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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.

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slide1

An intertemporal theory of

renewable energy development

Darko Jus

Center forEconomicStudies

Ludwig-Maximilians University ofMunich

July 30th, 2013

32nd USAEE/IAEE North American Conference, Anchorage

slide2

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))
  • Renewableresourcesareoftenmodeledas 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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slide3

Motivation II

  • Why do wemodel fossil energywithindynamicframeworks?
    • Non-renewableresource
    • Owners must decidewhentoextracttheresource
    • Solve an intertemporal problem (Hotelling 1931)
    • Hotellingrule (forconstantextractioncosts):
  • Isrenewableenergyreally a staticproblemsinceitdoes not involvetheuseof a non-renewableresource?
  • Staticproductionproblems: 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 considerheretheproblemofsociety, focussing on electricitygeneration

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slide4

Why renewable energy is an inter-temporal problem

  • 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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slide5

Why renewable energy is an inter-temporal problem

  • Also holds for Europe as a whole

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slide6

Why renewable energy is an inter-temporal problem

  • 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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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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slide8

Society’soptimalityrule

  • Intertemporal efficiency condition of the society

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Differencetotheproblemofextracting 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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slide10

Resultsfromthe simple dynamicmodel

  • 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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slide11

Resultsfrom a simple dynamicmodel

  • 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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Comparingthemodelresultswithreality

  • 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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slide13

Comparingthemodelresultswithreality

  • Installed solar power capacity as of 2010 in W per capita

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Thankyouforyour

commentsandquestions!

darko.jus@econ.lmu.de

Center forEconomicStudies

University ofMunich