Renewable energy shocks and business cycle dynamics in Brazil

The transition to renewable energy may affect economy-wide sensitivities to energy supply and demand shocks. We address this issue in a dynamic stochastic general equilibrium model that includes renewable energy production and stochastic economic growth while accounting for measurement errors from regulated energy prices and increased volatility during the pandemic. According to the Bayesian estimation for Brazil, a country where over 80% of the electricity is generated from renewable sources, energy price fluctuations are predominantly driven by supply shocks. However, non-energy shocks account for most output growth variability, with energy shocks contributing only 4.6%. This includes 2% from supply shocks and 1.3% each from residential and industrial demand shocks. Residential demand price elasticities are estimated to be −0.151, −0.378, and −0.479 for 1, 5, and 10 years, respectively. These findings suggest that price policies may have a limited impact on residential energy consumption, particularly in light of climate change and renewable energy supply shocks.