Equilibrium Transitions from Non Renewable Energy to Renewable Energy under Capacity Constraints
We study the transition between non renewable and renewable energy sources with adjustment costs over the production capacity of renewable energy. Assuming constant variable marginal costs for both energy sources, convex adjustment costs and a more expensive renewable energy, we show the following. With sufficiently abundant non renewable energy endowments, the dynamic equilibrium path is composed of a first time phase of only non renewable energy use followed by a transition phase substituting progressively renewable energy to non renewable energy and a last time phase of only renewable energy use. Before the complete transition towards renewable energy, the energy price follows a Hotelling like path. Depending upon the shape of adjustment costs, investment into renewable energy may either begin before production of renewable energy or be delayed until the energy price achieves a sufficient gap with respect to the renewable energy marginal production cost. In all cases, the renewable energy sector bears negative returns over its investments in its early stage of development. Investment into renewable energy production capacity building first increases before having to decrease strictly before the depletion time of the non renewable resource. Renewable energy capacity continues to expand afterwards but at a forever decreasing rate converging to zero in the very long run. The development path of renewable energy may be largely independent from the non renewable resource scarcity. In particular with initially abundant non renewable energy, the length of the transition phase between non renewable and renewable energy together with the accumulated renewable production capacity at the end of this phase do not depend upon the scarcity rent of the non renewable resource and of the initial size of the resource stock.
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