 29 2017
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Since September 2011, “many hundreds of billions” of investors’ dollars have been squandered due to investment decisions led by poor forecasts, an energy expert has said.

Poor investment decisions made in the American oil, gas and coal sectors, the European power utilities sector and by oil-producing countries have seen investors suffer, the founder of Bloomberg New Energy Finance (BNEF), Michael Liebreich said in a September keynote address.

But, these decisions have been informed by forecasts that may not have been up to scratch, he said, arguing that “bad forecasts from authoritative agencies have consequences”.

Noting that forecasts are self-reinforcing, he explained that he chose September 2011 as the measuring stick because it was the date that solar energy company, Solyndra went bankrupt, “losing around $USD500 million of US Department of Energy loans”.

At the time, Solyndra – which claimed to offer a cheaper and more silicon-efficient alternative – failed because, as Mr Liebreich argued, the company had underestimated the growth of renewable energies.

He added that the $500 million in government loans and $1 billion in investor funds was “chump change” compared to the money traditional energy companies have lost due to poor internal and external forecasts.

For example, Goldman Sachs’ buyout of TXU Energy was prompted by a thesis that “coal was a good thing to hang on to” and that gas was only going to grow in price.

However, in the end they “burnt through $48 billion of value”.

From 2015 to 2017, the value of US oil and gas company bankruptcy filings has come to $79 billion of debt. Mr Liebreich said this has occurred because the companies did not foresee the “glut of gas and coal, and the Saudi actions in opening the taps”.

In an accompanying feature, Mr Liebreich wrote: “You have to assume that the executives who lost all this money, and certainly their investors, would rather they had not made such catastrophic calls.

“Trend forecasts and economic forecasts actually matter because if you get it wrong you actually lose a lot of money,” he continued, taking aim at “talking heads” and industry pundits that, while possessing the necessary requirements to expound on the future prices of coal and oil, lack a track-record of accurate predictions.

Mr Liebreich acknowledged that BNEF was not perfect, having underestimated the extent to which wind and solar would reduce energy costs.

What will power the world in 2040?

By 2040, wind and solar will fuel 34 per cent of the world’s electricity, BNEF forecast.

“These technologies are going to decarbonise over a third of the electricity supply, that’s the reality,” he said.

Further, by 2040, 86 per cent of investment dollars will be going to zero-carbon energy options, with $3.3 trillion of that going to wind, $2.8 trillion to solar, $1.4 trillion to nuclear and $1.1 trillion to hydro.

According to Mr Liebreich, the global energy sector is set to experience a series of tipping points that will see the value of coal continue to drop, with the analyst noting that “no one is going to make coal great again in the US”.

He argued that this was because wind and solar is already becoming cheaper than any other new option on the market; “So, any growth in demand or anything you have to retire is likely to be replaced by wind and solar.

“The second tipping point is when wind and solar become cheaper than running existing fossil fuel plants. Suddenly your addressable market is not just incremental demand and replacements, it is actually now everything.”

“That’s why our figures start to diverge from everybody else, because we acknowledge that this is going to happen.”

Mr Liebreich said in the accompanying feature that BNEF’s figures are outside of the ‘Orthodoxy Window’, that is, a window in energy sector discourse that excludes ideas or theories that are not considered reasonable by the general public, and are considered too dangerous for politicians or experts to touch.

“The Orthodoxy Window is maintained by a whole ecosystem of supposed thought-leaders, all trying their hardest to avoid having to think uncomfortable thoughts,” he said, calling for a shift in the “Orthodoxy Window” to better accommodate a more energy-efficient future and avoid “losing billions of dollars” again.

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