Don't Read too Much into the EIA AEO2013 Reference Case
Earlier this week, the U.S. Energy Information Administration released its Annual Energy Outlook 2013 Early Release Overview. The report essentially consists of the reference case that the EIA will use to help determine the impacts future policies and economic factors that are considered likely—or possible—from 2013 through 2040.
Regarding biofuels, the reference case predicts a lower rate of advanced biofuel adoption that suggested in the 2012 reference case. In the report, the EIA said “the AEO2013 projection is less optimistic than AEO2012 about the ability of advanced biofuels to capture a rapidly growing share of the liquid fuels market. As a result, biomass use in AEO2013 totals 4.2 quadrillion Btu in 2035 (compared to 5.4 quadrillion Btu in AEO2012) and 4.9 quadrillion Btu in 2040, up from 2.7 quadrillion Btu in 2011.”
This reduced estimate may seem bad for the industry—but it’s really not.
This is not the EIA’s projection of what the industry will accomplish under real world conditions. This is a reference case. In fact, the EIA warns that “the reference case results should not be viewed in isolation.”
The reference case makes certain assumptions. First, it assumes that current laws and regulations that impact the energy sector will remain unchanged throughout the projection—in this case, through 2040. This is a highly unlikely scenario. I almost guarantee that many of the laws and regulations currently governing the U.S. energy sector will change over the next 27 years—in some cases drastically. Second, the reference case assumes that laws will sunset on the dates currently written in law. However, many energy tax credits and incentives are renewed on a short-term basis. It is highly unlikely that there won’t be incentives to develop renewable energy sources long into the future. Finally, the case study also makes certain assumptions about economic factors and the like. I doubt there is anyone in the world who would tell you that projecting the price of oil and other energy commodities over a nearly three decade time span is an exact science. It’s not, as proven by volatile commodity prices we’ve experienced in recent years.
The purpose of the reference case is to provide a sort of benchmark to see how all these factors could impact the energy sector in the future. In other words, it provides a reference point to help understand the other sets of projections that will be included in the full Annual Energy Overview 2013 when it is released in the spring.
The full release will feature several cases alternative cases. In fact, last year’s full release included 29 alternative cases. According to the EIA, the purpose of the reference case is to provide the basis for examination and discussion of energy production, consumption, technology and market trends, and the direction they may take in the future. The alternative cases explore the important factors of uncertainty for markets, technologies and policies in the U.S. energy economy.
The point is that we shouldn’t read too much into the reference case released this week. The EIA’s true projections for the renewable energy industry won’t be in until this spring.