We spotted an interesting article by academic Paul Mainwood. It highlights that the International Energy Agency’s (IEA) yearly forecast of the increase in renewable energy as a percentage of global energy has been meaningfully below the actual increase. Every year since its first forecast in 1994!

A lot of people, companies and governments rely on these forecasts to plan for the future and we believe the inaccuracy of these forecasts have held us back. Underestimating the rate of renewable energy adoption, we think, will continue to slow the (inevitable) progress of renewable energy. Note, they have never overestimated the rate of renewable energy adoption!

As investors, it’s our job to make forecasts about the future. We get some right and we get some wrong. Accepting and learning from inevitable failure is vital for success. It is always easy to mock in hindsight when a forecaster is proven wrong. However, this doesn’t mean we shouldn’t call out bad forecasting when we see it. Especially when it really is so bad and so important!

So what makes a bad forecast as opposed to a good effort that’s gone wrong? Below are some examples of behaviours which lead to bad forecasts:

• Using biased data,
• Not controlling for cognitive dissonance (e.g. embedded views),
• Failure to admit process error despite being consistently wrong,
• A failure of the imagination (i.e. a fixed mindset).

It looks to me like the International Energy Agency may be guilty of these behaviours in recent years.

In his article, Mainwood decided (I think brilliantly) to adjust the annual forecast up by the amount of the average annual forecast error (i.e. the percentage the IEA was below the actual one-year forward number). The green line in the chart below is his new adoption curve based on his adjustment.

Source: https://www.quora.com/profile/Paul-Mainwood/Flotsam/A-modest-proposal-to-the-International-Energy-Authority

What can we see? It looks like a classic S-curve growth rate. This makes intuitive sense given the cost curves of wind and solar.

Ultimately this chart is hugely optimistic. But, if Mainwood’s rule of thumb adjustment is even half right, we can all be confident about a greener future.

And we will be doing our best to capture investment value from it.

Since writing, the IEA have made this announcement.

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