Renewable Energy Shocks and Business Cycle Dynamics with Application to Brazil

Transition to renewable energy might affect sensitivity to different types of energy supply and demand shocks economy wide. This paper develops a DSGE model that features renewable energy production, stochastic growth, and external habit formation to tackle this issue. The model is estimated by Bayesian techniques for Brazil, a large country highly dependent on renewable sources with an energy matrix that may soon reflect other countries' matrices. We assess historical decompositions of energy supply and demand shocks, address measurement errors due to regulated energy prices, account for the sharp increase in volatility during the pandemic period, compute structural impulse response functions, and calculate price-elasticities of energy demand. Energy supply shocks are the major driving force of energy prices. Output growth variations are mostly explained by non-energy shocks. Nevertheless, energy shocks account for 4.6% of its fluctuations, decomposed in 2% to energy-price (supply) shocks and 1.3% to each residential and industrial consumption (demand) shocks. Price-elasticities for residential energy usage are -0.150%, -0.364%, and -0.459% after one, ve, and ten years, respectively. Accordingly, price increases would have a limited impact to refrain energy consumption in times of climate change and adverse shocks in renewable sources.