The fan diagrams that emerge in the Figures from successive revisions in forecasts is a well known image in energy economics. It became familiar through revisions to projections for oil prices from the 1970s through the 1990s, as well as through revisions to forecast electricity and overall energy demand growth in the late 1960s through the 1970s. These projections often seemed to extrapolate historic rates of demand growth out into the future, thus failing to anticipate the dampening effect that higher energy prices would have on demand for energy.

Beginning in the early 1970s, the rate of growth for electricity demand deviated from historic trends. Indeed, the error in demand projections led to an overcommitment to capacity additions with vintages of technology — both nuclear and fossil — from earlier decades that has important lingering implications for the electricity industry today.

The fan diagram appears prominently in projections of generation for two out of five of the renewable technologies we surveyed. Early projections for solar photovoltaics and solar thermal proved to be too high, and they were reduced over time by dramatic margins. It is clear that these renewable technologies failed to meet expectations with respect to market penetration.

A modest fan diagram appears in two other cases: projections of generation from the 1970s were too high by significant amounts for wind, and early projections for geothermal proved to be too high by modest amounts. In both cases the technologies have come close to meeting revised projections from the 1980s and 1990s.

The exception to this pattern is biomass applications, for which market penetration has exceeded previous projections.

However, a different picture emerges in the assessment of projections for the cost of renewable technologies. In every case, successive generations of cost projections have either agreed with previous projections, or have declined relative to them. More important, in virtually every case the path of actual cost has equaled or been below the projections for that period in time.³⁹

The story is reversed in our evaluation of projections of conventional technologies. Expectations generally were accurate with respect to generation from conventional technologies, and the cost projections for conventional generation were unambiguously overestimated. Hence, in the case of conventional technologies, forecasts of generation are accurate while successive revisions of cost create the familiar fan diagram. The appearance of the fan diagram in the projections of the cost of conventional generation has three implications worth noting.

First, projections of generation and cost, considered in tandem, are not necessarily more accurate for conventional generation than for renewable generation. Since quantity and price are related, it is not clear that the projections of sales for conventional generation are as accurate as indicated in Figure 11. Either the sales projections are built on an assumption of extremely price-inelastic (i.e., not sensitive to incremental changes in price) demand curves, or highly income-elastic (i.e., sensitive to incremental changes in income) demand curves, or both, or else there is an element of luck in their success. Had the projections with respect to price been accurate, sales would likely have been less than were actually achieved, according to most estimates of elasticity of demand. Were the errors in forecasting retail prices taken into account, a fan diagram conceivably would appear in the demand projections. That is, if forecast prices had turned out to be accurate, forecasts of electricity demand would have been too high compared with actual demand, continuing the trend from the 1970s.

Second, the rate of technological change might be expected to be far greater for an emerging technology than for mature technology. However, it is important to realize that such change continues for mature technologies. Technological progress has contributed to the decline in price experienced by all forms of generation.⁴⁰ Table 3 reports a 44-percent decrease in the cost of generation between 1983 and 1995. Changing fuel prices are the dominant factor in explaining this decline but not the only factor. In a recent econometric study, Carlson et al. find significant technological improvement and reductions in the cost of production (holding input prices fixed) at coal-fired power plants between 1985 and 1994.⁴¹ Indeed, the rate of improvement in relatively mature conventional technologies may accelerate in the increasingly competitive environment of wholesale and retail competition in the electricity industry that was launched by another public policy initiative — the 1992 Energy Policy Act.

Third, the advantageous changes in conventional generation created a difficult obstacle for renewable technologies. The declining price of conventional generation constituted a moving baseline against which renewable technologies had to compete. Energy policy initiatives including PURPA and the deregulation of natural gas, oil pipelines, and rail industries complemented technological and economic trends that directly affected conventional technologies. Collectively these regulatory, technological, and market structure changes served to reduce generation costs for conventional technologies.⁴² To a significant degree, renewable technologies were an innocent victim of these other successes.

Table of Contents Previous section Next section