Modelling Energy Futures: A CGE framework for investigating investment in renewable energy applied to the EU electricity sector

The paper addresses the issue of introducing renewable electricity production into a CGE framework. This involves introducing an investment function that considers the relationship between two industries that produce the same commodity. This includes the possibility that a small sector (renewable electricity production) may grow more rapidly than would occur under standard model assumptions. Alternative functional forms for the investment functions are proposed. To analyse these functions, the paper uses the PEP-1-t model, with Europe-27 represented as a single region and the rest of the world exogenous. Each function is introduced into the model code, and tested through a simple simulation (subsidising the purchase of capital equipment). Comparing the functional forms, the paper suggests how improvements can be made to the standard model in cases where there is the potential for a transition between technologies (such as from conventionals to renewables in electricity production). The paper contends that the split in investment between two such industries should be dependent on the relative rental rates. Furthermore, it is argued that this relationship is best represented by a sigmoid curve, such as the logistic.