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An intertemporal theory of renewable energy development Darko Jus Center for Economic Studies Ludwig-Maximilians University of Munich July 30 th , 2013 32nd USAEE/IAEE North American Conference, Anchorage. Motivation I. - PowerPoint PPT Presentation
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An intertemporal theory of
renewable energy development
Darko JusCenter for Economic Studies
Ludwig-Maximilians University of Munich
July 30th, 2013
32nd USAEE/IAEE North American Conference, Anchorage
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An intertemporal theory of renewable energy developmentJus 2
Motivation I
In the theoretical literature, fossil resources are usually considered within dynamic models (resource extraction literature, e.g., Hotelling (1931), Solow (1974), Stiglitz (1974), Sinn (2008))
Renewable resources are often modeled as a (static) ‘backstop technology’ (e.g., Dasgupta and Heal (1979), Gerlagh (2011) and van der Ploeg and Withagen (2012))
Result from these models: Society should immediately fully switch to renewable energy once it becomes cheaper than fossil energy
In reality: Simultaneous use of renewable and fossil energy Two questions:
How can we explain the simultaneous use of both? Is this optimal for society?
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An intertemporal theory of renewable energy developmentJus 3
Motivation II
Why do we model fossil energy within dynamic frameworks?
Non-renewable resource
Owners must decide when to extract the resource
Solve an intertemporal problem (Hotelling 1931)
Hotelling rule (for constant extraction costs):
Is renewable energy really a static problem since it does not involve the use of a non-renewable resource?
Static production problems: choices at one point in time do not affect the set of possible choices at a later point, e.g. daily production of milk
I consider here the problem of society, focussing on electricity generation
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An intertemporal theory of renewable energy developmentJus 4
Why renewable energy is an inter-temporal problem
1) Locations for the use of renewable energy differ in quality
Favorability of wind energy (average wind speed, left diagram) and photovoltaic (yearly sum of solar irradiation, right diagram)
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An intertemporal theory of renewable energy developmentJus 5
Why renewable energy is an inter-temporal problem
Also holds for Europe as a whole
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An intertemporal theory of renewable energy developmentJus 6
Why renewable energy is an inter-temporal problem
2) Improving profitability of renewable energy as a natural process
This is the time component of the argument
The social profitability of renewable energy generally improves over time, due to increasing social cost of fossil resources (relevant as fossil resources are a substitute for renewable energy in the electricity generation)
Increasing social costs of fossil resources because of
their increasing scarcity
rising extraction costs as increasingly unfavorable deposits need to be accessed
the marginal cost of adding carbon dioxide to the atmosphere increasing because of climate change
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An intertemporal theory of renewable energy developmentJus 7
Why renewable energy is an inter-temporal problem
To summarize:
the available renewable energy projects differ in quality
the profitability of renewable energy generally improves over time
Thus, if renewable energy is initially not profitable, at some point the high quality technology-location combinations first become profitable
However, low quality combinations need more time, and some may never become profitable for society
Hence, alternative locations/technologies imply different social profits at any instant in time, with each changing as time progresses
An inter-temporally optimizing society must decide when to start using renewable energy, at which location, and with which renewable energy technology
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An intertemporal theory of renewable energy developmentJus 8
Society’s optimality rule
Intertemporal efficiency condition of the society
𝑡
𝑡𝛼 𝑡𝛼𝑖
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An intertemporal theory of renewable energy developmentJus 9
Difference to the problem of extracting a fossil resource
When extracting a non-renewable (fossil) resource, the intertemporal problem is usually based on the resource being finite
In the case of renewable energy, no absolute finiteness of renewable energy locations is required
It is a relative scarcity that renders it a dynamic problem, namely involving a scarcity of locations of the same good quality
Suppose each quality of location for the use of renewable energy exists only once
Then, once a location with a certain quality has been used, this quality of location is no longer available for future projects
Each locational quality can be interpreted as a finite and non-renewable stock, although the total space for renewable energy is practically infinite.
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An intertemporal theory of renewable energy developmentJus 10
Results from the simple dynamic model
Society should go through three phases of electricity generation
First phase is characterized by a high degree of abundance of fossil energy, and consequently its low social cost
Over time, renewable energy becomes more favorable and the social cost of fossil electricity eventually rises sufficiently high to make the best available renewable energy project socially profitable
This project is characterized by having the best location and technology, in terms of yield and costs; society should realize this project once the dynamic efficiency condition is fulfilled
Renewable energy begins being used when this occurs, but does not fully replace fossil energy immediately
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An intertemporal theory of renewable energy developmentJus 11
Results from a simple dynamic model
As time progresses, increasingly more renewable energy projects become profitable, thus representing the second phase with a simultaneous use of fossil and renewable energy
The second phase might eventually flow into a third phase, in which only renewable energy should be used
This may become optimal as time goes to infinity, or even before, depending on how well renewable energy alone can satisfy society’s need for electricity
Moreover, it also depends on whether the fossil resources will be used up in finite time.
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An intertemporal theory of renewable energy developmentJus 12
Comparing the model results with reality
If renewable energy can be used in different regions sharing a common electricity market, a renewable energy technology should first be employed in the region offering the best conditions
In Europe, countries including Spain, Greece, Italy and also France are substantially more favorable than Germany on average (measured by the geographic distribution of the solar irradiation)
However, three of the four countries with the highest per capita solar power capacity in Europe – Germany, the Czech Republic and Belgium – are not very favorable
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An intertemporal theory of renewable energy developmentJus 13
Comparing the model results with reality
Installed solar power capacity as of 2010 in W per capita
Ireland
Sweden
Denmark
France
Cyprus
Portugal
Italy
Belgium
Czech Rep.
0 20 40 60 80 100 120 140 160 180 200 220
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An intertemporal theory of renewable energy developmentJus
Thank you for your comments and questions!
Center for Economic Studies
University of Munich